(Bloomberg) -- Israel’s finance minister said higher war spending would be financed through budget cuts, salary freezes and increased revenues rather than a wider deficit, as he outlined a long-delayed fiscal plan for next year.
The target fiscal gap for 2025 will be reduced to 4% of gross domestic product, Bezalel Smotrich said, requiring budgetary adjustments of at least 35 billion shekels ($9.5 billion).
Speaking to journalists in Jerusalem on Tuesday, he declined to give full details, saying he still needs to present his plans to Prime Minister Benjamin Netanyahu and other ministers. Still, he cited the need for substantial cuts in the public sector and pay freezes for ministers, politicians and state employees.
The war against Hamas in Gaza and hostilities with Hezbollah, a Lebanese militant group, have caused Israel’s expenditure to soar and strained the economy. Israel’s 12-month trailing deficit rose to 8.1% of gross domestic product as of July and the government’s suffered its first-ever ratings downgrades.
Smotrich reiterated the government’s plan to get the deficit to 6.6% for 2024 as a whole, though that would still be one of the widest gaps Israel’s recorded this century.
The 2025 budget will be approved in Israel’s parliament by the end of the year, Smotrich said, a deadline technocrats have warned is unrealistic given the structural work still necessary and the lengthy legislation process. Delays have unnerved investors and business leaders, who have warned a hiatus will cloud Israel’s economic prospects and elevate the already-high risk premium on its assets.
Smotrich said Israel could hit its budget goals for this year unless there were unexpected expenses from the conflict against Hamas or the skirmishes against Hezbollah worsened.
Tel Aviv’s main stock index extended losses after Smotrich spoke. It was down 1.5% as of 5:30 p.m. local time.
The war in Gaza is coming to the end of its 11 month. Higher defense spending has caused Israel to increase borrowing in domestic and international bond markets. Sectors such as tourism and construction have slumped since fighting started in October.
Smotrich said the finance ministry’s growth projection for 2024 of 1.9% “will likely be lowered soon.” Citigroup Inc. analysts are forecasting a figure of 1.4%.
Asked whether the government would continue allocating controversial political budgets to be spent at the discretion of coalition party leaders, Smotrich said they should be as low as possible. Those funds, which amounted to some 6 billion shekels this year, have stirred public rage as large portions are spent on religious schools and settlements in the Palestinian territory of the West Bank.
Israel’s fiscal policy next year will focus on supporting the hi-tech industry, Smotrich said, alongside streamlining the public sector and battling unreported income. He did not elaborate on how these would be achieved.
“The announcement on a 4% target deficit next year is important on a declarative level and may eventually allow the Bank of Israel to consider lowering interest rates earlier than expected,” said Ronen Menachem, chief markets economist at Mizrahi Tefahot Bank. “The announcement constitutes an alignment with the Bank of Israel and credit rating agencies, that were critical of the lack of budget discussions so far.”
Central bank officials, including Governor Amir Yaron, have for months been calling on the finance ministry to announce fiscal adjustments to cope with higher defense spending.
(Updates throughout.)
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