Israel is grappling with a growing budget deficit, reaching approximately 3.4% of the Gross Domestic Product (GDP) in the last 12 months ending in November. The deficit stands at about NIS 62.3 billion, with NIS 34 billion attributed to expenses incurred during the ongoing war.
The latest figures reveal a concerning trend as the deficit increased by 0.8% in the past month, compared to the end of October. The Treasury Accountant General’s Division predicts a continued deepening of the deficit into December, projecting a year-end figure of 4%. This estimate contradicts the forecast of the Bank of Israel’s research division and the Chief Economist Division of the Treasury, which anticipated a year-end deficit of 3.7%.
Senior officials in the budget department maintain their stance, asserting that despite November’s performance data, the deficit will ultimately stand at 3.7%. A discrepancy of approximately NIS 4.5 billion underscores the debate, driven by differing assumptions regarding government expenditures, revenues, and the scope of economic activity in December 2023.
The bulk of the deficit increase is attributed to the ongoing war, impacting both expenses and income. Government spending surged to about NIS 46.9 billion, a notable increase from NIS 36.5 billion in the same period last year. Of this, approximately NIS 3 billion can be traced to the expansion of the government budget, while around 5.8 billion is directly allocated to war-related expenditures. An additional 2 billion is allocated to civilian expenditures, with a portion dedicated to the welfare of evacuees. The Accountant General warns that many expenses are yet to be reflected in the budget, projecting their impact to extend into December 2023 and even spill over into 2024.
On the revenue side, approximately NIS 30.3 billion was recorded in November, marking a decrease of NIS 4.5 billion compared to the same period last year. This decline follows a pre-existing trend exacerbated by the war with Hamas, resulting in reduced economic activity and a series of tax relief measures. Indirect taxes saw a decrease of about 2.9 billion, while direct taxes experienced a drop of approximately 1.3 billion.
Examining the real change, accounting for inflation, between November 2022 and November 2023 reveals a staggering decrease of around 16.5%. This includes a 15% reduction in direct taxes and an 18.6% decrease in indirect taxes. Income tax revenues for the self-employed and companies plunged by 22% in November 2023 compared to the same period last year. Real estate tax revenues witnessed an alarming 61% decline, amounting to only about NIS 815 million, the lowest in five years, excluding holiday months, according to the Tax Authority.