Deficit narrows in 2025 under baseline scenario, but surges if Gaza conflict escalates

ISRAEL - In Brief 08 Apr 2025 by Sani Ziv

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The Ministry of Finance announced yesterday that Israel recorded a deficit of NIS 13 billion ($3.5 billion) in March. The trailing 12-month (TTM) budget deficit declined to 5.2% of GDP, down from 5.3% in February, 5.8% in January, 6.9% in December, and a peak of 8.5% in September 2024. In the first quarter of 2025, government spending totaled approximately NIS 57.7 billion, compared to NIS 56.3 billion in the same period last year. Since the beginning of the year, cumulative government expenditure stood at NIS 143.6 billion, a 2.4% decrease in real terms compared to NIS 147.0 billion in the corresponding period in 2024. The decline in expenditure reflects a reduction in spending by the government in the first quarter of the year (NIS 7.2 billion less), mainly due to lower war-related spending and the fact that the 2025 state budget had not yet been approved in March. Tax revenues showed continued strength in March, totaling NIS 40.2 billion and reflecting a real annual increase of approximately 4%. The year-on-year growth in Q1 reflects a modest recovery in consumption following the war. A significant part of the increase came from local VAT on domestic production, likely due to the pull-forward of purchases at the end of 2024 ahead of the VAT rate hike implemented in early 2025. Deficit projected to decline to 4.2% of GDP in 2025, but could rise to 6.2% if war escalates According to a new macro forecast from the Research Department of the central bank, Israel’s fiscal deficit is projected to reach 4.2% of GDP in 2025 and decline to 2.9% in 2026, while public debt is expected to stand at 69% of GDP in 2025 and 68% in 2026. The forecast reflects approved consolidation m...