Israel is facing significant challenges in meeting its fiscal deficit target of 6.6% of GDP by the end of 2024. Recent reports from the Ministry of Finance indicate a widening fiscal deficit, which reached 7.2% of GDP over the past 12 months, translating to NIS 137.7 billion. This marks an increase from 6.9% at the end of April, highlighting the difficulty in achieving the target set by the budget law.

According to the Israeli financial daily "Globes", in May alone, the deficit stood at NIS 10 billion. However, excluding tax payments postponed due to Passover, the deficit was actually higher, estimated at NIS 14.8 billion, compared to a deficit of NIS 4.5 billion in May 2023. Since the beginning of the year, Israel has recorded a cumulative fiscal deficit of about NIS 47.6 billion, a stark contrast to the surplus of NIS 13 billion during the same period in 2023. Government spending since the start of the year has surged to NIS 249.3 billion, reflecting a 35% increase compared to the corresponding period last year.

Israel's fiscal deficit reached 7.2% of GDP, or NIS 10 billion ($2.66 billion), in May over the prior 12 months due to ongoing funding for the conflict with Hamas. This marks the second consecutive month surpassing the government's 6.6% target for 2024.

— CYNN (@CYNN_Official) June 9, 2024

The primary driver behind the increased deficit is high spending on defense and civilian ministries due to ongoing conflicts. Even excluding war-related expenses, government spending has risen by about 10.7%, whereas state revenues have only increased by around 2%, amounting to approximately NIS 201.6 billion since the beginning of the year.

The Ministry of Finance estimates that the deficit will peak by September, followed by a decline. However, there is disagreement within the ministry on the extent of this decline. The budget department remains optimistic, projecting that the deficit will converge to the target of 6.6%, based on the state budget approved last March. Conversely, the accountant general's department, which closely monitors spending, forecasts a more pessimistic scenario, with the fiscal deficit potentially reaching around 8% of GDP by the end of 2024.

Israel's fiscal situation continues to worsen: The budget deficit in May was 10 billion shekels and the deficit is 7.2% of GDP over the past 12 months. It was 4.2% in 2023 and its 2024 target is 6.6% so the gov't needs big spending cuts or tax hikes to prevent more ratings cuts

— Steven Scheer (@StevenMScheer) June 9, 2024

Further complicating matters, lawmakers have raised concerns about the budget deficit. They warn that it could reach double digits by the end of 2024, potentially causing international financial actors to lose trust in Israel's economy. The budget deficit is the difference between the government’s expenses and its income or assets, occurring when a country’s spending exceeds its income. Despite the updated 2024 budget setting a deficit ceiling at 6.6%, the deficit had already reached 7% by the end of April.

The Knesset Finance Committee, chaired by MK Moshe Gafni (United Torah Judaism), held a session to address these issues, prompted by nine opposition committee members. During the session, Yesh Atid MK Vladimir Beliak criticized the government for rejecting steps to reduce expenditures, such as closing ministries or cutting "coalition funds" earmarked for political purposes. Beliak had previously warned of this scenario during the budget debates in March.

Israel's budget deficit could run into double digits by the end of 2024 and could cause international financial actors to lose trust in Israel's economy, MKs from the opposition warned in a Knesset Finance Committee session. Report by @BreuerEliav. https://t.co/z1SlkFgIsR

— The Jerusalem Post (@Jerusalem_Post) June 4, 2024

Asaf Wexler from the finance ministry’s budget department argued that the deficit would shrink back within the 6.6% limit by year’s end. He attributed the sharp increase in the deficit to months of intense fighting and economic slowdown, compounded by the uncertainty surrounding the end of the conflicts. However, Wexler acknowledged that a new conflict in Israel’s north would likely necessitate an updated deficit forecast.

In summary, while the Israeli government aims to meet its fiscal deficit target, the combination of increased spending, economic uncertainties, and potential conflicts pose significant challenges. Achieving the 6.6% target will require careful management of expenditures and strategic economic planning amidst a volatile geopolitical landscape.