Israeli cabinet ministers were set to vote on Thursday on a wartime budget for 2025 that focuses on spending cuts and increased taxes to fund the country’s ongoing military engagements. The budget, a response to the financial strain caused by the wars in Gaza and Lebanon, aims to reduce Israel’s growing deficit while maintaining economic stability.
The defense costs have surged due to equipment needs and the mobilization of hundreds of thousands of reservists. Compensations for those affected have further burdened Israel’s finances. At the cabinet meeting, Prime Minister Benjamin Netanyahu emphasized the need for economic discipline, stating, “Our security also depends on the economy. We cannot have a strong military if we have no way of financing it.” He noted that budgetary restrictions are essential, with cuts required in some areas to meet security demands.
Since the October 7, 2023, Hamas attack, Israel’s economy has stagnated, inflation has risen due to supply chain issues, and the cost of living has increased sharply. Major credit rating agencies downgraded Israel’s rating this year, raising borrowing costs as inflation stands at 3%. With no relief from high-interest rates, the central bank has maintained a cautious stance.
The 2025 budget includes about 40 billion shekels ($10.8 billion) in spending reductions and tax hikes, targeting a reduction of the deficit from 8.5% of GDP to 4%. One significant change will be a value-added tax increase from 17% to 18%. Military spending, though substantial at 102 billion shekels, will be limited, according to Finance Minister Bezalel Smotrich. He also highlighted the importance of economic stability, saying, “The economy serves security. We will end the war with victory and bring security and with it also a good economy.”
The total 2025 budget is projected at 744 billion shekels, with 161 billion shekels allocated for debt servicing. Economic growth forecasts suggest a modest recovery, with 0.4% growth expected in 2024 and 4.3% in 2025. As the longest and most expensive conflict in Israel’s history continues, Smotrich expressed confidence in the country’s economic resilience.
Following the cabinet’s approval, the budget will move to parliament for an initial vote, with final approval anticipated in January. If not passed by March 31, 2025, failure to adopt the budget could prompt new elections.