Israeli gov't mulls tax cuts as deficit narrows

Avi Simhon, Bezalel Smotrich and Yogev Gradus credit: Yossi Cohen, Noam Moskovich/Knesset Spokesperson, Amit Shabi/Yediot Ahronot
Avi Simhon, Bezalel Smotrich and Yogev Gradus credit: Yossi Cohen, Noam Moskovich/Knesset Spokesperson, Amit Shabi/Yediot Ahronot

National Economic Council chairman Prof. Avi Simhon: If we are convinced this is a continuing trend, the first tax I would reduce is cutting VAT back to 17%.

The exceptional data published on Monday by the Accountant General - an all-time record in state revenues in January 2025 and a narrowing of the fiscal deficit confront the Ministry of Finance with a challenge. While Ministry of Finance officials are trying to cool the enthusiasm, and stress the one-time factors that contributed to the record revenues, in the background, pressures are already increasing to soften the tax hikes imposed on the public, and perhaps also the cuts in government ministry budgets

The timing of publication of the data, which included a budget surplus of NIS 23.2 billion in January alone, is important. Although it is already February, the 2025 state budget has not yet been passed, and discussions on it in the Knesset are still progressing sluggishly. Just this week, the first discussion took place in the Finance Committee, headed by MK Moshe Gafni, on the budget bill itself, ahead of a long series of additional discussions before decisions are made.

Some of the budgetary convergence measures have already been approved in the Knesset in advance, separately from the budget. While a package of adjustments worth NIS 26.2 billion, which includes the Trapped Profits Law (about NIS 9 billion) and the increase in National Insurance contributions (NIS 4.6 billion), has already come into force, additional measures worth NIS 10.1 billion are still awaiting Knesset approval, and there is no certainty that they will be approved.

Among the pending measures is the reduction in the recreation day for employees, which should yield NIS 1.3 billion shekels for the state treasury, and a salary cut in the public sector of about NIS 5 billion. The haredi parties in the coalition may exploit the exceptional revenue figures as an argument to continue delaying the Ministry of Finance's plans, against the backdrop of the crisis over the army recruitment bill and the struggle over funding educational institutions. Their control of the Knesset's Finance and Labor and Welfare Committees allows them to block budget initiatives, as happened in the 2024 budget.

"I would cut VAT"

National Economic Council chairman Prof. Avi Simhon is already talking about returning to a more moderate policy. "We must examine whether this is an advance in revenue that will lead to a decline in the coming months, or a long-term trend," Simhon tells Globes. "If we are convinced this is a continuing trend, we will need to renew the discussion about reducing taxes, and the first tax I would reduce is cutting VAT back to 17%."

The cumulative fiscal deficit over the past 12 months has dropped drastically, from 6.9% of GDP at the end of December 2024 to 5.8% at the end of January 2025, which is NIS 115 billion, according to data published by Accountant General Yahli Rotenberg. The improvement in the deficit came following a record month in state revenues, which stood at NIS 63.1 billion in January - about 30% above the previous record, exactly three years earlier.

Revenues in January surged mainly due to the public advancing payments before various Ministry of Finance measures came into effect, such as the VAT hike to 18%, the new surtax, and the Trapped Profits Law. At the same time, government spending side was also restrained because the year began without an approved state budget, which limits government ministries' spending.

The state's exceptional revenues in January were based on a 60.9% jump in direct tax collection compared with January 2024, in the early months of the war. A key factor in the jump was increased dividend payments that companies and the wealthy brought forward to the end of 2024, in order to avoid the new surtax that came into effect at the start of 2025. According to Treasury estimates, this item alone recorded excess collection of NIS 7.5 billion shekels above the normal monthly average.

On the indirect tax side, a significant increase of 22.5% was also recorded, which resulted, among other things, from the public bringing forward purchases in December 2024 before the VAT increase. At the same time, revenues from the purchase tax on vehicles actually decreased in January due to the bringing forward of purchases to December, before the update of the green tax on electric vehicles and the increase in the price of cars.

On the expenditure side, the government spent NIS 39.9 billion in January, down 3.5% from January 2024. The decrease was due, among other things, to a sharp 23% drop in defense spending compared with the same period last year, when the war was in full swing.

Published by Globes, Israel business news - en.globes.co.il - on February 11, 2025.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2025.

Avi Simhon, Bezalel Smotrich and Yogev Gradus credit: Yossi Cohen, Noam Moskovich/Knesset Spokesperson, Amit Shabi/Yediot Ahronot
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