Israel's fiscal deficit narrows after record state revenues

Finance Minister Bezalel Smotrich credit Danny Shem Tov, Knesset Spokesperson
Finance Minister Bezalel Smotrich credit Danny Shem Tov, Knesset Spokesperson

The improvement in the fiscal deficit follows all-time record state revenues of NIS 63.1 billion in January, and a fall in government spending.

Israel's fiscal deficit has fallen sharply from 6.9% of GDP in the twelve months to the end of December 2024 to 5.8%, or NIS 115 billion, in the twelve months to the end of January 2025, Ministry of Finance accountant general Yali Rothenberg reported today.

The improvement in the fiscal deficit follows an all-time record high in state revenues of NIS 63.1 billion in January, 30% more than the previous record in January 2022.

January 2025 itself ended in a fiscal surplus of NIS 23.2 billion. January is traditionally a strong fiscal month for the Ministry of Finance with a surplus recorded every year since 2022.

This year, 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.

Jump in collecting direct taxes

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.

Decline in defense spending

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.

The restraint in spending is also attributed to the limitations of the ongoing budget, which allows for a monthly expenditure of only NIS 43.6 billion - significantly lower than the expenditure planned in the 2025 budget that has not yet been approved.

The Ministry of Finance stresses that since a significant part of the improvement in the deficit stems from bringing forward revenues that were supposed to be received during 2025, there may be a slowdown in tax collection in the coming months. However, even after deducting one-time effects, a real increase of 21% was recorded in tax revenues compared with January last year, indicating a recovery in economic activity despite the war.

Published by Globes, Israel business news - en.globes.co.il - on February 10, 2025.

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

Finance Minister Bezalel Smotrich credit Danny Shem Tov, Knesset Spokesperson
Finance Minister Bezalel Smotrich credit Danny Shem Tov, Knesset Spokesperson
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