Widening fiscal deficit threatens Israel's 2024 budget

Bezalel Smotrich credit: Ronen Zvulun Reuters
Bezalel Smotrich credit: Ronen Zvulun Reuters

Israel's Ministry of Finance estimates that the fiscal deficit will grow to 2%-3% of GDP by the end of 2024, requiring a budget cut before next year begins.

Israel's Ministry of Finance estimates that the fiscal deficit will grow to 2%-3% of GDP by the end of 2024, a source close to the matter has told "Globes." This means that the deficit may turn out to be double or even more than the 1.35% target on which the 2024 state budget was built (1.35%), and which was approved only three months ago. This is due to the expected continuation of the trends of a decrease in state revenues in the face of an increase in expenditures.

Due to this, a cut in the state budget for next year may be required, even before 2024 begins. The Ministry of Finance is currently preparing a report, which examines current expenditure and deficit forecasts, compared with the calculations made during the preparation of the 2023-2024 budget. Minister of Finance Bezalel Smotrich, is required to submit the report to the Knesset Finance Committee in November.

An annual deficit of up to 3% is not a big disaster by worldwide comparative standards, but it still requires a reorganization of the budget. If it turns out that the differences compared with the original plan are too large, and cannot be bridged through the reserve put aside for such a case, the government will be required to prepare a budget balancing plan that will cover the difference. Such a plan could include cutting government spending on various projects, or alternatively, taking measures to increase state revenues, such as canceling the reduction of the excise tax on gasoline, which would lead to a jump in the price of fuel.

Smotrich's deadline to finally approve any budget balancing plan for the 2024 budget is December 15. If he does not succeed in bridging the difference, and it turns out that the deficit and spending gaps are still too large, the government will be required to approve a reduction in the budget items. The law takes into account an event in which the government does not implement the cuts imposed on it. In such a scenario, the state budget will simply not go into effect, and 2024 will open without an approved budget. The government will be given an extension to submit a budget balance plan to the Knesset by the end of March, and until then the state will operate with only a continuation budget, which greatly limits the expenses of ministries and reduces them. After this date, the government will have to prepare a new budget for 2024 from scratch, since the already approved budget would be completely canceled.

These are the worst scenarios, but the minister of finance minister still has some room for maneuver before he is forced to announce cuts. First, as mentioned, there is the budget reserve. The Ministry of Finance proposed to keep a kind of "security fund" of 0.4% of the allowed spending until 2024. The spending framework approved for next year is NIS 514 billion, so the Ministry of Finance is supposed to have NIS 2 billion shekels kept in reserve that will help with fiscal convergence.

If the Treasury expects a deficit of up to 3%, it is likely that NIS 2 billion will not be enough to cover the shortfall what with the slowdown in the economy, the difficulties in the real estate and tech industries, the weakening of the shekel, and the possible consequences of the changes in the judicial system. Thus, if no other sources of bridging the gap are found, say, the state budget will be cut significantly.

It is estimated that in practice the Ministry of Finance will try to avoid painful cuts but5 how exactly they will manage to do this is still unclear.

Published by Globes, Israel business news - en.globes.co.il - on September 14, 2023.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2023.

Bezalel Smotrich credit: Ronen Zvulun Reuters
Bezalel Smotrich credit: Ronen Zvulun Reuters
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