At a Tuesday press conference at the finance ministry in Jerusalem, Finance Minister Bezalel Smotrich presented the main points of the 2025 budget and his economic plan. On Thursday, the budget will be presented for the approval of the Prime Minister and his staff, and at the same time, the finance ministry will begin an intensive dialogue with government ministries to determine their priorities and efficiency goals.
Under the title “Budget 2025 – from War to Growth,” Smotrich set the deficit target at below 4% in a way that he claims maintains the stability of the debt-to-GDP ratio in the coming year and sets it on a downward path in the coming years.
He defined convergence measures that include freezing wages and tax and pensions brackets, and taking savings and efficiency measures in government ministries and the public service totaling about NIS 35 billion ($9.44 billion).
According to Minister Smotrich, the convergence steps were put together in a way that creates an equal burden and enlists all the segments of Israeli society to go “under the stretcher” in a measured way and without starting public disputes that aren’t needed in a time of war.
Despite the rotation agreement with Shas, Smotrich will likely remain the finance minister for the duration of Netanyahu’s term, since the High Court banned Shas Chairman Aryeh Deri from serving in a government ministry. Will Smotrich be able to elicit the support of Shas and the other Haredi party, UTJ, whose services to its voters stand to be curtailed by efficiency measures?
In July, the Director of the Tax Authority, Shay Aharonovich, shared with Bank of Israel Governor Prof. Amir Yaron his recommendations for the 2025 budget. In view of the continuing increase in expenses because of the war, Aharonovich believes there is a need for long-term taxation measures without shortcuts, warning that if the necessary steps are not taken in taxation, including a 1% increase in VAT, freezing the tax brackets, and keeping a high purchase tax for investors, it won’t be possible to close the additional minimum deficit of NIS 30 billion ($8.09 billion). This, in turn, would deteriorate Israel’s economy and lead to its further downgrading by the credit rating agencies.
IT’S ABOUT CAPITALISM, STUPID
Some of the Tax Man’s suggestions appear to be reflected in Smotrich’s 2025 budget. But will PM Netanyahu embrace it?
Prof. Avi Simhon, head of the National Economic Council and the prime minister’s economic advisor, appears to be miles away from Smotrich’s key budget points. Asked on July 19 if he believes in raising taxes to meet the war challenges, Simhon responded, “God forbid. I oppose any tax increases, both in the current budget and next year. I not only rule out the planned increase in VAT to 18% in 2025, but I also rule out other proposals and recommendations such as taxing training funds, reducing the value of government credit points, and raising health and social security insurance taxes.”
Netanyahu’s chief economic advisor told Ynet: “We may end the year with a significantly lower budget deficit than planned, around 5.5% of the domestic product – and much less in 2025.”
Simhon, like Netanyahu, is a great believer in the market forces that have the power to correct negative trends in the economy. Or, as he put it, “I am simply against increasing the tax burden. It’s an unnecessary move that would harm the economic activity and the standard of living of the wage-earning middle class that carries the economy and security on its shoulders. We, the government, must not punish it with an additional tax burden – especially when, from a fiscal point of view, there is no need for it. We have other sources.”
He pointed out that in the first half of 2024, the state’s revenues from existing taxes were 16 to 19 billion shekels ($4.31 – 5.12) higher than the budget’s projections. This is already an increase of the order of 1% of GDP, more than double the increase in the VAT rate, and we keep it coming.”
NOW COMES THE HARD PART
Finally, Finance Minister Bezalel Smotrich said on Tuesday:
“Managing an economy in wartime is a challenge that requires national responsibility, judgment, and professionalism. In 2025, we will continue the growing civilian policy we have been leading since the outbreak of the war, a policy that includes a broad response to evacuees and survivors, to reservists and business owners in the war zones, and the rehabilitation and development of border settlements.
“Alongside this, we will continue to maintain budgetary responsibility and the fiscal frameworks and convey a message of trust, commitment, and stability to the markets and investors in the Israeli economy. Our economic policy is proving itself in national resilience, a strong shekel, the rising stock market, the tight employment market, the increase in the state’s income from taxes, our great access to loans, and the rapid recovery of the high-tech field.
“I am convinced that the Prime Minister and all my colleagues in the government and the coalition will show the necessary responsibility to continue this policy and pass a responsible and growth-oriented budget that will allow us to lift the Israeli economy from war to an accelerated growth path.”
Israel’s Social Security Insurance declared it opposed “harming allowances for the disabled, elderly, nursing, unemployed, etc. The cuts should be made from other sources and not on the backs of the weak in society.”
Smotrich and his team will be hearing a lot of that from every government ministry.
