Israel's Government Deficit Reaches 8.5% of GDP Amid Rising Expenditures - 0.2% increase

As of the end of September, Israel's government deficit has reached 8.5% of GDP, amounting to approximately NIS 166 billion. This marks a 0.2% increase (about NIS 8.8 billion) from the previous month, reflecting escalating financial pressures related to ongoing military operations.

Despite expectations that the deficit may decrease over the next three months—traditionally high deficit months—the year is now projected to end with a deficit of 7.2%, surpassing the government's target of 6.6%. This revision stems from the necessity to redraw the budget in response to the war in northern Israel and delays in anticipated American aid.

Government Expenditures Soar

Government expenditures in September totaled about NIS 51 billion, with cumulative spending since the beginning of the year reaching approximately NIS 450 billion. This represents a significant 31.2% increase compared to NIS 343.2 billion in the same period last year. Notably, the majority of this increase is attributed to war-related expenses, which accounted for about NIS 78.3 billion since the beginning of the year.

Revenue Trends

On a more positive note, state revenues remain robust, with September revenues hitting NIS 42.2 billion, and total revenues for the year reaching around NIS 357.3 billion. This amount represents approximately 78.8% of the total revenues projected in the original budget (NIS 453.6 billion) and about 76.8% of the updated forecast of NIS 465.3 billion.

The bulk of government income continues to come from tax revenues, which stood at about NIS 38.7 billion in September—a 7.7% real increase from the same month last year. Notably, VAT revenues surged by 21.6% year-over-year, despite a 1.7% decrease in direct taxes, signaling potential declines in economic activity.

Implications of VAT Refunds

The observed increase in VAT revenues may reflect a reduction in business investments, as businesses are submitting fewer requests for VAT refunds. A decrease in these refunds indicates lower spending on investments, suggesting a broader slowdown in economic activity.

In summary, while revenues are strong, the rising government deficit due to military expenditures poses ongoing challenges for Israel’s fiscal health as it approaches the end of the year.