As Knesset must pass budget by end of the month, Finance Ministry cuts the country’s growth forecast

The Israeli Finance Ministry cut the country’s growth forecast to 2.7%, 0.3% less than previously expected. In addition, the ministry also revised next year’s growth forecast to 3.1%, approximately 0.1% less than previously forecasted.

Earlier in May, the Finance Ministry published statistics for the first fiscal quarter which showed the deficit widening, in part due to continued decrease in state revenue from taxes

Shira Greenberg, chief economist at the Finance Ministry, partly links the decline in the economic growth forecast to the decline in investments in the tech sector "which are constantly decreasing.”

In addition, the Netanyahu-led government’s controversial judicial reform plan is believed to have had a negative impact on investor confidence in independent and robust Israeli institutions.

"This is perceived by the market as undermining the strength and independence of state institutions and therefore increases uncertainty. It is expected to significantly harm economic growth and activity, especially for what is foreign investment," said Greenberg.

The chief economist also warned that the government’s decision to increase social funding in the ultra-Orthodox sector could undermine its potential long-term integration into the modern Israeli economy.

"The decisions of the government concerning the increase in the budget of the non-official sectors of education (yeshivas), the increase in social allowances, and the activation of aid programs such as the provision of vouchers of food, should lead to a reduction in the potential for integration of ultra-Orthodox men into the labor market," stated Greenberg.

Greenberg also assessed that the decision made by global credit agency Moody’s to downgrade its economy forecast for Israel may negatively effect the country’s economic growth.

"Lowering it will hurt growth," predicted the chief economist.

The Israeli economy’s growth potential is further impacted negatively by the local tech sector laying off more workers due to a decrease in investment.

The lowered economic outlook comes as the government is in final negotiating stages for the 2023 budget, which needs to be passed by the Knesset no later than May 29. Without an approved budget by the end of the month the government will automatically collapse and new elections will be called.