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Israel's deficit rises to 0.9% of GDP: a closer look at the economic challenges

Israeli Finance Minister Bezalel Smotrich attends a discussion about the state budget, during a Finance committee meeting at the Knesset, July 3, 2023. (Photo: Yonatan Sindel/Flash90

The Accountant General's Division of the Ministry of Finance has revealed that Israel's deficit in June 2023 has experienced a significant increase, reaching 0.9% of the country's GDP. This equates to a cumulative deficit of approximately NIS 15.4 billion over the past 12 months. Comparatively, only two months ago, this figure stood at 0.3%.

It is important to note that from its inception the state budget was designed with the aim of achieving a deficit target of 1.1% by the end of this year and 1.35% in 2024. However, the current trajectory suggests that meeting either of these targets would be unlikely if the current trend persists. In fact, market analysts suggest that this year's deficit may exceed the target by a significant margin. According to Rafi Gozlan, the chief economist of the IBI investment house, a more realistic outcome for 2023 would be in the range of 2.25%-2.5%. While this forecast remains within the total multi-year deficit of the Finance Ministry (which stands at 2.5%), it raises concerns about the possibility of even worse figures in the following year. Additionally, the capital markets are already projecting that without any special adjustments made by the government, the deficit could reach as high as 4%-5% of the GDP in 2024.

The acceleration of the budget deficit has become increasingly apparent in recent months. The surplus that had accumulated since the start of the year has rapidly diminished, plummeting from NIS 13 billion to NIS 6.7 billion. Notably, in June alone, a deficit of NIS 6.2 billion was recorded, presenting a stark contrast to the deficit of NIS 1.5 billion observed during the corresponding period last year.

State income has experienced a distinct decline, with revenues in the first half of 2023 decreasing by 4.5% compared to the same period last year. Although the first half of 2022 saw exceptionally high revenues, the rate of decline in revenues has gradually deepened in recent months.

Despite a slight deceleration in the rate of declining revenues over the past two months, it is important to approach this trend with cautious optimism. The reason for such caution lies in the persistent downward trajectory that has been observed since the midpoint of the previous year. Moreover, although tax revenues currently stand at historically elevated levels compared to the pre-COVID-19 era, they fall short of the records established in 2021-2022.

The decline in income in June is particularly evident within real estate, one of the leading sectors of the economy. Taxes raised here reached 1.1 billion shekels, marking a significant 56% decrease compared to the 2.5 billion shekels recorded in June 2022. The Tax Authority has confirmed that this represents the lowest level of income generated from real estate taxes since the start of 2021.

Regrettably, the lack of more stringent cost management initiatives implemented by the government has further exacerbated the current predicament. The current fiscal period has witnessed a notable upswing of 6.9% in government expenditure, which can be attributed to Prime Minister Netanyahu's unwavering dedication to allocating resources towards initiatives benefiting coalition members. Based on the prevailing circumstances, it is evident that the road ahead presents significant challenges for the forthcoming 6-18 month period, assuming the continuity of the present government.

This article originally appeared here and is reposted with permission.

Read more: ECONOMY is a website that takes a unique look at Israel's economy, business, and innovations. It gives an overview of what's going on in the country's financial markets and provides its readers with useful information about Israeli companies that work in Israel and around the world. It is a good source of information for anyone who wants to get to know Israel from a non-political point of view.

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