Hamas war takes toll on Israeli economy as Israel delays 2025 budget

Finance
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The government will debate a proposal for the 2025 budget on October 31, a spokesperson for Finance Minister Bezalel Smotrich, said earlier this week. This delay could mean that the budget is not passed by the end of 2024, the spokesperson added.

The October discussion is later than intended, as Smotrich previously said he intended that the budget should pass the government in early October and its first reading in Knesset by mid-November.

Also this week, Smotrich sent a letter to Budget Division head Yogev Gradus in which he outlines his intention to overhaul the way the budget is constructed and spent – reducing the Budget Division’s centralized control over the process, according to Globes.

It is unclear how this significant structural change fits into the timeline for next year’s budget and how much focus Smotrich wants to place on such an overhaul to pass a 2025 budget in the few months left before the end of the year.

When the budget does not pass by the end of the calendar year, the government must operate according to the previous year’s spending levels until the new budget is approved.

This could cause potential problems as the government attempts to face a reality in which there are significant numbers of evacuees, totally new security needs, massive rehabilitation projects, and more without a budget that has been created to address these problems. Beyond this, the failure to pass a budget as planned would be a devastating signal about the health of Israel’s economy.Bezalel Smotrich is seen pointing down in an illustrative featuring credit agency Moody's. (credit: MARC ISRAEL SELLEM/THE JERUSALEM POST, SHUTTERSTOCK)

Bezalel Smotrich is seen pointing down in an illustrative featuring credit agency Moody’s. (credit: MARC ISRAEL SELLEM/THE JERUSALEM POST, SHUTTERSTOCK)

The impact of the war on Israel’s economy and public spending has created vast amounts of uncertainty surrounding the stability of Israel’s economy. This is impacting Israel’s credit score and, more generally, how investors view the country’s economy.

It also affects how Israelis view the economy and how comfortable they feel with their savings invested in Israel as well as with building their lives here.

Late last month, Reichman University’s Aaron Institute for Economic Policy warned of the possibility that a lack of confidence in Israel’s economy and its future could spur Israelis to withdraw savings from the country and potentially leave if they are able to.

While this is not necessarily an imminent risk, it will be the eventual result if confidence in Israel’s economy is not restored.

Investors and Israelis must believe that the state can handle the additional costs caused by the war and make the necessary and difficult decisions to cover new security costs without increasing the debt-to-GDP ratio to a point from which it is hard to return; in general, to steer the economy away from the threat of recession and back to a path of growth.

The most basic step required for reinstilling confidence and for handling the new costs thrust on the country, is the creation and passage of a budget.

Difficult decisions ahead

A budget demonstrates that the government has a plan to get Israel’s economy through the hits it has been taking since October 7 of last year and that it has the capability to deal with political challenges and difficult decisions that will arise, such as raising taxes and prioritizing national over sectoral needs.

On the flip side, the delays and the failure to pass a budget and to meet the goals publicly laid out by the minister have had the opposite effect, resulting in a loss of confidence in Israel’s ability to weather this storm.

Reprioritizing the budget to address national needs at the expense of sectoral needs is no small political challenge – United Torah Judaism chairman Yitzhak Goldknopf reiterated on Tuesday a threat he first made in September: that his party would oppose the budget unless a new bill passes that will grant most eligible haredi men an exemption from IDF service.

Raising taxes, canceling redundant ministries, and other actions necessary to contend with the war’s impacts on the economy are unpopular and difficult decisions for the government to pass.

Failure to do so and a continued delay of the budget, or passing one without the necessary measures to stabilize the economy, would show that Israel is not up to the task of handling the new economic reality in which it finds itself.

This will be devastating to the trust of Israelis and investors, whose confidence in the economy is necessary. Higher perceived risk will increase the interest Israel pays on its deficit and could, if left unchecked, drive Israelis to leave and seek economic security for themselves and their families in other countries.

Israel’s economic professionals have stressed it, ratings agencies have said it – Israel needs a responsible budget for 2025, and it needs to show it can pass one now.

Eliav Breuer contributed to this report.

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