As Israel's expenditures surge due to multi-front war, national fiscal deficit increases to 8.1%

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In recent years, Israel has experienced a fiscal deficit, but the ongoing conflict with Iran's terrorist proxies, Hamas and Hezbollah, has significantly impacted the country's finances. According to new preliminary figures released by the Finance Ministry, the fiscal deficit has now reached 8.1% of Israel’s Gross Domestic Product (GDP).

The new figure for July is also higher than in June, when the budget deficit reached 7.6% and it also marks the fourth consecutive month that the nation's expenses have surpassed the government’s target ceiling of 6.6% of the GDP.

The Finance Ministry reported that Israel's expenditures have surged significantly following the Oct. 7 Hamas invasion and terror attack, which resulted in the deaths of 1,200 Israelis in southern border communities with Gaza

“The increase is mainly due to high spending on defense and security, as well as by civilian ministries because of the war in addition to rigid payments resulting from agreements,” the ministry wrote.

The Finance Ministry projects that the budget deficit will continue to expand through the end of September due to ongoing war-related expenditures. However, the ministry anticipates a potential financial recovery in the fourth quarter, assuming the conflict does not escalate further.

Addressing the Knesset Finance Committee on Wednesday, Finance Ministry official Golan Badichi expressed cautious optimism about the future and said Israel needs to overcome three risks before it can meet the set deficit ceiling of 6.6%. These risks include: the delay of US aid; a potential escalation with the Hezbollah terrorist organization – the Iranian regime's proxy in Lebanon; and an extension of state funds to assist Israelis who displaced due to the war with accommodations, which is expected to expire in August.

“To the extent that these risks do not materialize, we will be able to remain within the deficit framework without breaching it,” Badichi assessed. “Should the government decide to extend aid for evacuees, or if the flow of US aid will not arrive as planned in the budget, it will either need to change the order of [spending] priorities or it will be necessary to change the ceiling of the deficit.”

Earlier this summer, Bank of Israel Governor Amur Yaron announced that the war in Gaza was expected to cost Israel $67 billion in military and civilian costs during the period between 2023 and 2025. If realized, it would become the most expensive war in Israel’s history. By comparison, Israel's annual GDP in 2023 was over $500 billion. Israeli defense expenses during a “normal” year are approximately $20 billion.

“The government needs to make sure that it makes the right balances and budget adjustments in light of growing permanent security expenses,” Yaron said.

“This is certainly a budgetary burden. In addition, the future defense budget is expected to grow on a permanent basis, with macroeconomic impact.”

Israel is currently preparing for a potentially massive “revenge” attack by Iran and its terrorist proxy Hezbollah for the recent eliminations of the top Hezbollah military commander Fuad Shukr in Beirut and Hamas terrorist chief Ismail Haniyeh in Tehran.

While the scope and implications of such attacks are currently unclear, they could potentially have a significant negative impact on the Israeli economy, as well as the economies of Lebanon and Iran.