Israeli deficit narrows to 7.9% of GDP despite ongoing military spending

The State of Israel's financial deficit shrank to 7.9% of GDP in October, according to a new report released by the Finance Ministry in Jerusalem.

Israel's financial deficit decreased to 7.9% of GDP in October, according to a new report released by the Finance Ministry in Jerusalem. During the same period, the state revenue expanded and reached NIS 398.6 billion (about $106 billion).

While the deficit is still above the annual target, it marks an improvement compared to the preceding month when the deficit was 8.5% of GDP. Furthermore, this fiscal improvement occurs amid continued military expenses related to the ongoing conflict with Iran and its terrorist proxies, Hamas in Gaza and Hezbollah in Lebanon.

The Iron Swords War, which began last October, is by far the most expensive war in Israel's history.

Earlier this year, Bank of Israel Governor Amir Yaron estimated that the war could end up costing some $67 billion in accumulated military and civilian expenses during the period 2023 to 2025. Approximately half of the expenses are earmarked for the Israeli military and its ongoing operations.

While the war will eventually come to an end, Yaron urged the Israeli government to prepare for larger spending on long-term security needs.

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

While few pundits are surprised by the financial deficit amid war, the Ministry of Finance linked it to uncertainty concerning aid from the United States.

Although Israel’s budget deficit has improved, the global S&P agency predicts that the Jewish state will not experience a major economic recovery before 2026. The pessimistic outlook stems from the expectation that the ongoing war will persist into 2025, continuing to impact the Israeli economy. Nevertheless, the agency highlighted that Israel's economy remains robust and diversified.

"Israel's diverse and flexible economy, which is focused on the exports of goods and services in the tech industry, together with a strong balance of payments, remain main strong points," S&P stated.

The Israeli economy has faced numerous challenges in recent months.

In February, Moody’s downgraded the Israeli credit rating for the first time due to security concerns and political instability amid war.

In May, Turkey announced it would end all trade with the Jewish state due to the Gaza War, which Turkey’s pro-Hamas government opposes. Until recently, Turkey was one of Israel’s largest trading partners. At the time, then-Israeli Foreign Minister Israel Katz blasted Erdoğan's decision to halt trade with Israel.

“Erdoğan crossed a line and blocked ports for Israeli exports and imports. This is how a dictator behaves – trampling on the interests of the Turkish people, businessmen and ignoring international trade agreements,” Katz stated.

In August, Fitch downgraded the Israeli credit rating from “A+” to “A” amid concerns that the war with Iran and Hezbollah would expand even further.

“The downgrade to 'A' reflects the impact of the continuation of the war in Gaza, heightened geopolitical risks, and military operations on multiple fronts. Public finances have been hit and we project a budget deficit of 7.8% of GDP in 2024 and debt to remain above to 70% of GDP in the medium term. In addition, World Bank Governance Indicators are likely to deteriorate, weighing on Israel's credit profile,” the Moody's report stated.

The agency assessed that there was a high likelihood the war would continue in 2025.

“In addition to human losses, it could result in significant additional military spending, destruction of infrastructure and more sustained damage to economic activity and investment, leading to a further deterioration of Israel's credit metrics,” Moody's warned.