Israel's Fiscal Deficit Narrows to 5% of GDP in May 2025 Due to IAI Dividend.

Israel's fiscal deficit narrowed to 5% of GDP in the twelve months to the end of May 2025 due to a NIS 1.6 billion dividend from Israel Aerospace Industries. The deficit would have widened otherwise. The national debt jumped 17.9% in 2024. State revenue increased by NIS 5.6 billion in May, while government spending totaled NIS 256.2 billion, up 2.8% since the beginning of the year.

Israel's government has taken a significant step towards fiscal responsibility by approving a three-year economic plan aimed at reducing the country's budget deficit to below 3% of GDP by 2028. This plan, approved on Sunday, reflects a careful balance between cautious optimism and responsible fiscal action, as stated by Ilan Rom, Director-General of the Finance Ministry [1].

The current budget deficit stands at 5% of GDP, a figure that has been exacerbated by the ongoing conflict with Hamas in Gaza. The plan projects a deficit of 2.8% of GDP in 2026 and 2027, and 2.9% in 2028. This reduction is expected despite the economic impact of the conflict, which saw growth drop to about 1% in 2024 but is projected to rebound to between 3% and 3.5% this year [2].

The Finance Ministry's plan does not include the financial implications of the recent military escalation or yet-to-be-made political decisions. However, it forecasts economic growth of 4.4% in 2026, indicating a positive outlook for the Israeli economy [1].

The Bank of Israel has expressed caution regarding the plan, forecasting a deficit between 3.5% and 4% for 2027 and 2028, which exceeds the government's projections. Governor Amir Yaron emphasized the importance of reducing debt levels to maintain market confidence and warned that an escalation in conflict could derail the 2025 deficit target [2].

The plan also includes recommendations for future adjustments, prioritizing spending cuts that do not undermine labor incentives or education, while also raising selective taxes and removing distortive tax exemptions, particularly in the realm of indirect taxation [2].

In 2024, Israel's national debt increased by 17.9% to 1.33 trillion NIS, attributed to the financing needs of the war. This increase, along with a decrease in GDP by only 1%, led to a significant jump in the debt-to-GDP ratio [4].

The Israeli economy has shown resilience in the face of adversity. Despite the conflict, Israel's defense exports reached a record $14.8 billion in 2024, with 54% of exports directed to European countries [5].

References:
[1] https://www.watanserb.com/en/2025/06/09/israel-approves-three-year-economic-plan-to-cut-budget-deficit-below-3-by-2028/
[2] https://money.usnews.com/investing/news/articles/2025-06-08/israel-plans-to-bring-budget-deficit-below-3-of-gdp-for-2026-28
[3] https://www.tradingview.com/news/reuters.com,2025:newsml_L1N3SB02R:0-israel-aims-to-cut-budget-deficit-to-less-than-3-of-gdp-for-2026-28/
[4] https://investorempires.com/israels-national-debt-jumped-17-9-in-2024/
[5] https://www.ynetnews.com/business/article/sjgxihtzgg