Israel's Deficit Trajectory Flattening as Political Uncertainty Looms
Israel's fiscal deficit trajectory mirrors a Nike swoosh, stabilizing around 3.2% of GDP but facing rising pressure. Driven largely by political paralysis and a delayed 2027 budget, the economy faces severe spending freezes.
Israel's fiscal deficit trajectory since the outbreak of the war mirrors the Nike swoosh logo, surging sharply from 2.6% of GDP in October 2023 to 8.4% in September 2024 within 11 months, followed by a slower decline down to 3.2%. While the improvement is clear, the swoosh tail has flattened out, with the annual deficit remaining stuck in the 3.2% to 3.3% range since June. Furthermore, October alone recorded a deficit of 18.3 billion shekels, compared to 15.2 billion shekels in the same month last year—a jump of over 20%.
Revenue Pressures and Defense Spending
The slight deterioration in recent months stems primarily from the revenue side. Since August, revenues over the trailing 12 months dropped by roughly 0.15 percentage points of GDP to 26.5%, while expenditures remained nearly flat around 30% of GDP. Nevertheless, the deficit is not expected to spiral out of control either this year or early next year. To meet the budgetary deficit target of 4.9% of GDP—amounting to 111.2 billion shekels—a deficit of 63.4 billion shekels is required over the remaining two months of the year. For comparison, the deficit in November and December of last year totaled only about 27 billion shekels.
At this stage, the deficit is largely a function of revenues. While moderating, they are not collapsing; October tax collection rose by 4.1% in real terms at uniform tax rates. Even if expenditure in November and December outpaces the same period last year by roughly 10%, the year is projected to end well below the target, assuming no additional military escalations occur.
Budget Expansion and Accounting Nuances
Yet, the relatively low deficit is not evidence of genuine fiscal restraint. The budget itself expanded over the course of the year by 23.6 billion shekels to 721.8 billion shekels. The defense budget was boosted from 169.9 billion to 186.6 billion shekels, and the general reserve of 12.8 billion shekels was almost entirely distributed. Defense spending grew by 9.9% since the beginning of the year, compared to just 1.4% for civilian ministries.
Official reports compare performance against the original budget, displaying an execution rate of just 78.9%—a picture more restrained than reality. Revenue figures also require caveats. The Treasury reports a nominal 12.9% increase in tax revenues, while the Tax Authority cites an 8.4% real increase at uniform tax rates. Part of the gap stems from accounting differences, such as the compensation fund allocation returning to 25% from 100%, alongside a 5.5 billion shekel loan from the National Insurance Institute recorded as revenue.
Political Uncertainty and the 2027 Outlook
Looking ahead, next year's deficit is expected to drop for an entirely different reason: the political calendar. With elections held late last month, the Treasury has not yet begun preparing the 2027 budget. In the absence of an approved budget, the economy will enter January under a continuation budget. Based on calculations, the Deficit Reduction Law sets the 2026 expenditure baseline for the continuation budget at roughly 633 billion shekels, excluding one-off expenditures. Accounting for population growth yields a continuation budget of about 642 billion shekels, or around 53 billion shekels per month, compared to an average monthly expenditure of 55 billion shekels this year.
This tightening is not the result of deliberate economic policy, but rather policy paralysis at a time when the economy needs direction most. A continuation budget freezes new initiatives, investments, and civilian ministry activities while leaving mandatory commitments intact, including salaries. Government obligations for 2027 reach approximately 720 billion shekels—roughly 80 billion shekels more than the continuation budget permits, creating a massive fiscal gap that the incoming government will immediately have to face.
