Nvidia Fuels Israel's Economy as Projected Deficit Drops to 4 Percent

The Israeli economy's reliance on tech giant Nvidia has reached new heights. The company has not only cushioned GDP during the war years, but also played a pivotal role in reducing government debt and reining in the deficit. According to economists' projections, the deficit is expected to stand at just 4% by the end of the year, significantly lower than the Treasury's target of 4.9%, driven largely by corporate taxes paid by Nvidia.

Last week, the Accountant General at the Ministry of Finance published the government deficit data, which stood at 3.2% over the past 12 months. However, the Treasury noted that government spending traditionally accelerates toward the end of the year, anticipating a notable increase. Ministry officials remain convinced that the deficit will ultimately stay below target, buoyed by positive tax collection surprises.

The Local Growth Engine

Since the beginning of the year, tax revenues have surged by 13.3% compared to the same period last year, with a significant portion of the increase attributed to Nvidia's operations. According to Yonatan Katz, chief economist at Leader Capital Markets, Nvidia pays an estimated tax rate of roughly 7.5% on net exports produced in Israel and attributed to it. He noted that this translates to tax collection rates of about 2.5 billion shekels per quarter, or approximately 0.5% of GDP, with potential increases in the second half of the year.

Katz estimates the scale of tax collection using national accounts data, specifically focusing on exports "that do not cross the country's borders" — a term mainly referring to high-tech exports. Market and government estimates point primarily to Nvidia, which is registered in Israel and develops its products locally, though manufacturing takes place abroad and exports are shipped directly to international customers. This export segment has grown dramatically in recent years, reshaping the Israeli economic landscape.

Data from the Central Bureau of Statistics indicates that last year's growth reached 3.5%, but without Nvidia, it would have stood at a mere 2.1%. Furthermore, Katz's analysis of GDP figures from the second quarter of 2024 through the second quarter of 2026 shows official growth at 10%, which would have dropped to about 6.6% excluding the activity of Nvidia and similar firms.

The Central Tax Engine

Tax revenues were also bolstered by additional factors: the Wiz-Google deal, enhanced enforcement following the trapped profits reform, and the "Israel Invoices" reform. Furthermore, Katz explains that "part of the increase in tax revenues from reservists returns to state coffers via expenditure taxes, which rose by 5% in real terms."

From Katz's perspective, while heightened tax collection is a welcome development, it masks underlying vulnerabilities beyond the growing dependence on a single corporation. "In the coming quarters, Nvidia is expected to continue making substantial contributions to tax revenues, but there is uncertainty regarding our ability to rely on such massive collection volumes in the years ahead," Katz warned.

This is compounded by a high structural deficit. The causes lie in the defense budget, which has nearly tripled since the outbreak of the war, and a high debt-to-GDP ratio (68.5%) leading to heavy interest burdens. Moreover, civilian spending in Israel ranks in the lower third of OECD countries, while the economy desperately needs investment in education, infrastructure, and public services — a collection of challenges that the Bank of Israel governor terms the "fiscal trilemma" facing the incoming government.

Katz adds that "a deficit lower than planned is a positive development for the bond market, but at this stage, the market is driven more by overseas yield trends and uncertainty surrounding fiscal policy following the elections."

Other economists are similarly evaluating the economic outlook following the upcoming Knesset elections. Muli Shpritzer, chief financial markets strategist at Bank Hapoalim, points out that Israel's risk premium is on an upward trajectory across several indicators, including the comparison of the local government bond market to those of the United States and Germany, alongside a moderate rise in Israel's CDS premium.