Key facts
- Israel's Finance Ministry published its 3-year fiscal projections.
- The projected budget deficit is expected to exceed the permitted ceiling in 2029, requiring NIS 15.7bn in savings.
- The deficit is projected at 2.5% of GDP in 2027 and 2028, rising to 3.0% in 2029, with the ceiling set at 2.4% of GDP.
- Defence spending and interest payments show a significant increase compared to the pre-Gaza war period.
- The ministry forecasts 4.0% economic growth in 2026, with less optimistic scenarios also considered.
- Risks include prolonged military conflict, global economic slowdown, and real estate market slowdown.
The Israeli Finance Ministry has released its updated 3-year fiscal projections, indicating that the budget deficit is not expected to exceed the permitted ceiling in 2027-2028 under current government commitments. However, the ministry estimates that NIS 15.7 billion in savings will be necessary in 2029 to prevent the deficit from surpassing the 2.4% of GDP ceiling, as it is projected to reach 3.0% that year, compared to 2.5% in 2027-2028.
This fiscal framework represents an improvement from previous estimates in January, attributed to increased revenue projections and a slight downward revision in expenditure forecasts. Despite this, current government spending commitments still slightly exceed the ceiling for 2027-2028. The ministry highlights that these projections do not include potential future fiscal policy decisions, coalition funds, or pipeline projects.
Defence spending and interest payments are noted to have significantly increased their share of the total budget, rising to over 22% and 13.0% respectively in 2027-2029, from 15.5% and 9.2% in 2022 before the Gaza war. Several factors could further impact spending, including the recruitment rate of reserve soldiers, plans to improve the security situation, a national plan for war-wounded rehabilitation, the end of the US security aid scheme in 2028, and potential future wage agreements.
The economic growth forecast for 2026 is set at 4.0%, expected to accelerate to 4.8% in 2027 before easing to 3.5-3.6% in the subsequent two years. The ministry also outlined two less optimistic scenarios related to potential escalations with Iran, which would result in lower GDP growth in 2026 but higher growth in 2027.
Negative risks to the forecast include a prolonged military conflict, damage to infrastructure, disruption of foreign trade, a slowdown in the global economy, and international moves against Israel. The real estate market slowdown is also identified as a risk that could lead to broader economic effects. Positive factors that could improve the forecasts include renewing normalization with Arab nations, increased defense exports, improved labor productivity from AI, and a faster return of reservists to the labor market.