Israel's government set to start debate on new state budget this month

The government intends to debate a proposal for the 2025 state budget on October 31, a spokesperson for Finance Minister Bezalel Smotrich confirmed on Tuesday.

The government debate will be held later than intended, as Smotrich said in September that he expected the budget to pass in the government already by the beginning of October, pass its first reading in the Knesset by mid-November, and pass into law by the end of December.

The delay in bringing the budget to the government means that it may not pass by the end of 2024, the spokesperson admitted. This means that the 2025 fiscal year could begin without an official budget. In this scenario, the government will be forced to operate based on 2024 spending levels until the 2025 budget is approved.

The process may face political hurdles as well. United Torah Judaism chairman Yitzhak Goldknopf reiterated on Tuesday a threat he first made in September, that his party would oppose the budget unless a new bill passes that will grant most eligible haredi men an exemption from IDF service.

A source said on Tuesday that the haredi parties "received the impression" that without progress on the haredi draft bill, Prime Minister Benjamin Netanyahu will delay the October 31 meeting. The Knesset Foreign Affairs and Defense Committee began in July to debate a new bill, but the committee has not held a discussion on the matter for over a month. Both leaders of the Knesset's two haredi parties, United Torah Judaism and Shas, stood behind conditioning the budget on the draft bill, the source said.

The budget comprises a number of bills, and the timing of its passage will largely depend on the speed at which it passes through the Knesset's committees, chiefly among them the Knesset Finance Committee. To this end, Smotrich met with Knesset Speaker MK Amir Ohana on Tuesday to present the budget's "guiding principles" and "main steps."

Israel credit downgrade

Smotrich said in a press conference in September that the government intends to make a NIS 35 billion cut in the 2025 budget, which will, in part, be funded by a freeze of the expected increase of stipends provided by Israel's National Insurance Institute (NII).

However, recent credit rating drops by both Moody's and S&P could require increased government expenditure on debt, and therefore larger budget cuts may be necessary.

The Knesset recently approved an expansion of approximately NIS 3.35 billion in government expenditures in 2024. Smotrich argued that this was a necessary step in order to fund government plans for evacuees, reservists, and other groups affected by the war.

However, members of the opposition argued that the expansion would lead to an increased budget deficit, which, they claimed, will already be larger than predicted due to delays in US security funding aid. An increased deficit in 2024 could require changes in the 2025 budget as well.