Israeli leaders kick off 2025 budget talks as war costs push up 2024 deficit

Prime Minister Benjamin Netanyahu and senior economic officials held their first high level meeting on the 2025 state budget on Monday that they seek to be approved by parliament by the end of 2024.

Bank of Israel Governor Amir Yaron, Finance Minister Bezalel Smotrich, the director general of the finance ministry and Netanyahu's economic adviser participated in the meeting, according to a joint statement that offered no details of the discussions.

Why is this important?

In the wake of credit rating cuts by S&P and Moody's, Smotrich is under pressure to maintain fiscal responsibility at a time when the budget deficit has swelled due to Israel's war against Palestinian Hamas militants, now in its 10th month.

Spending on the war has topped 80 billion shekels ($22 billion) and investors are watching to see if Smotrich has the political will in the coalition of right wing and religious parties to make big fiscal adjustments.

By the numbers

The 2024 budget approved before the war was amended to include the extra spending while raising the budget deficit target to 6.6% of GDP this year from a planned 2.25%.

In June the deficit reached 7.6% of GDP.

Key Quotes

"It is the government's responsibility to take the necessary steps, even if some of them may not be popular, to ensure economic stability and to promote sustainable growth," Yaron said last week after the central bank held interest rates steady.

"If the government only partially implements the fiscal adjustments required, or defers the approval of the budget into 2025 ... it is liable to lead to an additional increase in Israel's risk premium. This would be a result of the formulation of the perception in the markets that the debt to GDP ratio is on an uncontrolled path."