The recently approved budget plan for 2025 has sparked significant controversy, as it proposes stringent measures aimed at managing escalating war expenditures and addressing a growing fiscal deficit. There are indications that some government ministers may voice their objections to the harshness of these measures.
At a cabinet meeting on October 31, Prime Minister Benjamin Netanyahu initiated discussions to finalize the state budget, which is particularly critical given the current financial climate. Following the cabinet’s approval, Israelis will face increased taxes and diminished disposable income, alongside a reduction in public services in response to surging costs associated with ongoing military operations. On Friday, the cabinet surmounted an initial obstacle in advancing the 2025 budget by making key last-minute modifications.
These adjustments included the elimination of a proposal to freeze government benefits and removing certain tax advantages related to savings plans. While this development is a positive aspect, it is accompanied by a reality of trade-offs. The government is still tasked with developing an austerity package worth NIS 37 billion (approximately $9.9 billion), necessitating tax hikes and significant cuts in spending to bridge the fiscal gap stemming from projected revenues and heightened defense spending amidst prolonged conflict with Hamas in Gaza and ongoing tensions with Hezbollah in Lebanon.
The budget deficit, which has recently escalated to 8.5% of GDP, is expected to be curtailed to a target of 4.3% for 2025. Instead of imposing a freeze on welfare benefits allocated to vulnerable groups—including the elderly, people with disabilities, Holocaust survivors, and families of fallen soldiers—the decision was made to correspondingly increase contributions to the National Insurance scheme. Commenting on the budget, Dr. Gali Ingber, the head of finance studies at the College of Management Academic Studies, remarked, “The primary takeaway from this budget is that it will predominantly impact the working population, who bear the burden of taxation and military service.”
Ingber emphasized that the adjustments in taxation would significantly affect employees’ net income, imposing a heavier load on the working class. She expressed disappointment that the government did not take more drastic measures to cut expenditures across various ministries, suggesting that the 5% spending cut was insufficient while highlighting that coalition funds remained largely unscathed. The proposed budget amounts to NIS 607 billion (approximately $162 billion) and must secure approval from the Knesset by the end of March. Failure to do so could lead to early elections triggered by the collapse of the government.
Yoram Leviant, a pension and retirement specialist, noted that while the freeze on government allowances and alterations to tax benefits for advanced study funds were expected to create public discontent, the government’s choice to primarily focus tax increases on the workforce rather than cutting its own expenses is telling. “The average middle-class family will shoulder a heavier burden as their income rises less than the costs imposed by taxes and living expenses,” he warned.
Anticipated tax measures slated for implementation in 2025, pending Knesset approval, include:
1. An increase in National Insurance contributions, which fund health-related benefits. The current employee contribution rate of 3.5% is expected to rise and could impose an additional NIS 1,000 to NIS 2,000 in annual costs for average households.
2. The freezing of income tax brackets and tax credit points, which will not adjust for inflation, potentially leading to real income reductions despite consumer prices remaining high.
3. A reduction of two recuperation days for employees in 2025, translating to around NIS 800 less in recuperation pay.
4. An increase in value-added tax (VAT) from the current 17% to 18%, impacting the cost of consumer goods and disproportionately affecting lower-income individuals.
5. Retaining the current tax exemption rate on pensions rather than increasing it as planned.
Amid these outlined changes, the finance ministry had previously considered various austerity measures, which have now been temporarily shelved. These included taxing interest from tax-exempt savings plans, freezing welfare benefits for vulnerable populations, eliminating VAT exemptions for tourists, and halting automatic increases in the minimum wage.
Alongside these tax increments, significant cuts to government services, including health, education, and welfare, are expected. Furthermore, approximately NIS 4.1 billion of controversial coalition funds has been preserved, reflecting political commitments made during coalition negotiations. Dr. Ingber suggests that the government should redirect funds toward sectors that could foster future growth, such as high-tech industries and healthcare infrastructure.
However, with the assumption that hostilities will conclude by the end of 2024, economists express skepticism over the government’s budgetary deficit target of 4.3%, suggesting that a prolonged conflict would necessitate additional allocations to meet defense expenditures. In summary, this budget carries significant implications for Israeli society, particularly for middle-class families already grappling with a high cost of living amid ongoing wars, as well as for vulnerable populations who depend on government supports that may face cuts or reconsideration moving forward.
