Israeli cabinet approves 2025 state budget as war drags on

Jerusalem: The Israeli cabinet approved a long-delayed wartime budget package on Friday that includes a raft of tax increases and spending cuts to pay for a war that has entered its second year with no immediate end in sight.

Israel has had to boost military spending by billions of shekels to accommodate the cost of a war that has resulted in thousands of troops deployed in Gaza and Lebanon, while much of the economy has slowed drastically due to a lack of workers.

This week, the finance ministry cut the 2024 growth outlook for the second time this year to just 0.4 per cent from an earlier estimate of 1.1 per cent.

The cost of fighting and the absence of tens of thousands of reservists serving at the front, along with the exclusion of thousands of Palestinian workers from Israel for security reasons, have weighed heavily on the main pillars of the economy including tech, construction and agriculture.

"The main goal in the 2025 budget is maintaining the security of the state and achieving victory on all fronts, while maintaining the resilience of the Israeli economy," Finance Minister Bezalel Smotrich said in a statement.

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In all, the budget includes a roughly 40-billion-shekel package of tax hikes and spending cuts to try to rein in a budget deficit now running at 8.5 per cent of GDP.

Overall spending was set at 744 billion shekels ($199.23 billion), of which 161 billion will go towards debt servicing.

Prime Minister Benjamin Netanyahu said defence allocations may be boosted further, either by adding funds to the budget before it comes to a vote in parliament in January, or by means of a supplemental budget.

He said the budget does not include potential additions that may be made after proposals from the Nagel committee, a special panel appointed by the government this year to make long term recommendations on the security budget in the coming decade.

All three of the main credit-rating agencies have cut their ratings on Israel this year on worries that the war could continue well into next year.

Among the measures likely to bite hardest on Israeli households, value-added tax will rise in 2025 to 18 per cent from 17 per cent. In addition, there will be spending cuts across most ministries.

The package will have to go to parliament for approval, which Smotrich said was expected by January. Failure to approve the budget by the end of March would trigger new elections.