In a bid to address the financial strain caused by escalating war costs, Israel’s Finance Ministry has proposed a series of tax increases and spending cuts, targeting the nation’s lowest earners. The plans, announced on Monday, include freezing certain pension benefits and increasing contributions to national insurance.
The proposed changes aim to close a substantial budget shortfall projected between NIS 30 billion and NIS 40 billion ($8 billion to $10.6 billion) to help reduce the state’s deficit to 4% by 2025. This initiative is part of the Economic Arrangements Law, a comprehensive legislative document made public for public comment, which outlines funding allocations and necessary tax adjustments.
Due to increased defense and civilian expenditures resulting from a prolonged conflict with Hamas, the government raised the 2024 budget deficit target from a planned 2.25% to 6.6% of GDP. Since hostilities erupted on October 7, 2023, the direct costs of the war have exceeded NIS 250 billion, following Hamas’s brutal assault that claimed around 1,200 Israeli lives and resulted in over 250 kidnappings to Gaza.
Finance Minister Bezalel Smotrich has committed to finalizing the 2025 state budget for Knesset approval by the end of the year. If passed on time, many austerity measures aimed at deficit reduction and war financing will take effect in January. A failure to finalize the budget by the end of March could trigger new elections.
The proposed changes increase the monthly contributions required from unemployed individuals to the National Insurance and Health Insurance schemes by 10%, raising the current rate of NIS 203 ($54). This adjustment is expected to generate an additional NIS 660 million in 2025 and approximately NIS 2.13 billion annually starting in 2026.
The draft also seeks to merge the lowest income tax bracket with the next higher bracket, effectively raising the tax rate from 10% to 14% for those currently at the minimum level. Additionally, taxes will be applied to profits and interest accumulated in tax-free short-term savings plans, known in Hebrew as keren hishtalmut, along with increased deductions from pension fund contributions.
Further measures include the elimination of the value-added tax exemption for visiting tourists, negotiations with the Bank of Israel for a tax on bank profits, and additional taxes on capital gains and real estate transactions. The legislation also proposes privatizing the Port of Ashdod and closing five government ministries along with some diplomatic missions.
In an effort to quell rising criticism regarding budgetary allocations, Smotrich has urged coalition partners to propose ministry closures. However, officials from the Finance Ministry have recommended closing even more ministries to streamline operations.
The proposed budget changes have drawn immediate backlash from opposition leaders, including Yisrael Beytenu head Avigdor Liberman, who criticized the government for penalizing average taxpayers. In a video statement, Liberman warned that these measures would undermine citizens’ savings accumulated over the years, particularly targeting pension and advanced study funds.
Aviad Houminer-Rosenblum, deputy director of the Berl Katznelson Center think tank, highlighted the lack of substantial reforms in the proposed Arrangements Law, asserting that it fails to address economic growth, social inequality, or the integration of marginalized communities. He noted that the budget primarily seeks to extract funds to cover what he termed “irresponsible war conduct.”
During a faction meeting of his Yesh Atid party, Opposition Leader Yair Lapid accused Smotrich of trying to secure Haredi support for the budget by continuing to provide benefits to ultra-Orthodox yeshiva students who have not enlisted in the army. He described these efforts as bribes aimed at facilitating evasion of military service while receiving government funding.
Lapid further cautioned civil servants in finance and other ministries against participating in any illegal attempts to misallocate funds. He threatened to pursue legal action against any efforts perceived as misconduct, stating, “We will not hesitate to file complaints with the police and lawsuits in the courts.”
When asked if he still believed the current government would collapse by year-end due to budgetary issues, Lapid reiterated that the administration’s inability to deliver promised funding would lead to its downfall.
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