Israeli cabinet set to approve austerity budget amid wars

Jerusalem: Israeli cabinet ministers were to start voting later on Thursday on a long-awaited wartime budget for 2025 that will rein in spending and raise a host of taxes to pay for the military conflicts that have engulfed the country.

The wars in Gaza and Lebanon have cost Israeli coffers tens of billions of shekels on spending for defence - equipment and in manpower after hundreds of thousands of citizens were called into reserve duty - and in compensation for those impacted.

"Our security also depends on the economy. We cannot have a strong military if we have no way of financing it," Prime Minister Benjamin Netanyahu said at the outset of the cabinet meeting before the budget vote, which could run into the night.

"There is no economy without restrictions. If you give to one place, you unfortunately need to take from another," he said.

Israel's economy has taken a hit since the October 7, 2023 attack by Palestinian Hamas militants. There has been zero growth but supply issues have pushed up inflation, and the cost of living for Israelis - already emotionally drained by the more than one-year war - has soared.

All three major credit ratings have cut Israel's credit rating this year due to the wars, raising financing costs, and stubborn inflation of 3% has forced the central bank to keep interest rates high with no respite from rate cuts in sight.

On top of all that, the 2025 budget imposes austerity, with some 40 billion shekels ($10.8 billion) of proposed spending reductions and tax increases aimed at bringing down the budget deficit from a current 8.5 per cent of gross domestic product - above a 2024 target of 6.6 per cent - to 4 per cent of GDP.

Among the tax hikes, value added tax will rise in 2025 to 18 per cent from 17 per cent.

The military in 2025 will not have an unlimited budget, said Finance Minister Bezalel Smotrich, although its spending will be 102 billion shekels next year.

In all, budgetary spending will be 744 billion shekels in 2025, with 161 billion shekels going to service the country's debt.

"It is important that we transmit stability and control and a hand on the wheel of the economy so that all our partners in the economy ... will move the economy forward," Smotrich said at the cabinet meeting.

"Now, the economy serves security. We will end the war with victory and bring security and with it also a good economy."

Economic growth is forecast at 0.4 per cent in 2024 and 4.3 per cent in 2025.

"We are in the longest and most expensive war in Israel's history," Smotrich said. "In the last year we have demonstrated an amazing ability to withstand all the efforts of the war and its costs. There is great resilience in the economy."

After the cabinet approval, the budget will head to parliament for an initial vote. Smotrich expects final parliamentary approval in January.

Failure to pass the budget by March 31, 2025 would trigger new elections.