A little more than two months into her war with the Hamas terror group, Israel has pumped NIS 5.8 billion ($1.5billion) in direct war costs into executing the war, a situation that created gaps in the country’s budget.

The budget deficit has swelled to 3.4 percent of gross domestic product (GDP), or NIS 16.6 billion ($4.48 billion), in November over the prior 12 months, as government expenditure increased and tax revenue dropped, according to preliminary figures released by the Finance Ministry on Sunday and reported by Times of Israel.

The deficit rose from 2.6% in October as the government has been forced to increase both military and civilian spending to fund the war. On October 7, the Hamas terror group launched a shock onslaught from the Gaza Strip, murdering some 1,200 people, a majority of them civilians, taking over 240 people hostage, and devastating southern communities. Israel declared war, pledging to topple the Hamas regime in Gaza and secure the return of the hostages.

In November, government expenditure amounted to NIS 46.9 billion, up from NIS 36.5 billion during the same month last year, partly due to NIS 5.8 billion in direct war costs and partly due to the advancement of payments to suppliers and local authorities, the Finance Ministry said.

More than 300,000 reservists, among them tech workers and employees across various business sectors, were called up, and as a result, many companies have been facing disruptions in their business operations. Others such as retail firms have furloughed their employees.

As in October, the figures showed that state revenues last month declined, shrinking to NIS 30.3 billion from NIS 32 billion month over month. Revenue from taxes in November amounted to NIS 29.7 billion, marking a drop of 16.5% year-on-year, partly due to the allowance of tax deferments for businesses and individuals during the war period, according to data published by the Israel Tax Authority.

Direct taxes fell by about 15% in November versus the same month in 2022, and indirect taxes slumped almost 19% during the same comparative period.

Net income from real estate taxation plunged 61% to NIS 0.8 billion in November versus the same month in 2022, marking the seventh month in a row of declines. The collection from purchase taxes dropped by 56% in November year-on-year and income from property betterment taxes nosedived by 69% year-on-year.

The Knesset last week advanced plans to make changes to the 2023 budget so the government can allocate slightly over NIS 30 billion to the war effort in Gaza, out of which some NIS 17 billion will be funneled to the military and about NIS 13.63 billion to civil support. As a result, the deficit in 2023 is forecast to increase to at least 3.7% of GDP up from the projection of 0.9% when this year’s budget was approved earlier this year, according to Finance Ministry estimates.

The government in 2022 posted the first budget surplus in 35 years of 0.6% of GDP as state revenues rose 4.8% to NIS 468.5 billion, benefiting from an exceptionally high increase in the collection of tax income.

The economic fallout from the war and expected downturn in private consumption and demand prompted the Finance Ministry and global credit rating agencies to cut their growth prospects in recent weeks, as the fighting is estimated to cost the economy as much as NIS 200 billion.

The Organisation for Economic Co-operation and Development (OECD) is the latest body to lower Israel’s GDP forecast for 2023 to 2.3% from 2.9% projected in June, and to 1.5% in 2024 versus 3.3% previously. The Bank of Israel shaved its growth outlook and now expects the economy to grow by 2% in 2023 and 2024, respectively, in line with a Finance Ministry forecast of 2% in 2023, down from a prior estimate of 2.7%. For 2024, the Treasury projects even lower growth of 1.6%.

Times of Israel