Budget deficit continues to increase despite positive tax revenues

ISRAEL - In Brief 11 Aug 2024 by Jonathan Katz

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Geopolitics: Despite the two targeted assassinations nearly two weeks ago and threat of reprisal from Iran and Hezbollah, ceasefire negotiations will be renewed on Thursday. Israel continues to operate in Gaza putting pressure on Hamas. Several Arab states are pushing Iran to respond moderately. US warships in the area are also a deterring factor. No one wants a full-scale escalation; therefore, the scope of retaliation is expected to be restricted. The fiscal deficit pushed higher in July The fiscal deficit in the last 12 months through July reached 8.1% GDP. Fiscal spending in January-July is up 33% y/y, including a 9% increase in non-war related expenditure. Taxes are up 3.9%. Taxes in July (excluding tax rebates) increased by 8% y/y. We expect a fiscal deficit of 7.1% GDP this year as stronger-than-expected tax revenue offset most of the spending overshoot. • The government has yet to convene in order to discuss the 2025 budget. The BoI is pushing for fiscal adjustments of 30bn ILS (1.5% GDP) to push the deficit to 4.0%. This will br politically rather challenging. Business sector growth remains steady but below pre-war levels. The hi-tech service sector (information and communication) is increasingly optimistic regarding export and employment next month. The labor market remains tight with businesses reporting a lack of workers. It is not clear to what degree the “waiting period” for an Iran/Hezbollah retaliation has impacted activity. Chain stores are enjoying a boost in demand while restaurants and leisure have suffered. The cancellation of flights but most carriers will reduce travel abroad and boost domestic consumption. The CBS Consumer Confidence index impro...