Israel’s budget deficit narrowed to 5.0% of GDP in May; Stronger-than-planned tax revenues may offset above-budget defense spending, assuming Gaza de-escalation by Q3

ISRAEL - In Brief 11 Jun 2025 by Sani Ziv

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The Ministry of Finance released the May budget figures yesterday, and overall, the data looks solid—even though we’re still operating in a high-expenditure environment. The fiscal deficit for May came in at NIS 8.6 billion (~$2.5 billion), with the trailing 12-month deficit edging down slightly to 5.0% of GDP, from 5.1% in April. That’s quite a shift, especially considering the peak of 8.5% recorded last September. What’s driving this improvement? Mainly stronger-than-expected tax revenues. In May alone, the government collected NIS 44.8 billion, bringing total tax collections since the beginning of the year to NIS 240.3 billion—an 18.6% nominal increase compared to the same period last year. Naturally, once we adjust for legislative changes (like the VAT hike) and timing effects (notably the deferral of April tax payments), the real underlying growth is more moderate—around 6.6%. On the spending side, things have remained relatively contained, even with the renewed fighting in Gaza. Since January, total government spending is up just 2.8% year-on-year, with civilian spending rising 3.6%, and a 4.2% decline in defense expenditures.  Bottom line: May’s revenue numbers were largely in line with the Ministry of Finance’s updated forecast, which added NIS 17 billion to the full-year revenue projection for 2025. If the current pace of tax collection continues, it could absorb much of the additional defense-related expenditure—assuming we see a meaningful de-escalation in the conflict by the end of Q3. That’s why, for now, the government’s 4.9% deficit target still looks within reach. On the funding side: In May, the Treasury raised NIS 16.6 billion in gross domestic bonds,...