Israel’s Finance Ministry is quietly preparing a contingency budget plan for 2025 in case the government avoids passing the 2025 budget for political reasons, sources familiar with the situation told Globes. According to the original timetable, the government was scheduled to approve the budget proposal this week, but there is currently no budget framework. The contingency plan, led by Finance Ministry Director General Shlomi Heisler, includes a list of reforms and legal changes aimed at cutting government spending before the emergency budget goes into effect.
Allocations and taxes
The package of measures approved by the Finance Ministry amounts to some NIS 20-25 billion to bolster the fiscal situation – a little over 1% of GDP. The list of measures includes merging the two lowest income brackets, so that those with lower wages will pay a higher tax rate. Today, those with a monthly wage of NIS 7,010 pay a 10% tax rate. The second bracket, with a monthly wage of NIS 10,060, pays a 14% tax rate. According to Finance Ministry estimates, this move alone would increase the state’s annual revenues by some NIS 2 billion.
Another move proposed by the Finance Ministry is likely to draw opposition from the Haredi parties. The state allowances currently paid to the sixth and seventh children are higher than the allowances paid to each of the first five children. The Finance Ministry proposes paying the same amount to each child from the sixth child onwards, up to the same amount paid to the first five children.
The plan also includes a freeze on various updates, with the aim of preventing an automatic increase in government spending starting on January 1. Thus, updates to income tax rates, tax credit points, property tax rates, National Insurance benefits, and adjusting the minimum wage to the average wage in the economy will all be frozen. These are relatively “soft” measures, as they do not impose new taxes on the public but temporarily deprive them of new financial benefits. A more complicated freeze that the Treasury wants to pass is the planned salary increases for hundreds of thousands of public sector workers next year, which requires Histadrut Chairman Arnon Bar-David to agree to changes to the framework agreement he signed.
The list also includes familiar tax-free measures that the Finance Ministry has already tried unsuccessfully to pass in the past: eliminating the tax exemption on personal imports from abroad up to $75, which mainly targets online shopping; “dealing with” the VAT exemption on inbound tourism; and imposing a VAT on foreign digital services, the so-called “Netflix tax.”
There will be no choice.
So far, senior officials at the Ministry of Finance have held three discussions on the subject. By August 22, a final summary of the plan will be presented, and by September 1, the legal details will be agreed upon with the Ministry of Justice in order to receive the necessary opinions. On September 15, the legislative proposals will be finalized.
Finance Minister Bezalel Smotrich is not involved in the backup plan, but he is aware of its existence. But ultimately the plan will require the approval of politicians in order to be implemented. This raises the question: If politicians are avoiding politically painful steps, why would they agree to the package presented by the Finance Ministry? The answer, according to Finance Ministry sources, is that they will ultimately have no choice.
Adding tens of billions of shekels to the defense budget is on the agenda even in an optimistic scenario that does not include war in Lebanon and Gaza in 2025, while fears of further credit downgrades and damage to Israel’s prestige among foreign investors could push the government into “involuntary cuts” at the last minute. If that happens, the professional level in the Finance Ministry will have a plan ready to implement.
In addition, the measures chosen by the Finance Ministry are “soft” compared to the original budget proposals, in which there was talk of tax cuts and increases of between NIS 30 and 50 billion. So, to some extent, the plan can be seen as a compromise with Smotrich and Netanyahu. The Finance Ministry is not sure that this will prevent the use of the idea of Netanyahu’s economic adviser, Prof. Avi Simhon, to use extra-budgetary funds as happened during the Covid crisis, which would increase the fiscal deficit, but it will make it possible to reduce tax increases and maintain government allocations and payments.