The Finance Ministry anticipates a third revision of the 2024 state budget, as US aid promised to Israel is not expected to arrive in time for use in the current fiscal year. Additionally, the expansion of military operations in the north and the commencement of ground maneuvers in Lebanon will necessitate an increase in the defense budget, requiring additional funds.
The budgetary expenditure is expected to grow by approximately $5.4 billion to $6.2 billion. The Finance Ministry had initially relied on about $4.9 billion in anticipated US aid, but these funds have been significantly delayed and are not expected to arrive soon. Furthermore, the US is imposing various restrictions on the use of these funds, which are currently under discussion between the two nations.
The implications of this delay mean that the budget deficit is likely to exceed initial projections. The planned deficit for 2024 was originally set at about 0.8%. With the outbreak of war and the sharp increase in expenses, it was inevitably raised to approximately 6.6%. In recent months, state revenues have grown beyond forecasts, allowing the government to meet its revised deficit target despite increased war-related expenses. However, the current budget gap, primarily due to the delay in receiving US funds, will necessitate further increasing the deficit, potentially reaching 7.7-8% of GDP.
The opening of an additional front in Lebanon means an immediate and extensive addition to the defense budget. The IDF has deployed four divisions to the north and is increasing the number of reserve soldiers daily. Each reservist represents a significant expense, not only in terms of reserve duty pay but also in logistics such as transportation, food, and other maintenance costs. These expenses are immediate, requiring the identification of budgetary sources right away.
Currently, there is no clear estimate of the number of reservists required for combat in Lebanon or the duration of operations on this front. It is unknown whether it will conclude soon or extend into the next year, and consequently, what additional budget will be required. The Finance Ministry estimates that the expected cost for mobilizing reserves will range between $544 million and $1.36 billion, which was not originally planned in the 2024 budget.
Other costs associated with the northern front, such as ammunition, missiles, and Iron Dome interceptors, are not expected to impact this year's budget but will affect next year's. Naturally, the ammunition being used today has already been purchased and paid for, as the IDF prepared in advance for operations in Lebanon and maintained sufficient inventory. When the need arises for restocking and replenishing supplies, the cost will be factored into future budgets, typically spread over several years. In this sense, Finance Ministry officials say the problem is primarily cash flow-related, as the money from the United States will eventually arrive and will be used to replenish the required inventory.
When planning the revised budget, the Finance and Defense ministries relied on the aid package promised by US President Joe Biden last October. However, in practice, considerable time passed before the aid package for Israel was approved by Congress in April 2024.
The United States was supposed to transfer about $8.7 billion to Israel as part of an aid program with various components; approximately $3.5 billion is a flexible budget that Israel can use for procurement according to its needs. Even this amount was delayed but finally reached Israel about a week ago.
The remainder, about $5.2 billion, comes with various conditions and is earmarked for specific needs; approximately $4 billion is designated for air defense, namely for various types of interceptors such as Iron Dome, Arrow system, and David's Sling, and another $1.2 billion for financing the laser interception system. These amounts are still delayed, and the Finance Ministry assumes they will not be transferred to Israel in the current fiscal year. The defense establishment has already purchased and used large quantities of interceptors, but the budgetary source intended for them has not arrived.
In recent months, disagreements have arisen with the Americans over how Israel can use the amount in question, at what stage the administration will transfer the money, and around questions such as whether it can be used to finance interceptors already purchased or only future purchases. It is not inconceivable that part of the delay or insistence on American requirements, if any, is also related to political difficulties with the current US administration in light of the expanding war. The issue of aid and its modes of use are under discussion at the political level but have not yet been finalized.
The 2024 budget has already been amended twice. The first time was in March, and the second time about a month ago when the need to increase the budget by about $925 million for payments to evacuees from the north and south became apparent.
The Finance Ministry prepared the revised budget based on the assumption that the war would last about six months, and estimating that the number of reserve soldiers at this stage would be significantly lower. Meanwhile, the war is extending beyond expectations and expanding to additional fronts, and reserve soldiers are already beginning their third and fourth rotations this year.
However, neither the scenario of war on the northern front nor the delay in US aid funds surprised anyone in Jerusalem; for many months, the Finance Ministry has been concerned about delays in American aid funds and especially about certain conditions that might be imposed on them, and they have already begun to prepare for such a possibility. Nevertheless, one must wonder why they made a budget amendment only a month ago when they already estimated that the aid funds would not arrive on time and that another budget update would be needed. Ultimately, the Finance Ministry preferred to deal with urgent payments to evacuees and postpone concerns about other amounts for later.
Reopening the budget just weeks after its amendment is an unusual step and sends a problematic message. Its meaning, beyond exceeding the deficit target, is damaging Israel's credibility with credit rating agencies and investors. If Israel fails to meet the budget constraints it has set for itself, it's a troubling signal about its ability to regulate expenses and meet its commitments. Naturally, the war necessitated a budget correction to address the unexpected increase in expenses, but opening it for a second and third time may signal a loss of control over expenses.
Two credit rating agencies, Moody's and S&P, have already lowered Israel's credit rating this month due to security developments in Lebanon and with Iran. Moody's also negatively noted the government's economic policy and expressed a lack of confidence in its ability to promote significant changes that would bring the budget to a convergence trend. The Governor of the Bank of Israel also referred to this in the interest rate decision this week. It's important to listen and take seriously the assessments of the rating companies, said Prof. Amir Yaron. They reflect the challenges and risks facing the Israeli economy as the world sees it. The rating agencies emphasize the impact of the geopolitical reality but also reflect the impact of fiscal policy management, emphasizing the importance of the future policy outline, he said.
The governor also referred to the possibility of opening the budget due to increased expenses and said, The rule is that there is a budget framework. It's clear that breaking it negates the whole idea of a binding budget framework. However, we are in a period where the war has been prolonged. There is a need to finance the evacuees, there is an increase in war expenses in the north that was unexpected, and in addition, there was a cash flow diversion from the special American aid. All these combined. I would have preferred everything to be done at once, along with the execution of the 2025 budget, it would have strengthened confidence.
The Accountant General at the Finance Ministry Yali Rotenberg recently published the updated deficit data for the last twelve months. The cumulative budget deficit reached a level of 8.5% of GDP during this period, which is about $45.15 billion. The increase in the deficit is mainly due to high expenses in the defense system and civilian ministries due to the war. The estimate of war expenses since the beginning of the year stood at $21.33 billion, and since the outbreak of the war at $28.16 billion. The deficit target set by the government for the 2024 budget stands, as mentioned, at a level of 6.6% of GDP.
The Finance Ministry believes that the deficit has reached its peak and is expected to decrease in the coming months. Since the deficit is calculated for twelve months backward, the current deficit level includes the first three months of the war, during which there was a huge spike in defense expenses.
