Israel Approves Three-Year Economic Plan to Cut Budget Deficit Below 3% by 2028

Watan-The Israeli government approved on Sunday a three-year plan aimed at reducing the country’s budget deficit to below 3% of GDP by 2028, down from a projected 5% this year.

The Finance Ministry’s plan projects a deficit of 2.8% of GDP in 2026 and 2027, and 2.9% in 2028. The deficit is expected to reach around 5% in 2025, following a sharp rise in spending due to the Israeli war on Hamas in Gaza, which began on October 7, 2023. The deficit in 2024 was 6.9%.

The plan also forecasts economic growth of 4.4% in 2026. Growth had been severely affected by the war, dropping to about 1% in 2024, but is expected to rebound to between 3% and 3.5% this year. The Finance Ministry clarified that the plan does not include financial repercussions from the latest military escalation or yet-to-be-made political decisions.

Israel’s Economic Outlook Faces Cautious Optimism Amid Fiscal Risks

Ilan Rom, Director-General of the Finance Ministry, said:“The economic plan for 2026–2028 reflects a careful balance between cautious optimism and responsible fiscal action. It ensures future financial commitments remain within the national budget framework, adhering to principles of prudent and responsible public financial management.”

Bank of Israel Governor Amir Yaron warned during a cabinet meeting that lower debt levels are essential to maintain market confidence.

In a statement, the central bank noted that while deficit reductions in 2026 may allow for a decrease in the debt-to-GDP ratio, risks remain above normal. The Bank forecasts a deficit between 3.5% and 4% for 2027 and 2028—exceeding government estimates.

Yaron added:“Further fiscal adjustments may be necessary, depending on geopolitical and economic developments. An escalation in conflict could derail the 2025 deficit target.”

He advised against reopening the 2025 budget to raise the deficit ceiling due to current economic uncertainty and recommended that any future adjustments should prioritize spending cuts that do not undermine labor incentives or education, while also raising selective taxes and removing distortionary tax exemptions, particularly in the realm of indirect taxation.