Smotrich at the Finance Ministry: the 2025 deficit beat its target, debt rose 8 points of GDP and all three agencies cut Israel's rating

This review covers Bezalel Smotrich’s term as finance minister since 29 December 2022, with data as of 12 October 2026. It separates what the wars forced from what the minister and the government chose. Amounts are in current shekels.

Deficit: over target in 2024, under it in 2025

In 2022 the government ran a surplus of 0.6% of GDP [1]. By 2024 the deficit had reached 6.9% of GDP in the first estimate [2], later revised to 6.8% [1], above a revised target of 6.6% that the supplementary budget had raised from 2.25% [3]. The 2025 deficit closed at 4.7% of GDP, about NIS 98.6 billion [4], below both the original and the revised target. The Bank of Israel says a positive revenue surprise offset that year’s spending overrun [5], and the IMF’s Executive Board welcomed the authorities’ commitment to fiscal discipline [6].

After war broke out in late February 2026, the government raised the target to 5.1% of GDP, and the Bank of Israel urged it to avoid additions not needed for the war effort [13]. At the end of March the Knesset approved a 4.9% target [12].

The unresolved issue is the structural deficit, which the Bank of Israel expects at about 3.7% of GDP in 2026–2030, above the roughly 3.2% that would keep the debt ratio stable [5].

Debt and credit ratings

Public debt rose from 60.5% of GDP at the end of 2022 to 68.5% at the end of 2025, while defence spending went from 4.2% of GDP in 2022 to 8.4% in 2024. The Bank of Israel puts the fiscal cost of the war that began in October 2023 at about NIS 350 billion, roughly half debt-financed, not counting decisions since the Iran campaign of late February 2026 [5]. The minister attributed the debt rise to necessary wartime defence spending [4].

All three agencies downgraded Israel during the term [14]. S&P and Moody’s returned their outlooks to stable in November 2025 and January 2026 [15] [16], while Fitch kept a negative outlook in March 2026 [17]. Supporters point to the stable outlooks; critics note that in March 2025 Moody’s described Israel’s political risks as very high [18].

Taxes and households

The war-financing tax package raised about NIS 30 billion in 2025 [5], roughly 1.5% of GDP, through higher VAT and National Insurance contributions, freezes and a tax on retained profits. By the Bank of Israel’s estimate, the top quintile bore more than half of the increase, more than its share of income, though the National Insurance and health tax changes are less progressive than other income tax measures [19], and indirect taxes such as VAT weigh less as income rises [5]. Wider income tax brackets in 2026 give relief of about NIS 4.5 billion, mainly to deciles 8 to 10 [20]. The Bank of Israel called the tax decisions inconsistent with rebuilding fiscal buffers [5].

The minimum wage rose in stages, under agreements with the Histadrut and the annual statutory update, from NIS 5,300 to NIS 6,443.85 in April 2026 [21] [22], a nominal increase of about 21.6% (our calculation). The poverty rate among individuals was 20.8% in 2022 and 20.7% in 2023 [23], and 20.7% in 2024, against a revised 20.6% for 2023 [24]. Inflation fell from 5.3% in 2022 [25] to 1.5% in the 12 months to August 2026 [26], when seasonally adjusted unemployment was 2.8% [27]. The Bank of Israel says the shekel’s rise rested largely on a lower risk premium, mainly due to security developments and fiscal restraint, and on global dollar weakness [28].

Coalition funds

Coalition funds ran at about NIS 4.8–5.5 billion a year during the term [29] [30] [31] [32], against NIS 1.4–2.7 billion a year in 2015–2018 and NIS 2.9 billion in the 2021–22 budget [29]. The minister reportedly said he was proud to fund hesder yeshivas, pre-army academies and national service even if they are called coalition funds [31], and a Finance Ministry representative said some of the money was already going to education needs in hotels housing evacuees [33]. The State Comptroller found that many coalition funds were cut little or not at all, and some grew after the war began [34]. The Bank of Israel wrote that the 2026 budget process was delayed and run with limited transparency [5].

Local government

Balancing grants to local authorities reached a record of about NIS 3.74 billion in 2025 [35]. Their accumulated deficit grew from about NIS 3.0 billion at the end of 2022 to about NIS 4.1 billion at the end of 2024 [36]. The Interior Ministry’s income-tested arnona (municipal tax) discounts will cost local authorities about NIS 1.06 billion a year by the Finance Ministry Chief Economist’s estimate, five times the Interior Ministry’s own figure [37], while the indemnity line in the state budget is only about NIS 3 million [38].

What it means

This is analysis. The Bank of Israel attributes the jump in the deficit and debt mainly to the wars [5]. The minister and the government controlled the financing mix and spending priorities: taxes and freezes in 2025, keeping coalition funds, and wider tax brackets in 2026. The 2025 consolidation rested on revenue, so it depends on the tax rises and freezes staying in place, while the 2026 relief is already reversing part of them. The next finance minister will have to close the gap between the structural deficit and the debt-stabilising level.