Fiscal deficit to widen to fund huge draft of reserves

The cabinet has approved drafting up to 450,000 reservists through emergency orders over the next three months. This is a record number in terms of the scale of potential recruitment since the start of the war, which enlarges and extends the existing order to draft 400,000 reservists by the end of May.

“2025 is expected to be a year of war, similar to 2024,” was how the extensive draft was explained in the cabinet resolution. However, the state budget for 2025, which the Knesset enacted only two months ago, was not planned to financially support another year of war. This means that the pace of military spending is moving above the planned amount.

Estimates among some Ministry of Finance sources are that in the event the plan is implemented and the intense fighting in Gaza continues for a long time, there will be no alternative but to open the budget and provide more for defense spending.

The Ministry of Finance will initially use the “emergency fund” set up in the budget for just such a case, of an unplanned extension of the fighting. However, the Ministry of Finance has not guarded the fund, and out of the NIS 10 billion allocated, only NIS 3 billion remained before the resumption of fighting. This will not suffice.

A reserve soldier costs NIS 800 per day

The 2025 state budget for was built around a planned fiscal deficit of 4.9% of GDP at most, with maximum utilization of the fund for the continuation of fighting. In other words, the government took into account an annual state “overdraft” of NIS 98 million.

Fighting a prolonged war will widen the deficit and may also cloud cut GDP growth. Even before the decision on the extensive call-up of reserves, the Ministry of Finance began working on an up-to-date macroeconomic forecast, which will be published in the coming days and is expected to show a decline in annual growth.

The Ministry of Finance’s rule of thumb is that the average daily cost of a reserve soldier is about NIS 800. This calculation does not take into account long-term costs, such as grants paid to the soldier for his service in the following budget year. Multiplying 450,000 reservists by three months is a whopping NIS 32 billion.

In practice, the amount should be much lower. The cabinet approved drafting up to 450,000 men, but the army may, depending on its operational needs, call up fewer. Not everyone who is drafted will serve continuously for 3 months. Basically, a soldier who receives an emergency call-up until the end of August is entitled to reserve pay until the end of the period, even if at home for part of the time, unless he was officially released from the tour of duty.

But even if the final bill charged to the Ministry of Finance is lower, say by half, NIS 16 billion is still an amount that requires breaching the spending framework in the state budget.

A series of cuts and tax hikes

Since October 7, hundreds of billions of shekels have been required to fund the war and 8ts ramifications over more than 18 months. The government has approved a number of cuts and tax hikes in efforts to balance the deficit.

From raising VAT, to increasing national insurance contributions, to collecting sick leave from every employee’s salary, to imposing a new tax on profits locked up in companies and temporary wage cuts for public sector employees, and ending with expanding the additional tax for high-income earners – the Treasury has already managed to anger almost every possible sector in the economy with its convergence measures.

The government, for its part, did not cut coalition funds, did not close superfluous ministries and distanced itself like fire from handling politically explosive issues such as the conscription of haredim into the army. Add to this the fact that next year is an election year, and the chance of political willingness for further cuts is increasingly remote.

Everything in order to not breach the budget framework

The approved defense budget includes a large portion in historical terms for drafting reservists. NIS 17 billion was meant to cover the needs of the reserves for all of 2025. In the first two months of the year, it still seemed that the pace of spending was in line with the original plan. With the collapse of the ceasefire in Gaza in March and the need to reinforce the reserves, the pace of implementation fell short of the plan.

The Ministry of Finance is already talking about a gap of about NIS 20 billion between the budget and reality, which stems mainly from the reserve expenditure – including delays in the implementation of a plan to extend compulsory service for soldiers, and also from other items such as replenishing the ammunition stockpile.

Minister of Finance Bezalel Smotrich’s instruction to his officials, at least in recent weeks, was to do everything in their power not to open up the budget. Smotrich estimates that the IDF will be able to manage within the framework of the extensive defense budget it received this year, which stands at more than NIS 110 billion, through internal streamlining.

This may indeed happen, if reports from abroad about US President Donald Trump’s progress in finding an agreement with Hamas that will stop the fighting and return hostages home are taken seriously.

Israel has been signaling for some time that it will expand the operation in Gaza, and the new order gives new validity to the scenario. But in the dynamic developments in the international political arena, preparations for combat are taking place in parallel with diplomatic efforts by the US to reach a ceasefire agreement, which will would change the situation on the economic level.

The reserve funds have been spent

Smotrich’s plan to maintain the budget is not consistent with his plan to continue the war with all its intensity in the long term. Others like Minister of Defense Israel Katz say, “Unlike in the past, the IDF will remain in any territory that is contentious,” while Shin Bet chief-designate David Zini, sees an “eternal war.”

Where will the Ministry of Finance get the budget increase for the military? After using up the remaining financial reserves, there will not be many choices left other than widening the fiscal deficit.

The Budget Division will perhaps try to raise some of the amount through additional cuts in the budgets of government ministries. But after several cuts in the past year, there is almost no “free” budget left from which to cut. In addition, the prevailing feeling in the Ministry of Finance that after hitting the working public hard in the 2025 budget, the government will have no public credit left, nor will it have any credit with the labor organizations for additional economic decrees in the near term that would allow the deficit to be reduced.

Published by Globes, Israel business news – en.globes.co.il – on May 27, 2025.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2025.