Israel: Budget posts NIS 553mn deficit in July

• Deficit switches from large surplus in July 2022
• Revenues continue declining over weaker consumption, real estate market moderation, lower import prices
• Ministry sees stabilization in tax revenues in trend terms but is still cautious to conclude there is turnaround
• Expenditures continue increasing at higher-than-planned pace

The budget posted a deficit of NIS 553mn in July, switching form a surplus of NIS 2.5bn in the same month a year ago, according to latest finance ministry data. The budget has been on a deficit for the third month running in July and in total of four months this year. In ytd terms, the budget remained on a surplus of NIS 6.1bn, down by 82.2% y/y from a surplus of NIS 34.4bn in Jan-Jul 2022. The government has announced a budget deficit target of NIS 16.9bn in the full 2023, which is 0.9% of the projected GDP. However, the 12-month rolling budget deficit increased further to 1.0% of GDP at the end of July from revised downwards 0.8% at the end of June.

Revenues decreased by 1.5% y/y in July and we note that they have been on a declining trend since last October. Revenues were down by 4.1% y/y in Jan-Jul. In uniform rates (adjusted for inflation, legislative changes and one-off effects) tax revenues fell by 3.7% y/y in July and by 7.2% y/y in Jan-Jul. Direct tax revenues dropped by 4.3% y/y in July and by 9.1% y/y in Jan-Jul dragged down by a sharp decrease in revenues from real estate taxes, a decrease in income tax revenues and an increase in tax refunds. Indirect taxes dwindled by 2.9% y/y in July and by 4.4% y/y in Jan-July affected by a slowdown in consumption but also by the lower activity in the real estate market. Net VAT receipts decreased to NIS 11.7bn in July from NIS 12.5bn a year ago but in adjusted terms they were down by real 9% y/y, the ministry estimates. It explains that the decrease was due to weakening private consumption but also due to high import value in July last year because of the high prices of raw materials. Net VAT revenues decreased by 10% y/y in Jan-Jul and part of the contraction is explained by reduction in real estate activity. On a positive note, the ministry sees stabilization in tax collection in trend terms in the past three months following a downward trend that has existed since the middle of 2022 but is still cautious to predict if this is a turning point.

Expenditures rose by 6.5% y/y in July and by 6.8% y/y in Jan-Jul. When excluding the economic aid programme related to the coronavirus crisis, expenses rose by higher 8.9% y/y ytd against planned budget expenditure growth in the budget law of 7.6%. The ministry had explained before that expenditures in H1 last year were relatively low while spending in H1 this year was elevated because of higher wage bill. The unions and the government reached a new agreement that pushed up public sector remunerations as of Marh this year.