Israel Approves Budget, Giving Netanyahu Political Respite

March 25, 2025

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(Bloomberg) — Israel’s parliament approved the state budget for this year, giving political respite to Prime Minister Benjamin Netanyahu after days of turmoil in markets.

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A majority of the 120-member Knesset, in which Netanyahu’s right-wing coalition has 68 seats, signed off on the bill. If the budget had failed to pass, the government would have collapsed under Israeli law.

The approval — which had looked in doubt at times this year due to wrangling within the coalition — shores up Netanyahu’s power base as tens of thousands of protesters take regularly to the streets to demonstrate against his rule. The decisions to remove Israel’s attorney-general and internal security chief, seen as undermining democracy, have drawn popular opposition, as has Israel’s return to fighting Hamas in Gaza after a near two-month ceasefire.

Israeli assets have come under pressure in the past month, both due to the break down of the Gaza truce and rising tension between Netanyahu’s government and key officials. The shekel was one of the world’s worst performers last week and the country’s credit-default swaps, a gauge of risk premium, rose.

The likelihood of the budget passing has helped the currency partly recover this week. It’s up around 1.2% against the dollar.

The 2025 budget totals 620 billion shekels ($166 billion), about 20% higher than the pre-war amount allocated for last year, though that was revised upward multiple times once fighting started. The target deficit is 4.7% of gross domestic product, 0.3% higher than in the original proposal brought to cabinet in November.

Defense is the single largest item, amounting to 110 billion shekels, about 60% higher than before the war against Hamas started in October 2023.

Israel’s government hasn’t disclosed a breakdown of the defense element, however Yuli Edelstein, who helms a parliamentarian committee that signed off on military spending, said millions of shekels have been allocated to boosting security along Israel’s eastern border that’s shared mostly with Jordan. Israeli officials say the boundary has become a target of Iran-backed weapon smugglers aiming to arm militants in the West Bank.

Israel’s debt to GDP ratio surged to 69% last year, its highest since 2010, and the budget includes a 35-billion-shekel fiscal-adjustment package aimed at taming the deficit. It mostly involves tax increases as well as some spending cuts.

Some have criticized the budget for lacking vision.

Central bank Governor Amir Yaron, who is also the government’s economic adviser, said recently there’s “room to change the budget composition to more prominently include growth engines, steps to improve labor productivity and reduce spending that doesn’t contribute to the economy’s future growth potential.”

Israel’s economy grew at its slowest pace in over two decades last year, excluding the Covid-19 pandemic, underlining the toll of wars fought in Gaza and against Hezbollah in Lebanon. Gross domestic product expanded 0.9%. The government’s borrowing surged and its credit ratings have been downgraded several times.

Both Hamas and Hezbollah are designated terrorist organizations by the US and other countries.

Turbulent Week

The budget vote came after a turbulent past week during which Netanyahu’s government fired Shin Bet’s chief, Ronen Bar, and launched an attempt to oust the attorney general, Gali Baharav-Miara, raising alarm at the dilution of checks and balances.

The government also plans to pass a controversial bill that will change the composition of the Judge Selection Committee, giving the executive branch more power over the appointment of Supreme Court justices.

Israeli business and hi-tech leaders, as well the country’s largest workers’ union, threatened to bring the economy to a standstill if the government doesn’t respect a court order suspending Bar’s firing until a hearing on April 8.

Given the circumstances, the budget may not be enough to satisfy markets.

“This is a bad budget from a social and moral perspective,” said opposition member Vladimir Beliak. “Rating agencies are watching and considering lowering Israel’s credit score again.”

From a political standpoint, passing the budget represents a success for Netanyahu due to obstacles within his ruling coalition. His Jewish Orthodox political allies had threatened to reject the bill and collapse the government over a debate around military service for the very religious, but most of them folded.

Far-right figurehead Itamar Ben Gvir’s return to cabinet last week bolstered the coalition’s majority. The National Security minister quit in protest against the Gaza ceasefire in mid-January, though returned swiftly once fighting resumed. The timing of his comeback raised questions among Netanyahu’s opponents, given the crucial budget vote was just days away.

(Updates with parliamentarians approving the budget.)