Israeli Fiscal Rule Framework

Israel’s fiscal rule framework is the set of statutory limits and budget procedures used to guide preparation and implementation of the central-government budget. Its principal numerical constraints are a deficit target and an expenditure limit, established in legislation and revised over time. Separate constitutional budget provisions govern when the budget must be presented, how it is approved, and what spending arrangements apply if approval is delayed. ^{[1] [1]}

Purpose and legal basis

Fiscal rules are lasting constraints on fiscal policy, commonly expressed as numerical limits on budget aggregates such as the balance, debt, expenditure, or revenue. The Israeli framework is chiefly built around budget-balance and expenditure constraints rather than a single fixed rule. In the IMF’s classification, these are two of the main types of fiscal rules used internationally. ^[2]

Israel’s budget process rests on several legal instruments and practices. The Knesset identifies the Basic Law: The State Economy as a central law for the budget process. Its provisions include requirements concerning presentation of the state budget, approval procedures, and the government’s authority while a continuation budget is in force. The statutory numerical rules are associated with the Deficit Reduction and Limiting Budgetary Expenditure Law, which provides for a deficit target and an expenditure limit as constraints on the budget framework. ^{[1] [1]}

The rules are intended to place an overall constraint on the government’s budget choices. They do not prescribe a specific allocation among ministries or determine the composition of taxes and spending. Those choices are made through the budget process, subject to the applicable legal limits and any legislative amendments. The deficit rule concerns the permitted budget balance, while the expenditure rule limits the budget amount used in calculating allowable spending. ^{[1] [1]}

The deficit target

The deficit target sets a legislated ceiling for the government’s budget deficit, generally expressed as a share of gross domestic product. A deficit occurs when government expenditure exceeds revenue over the relevant period; borrowing is one way of financing that gap. A statutory target can therefore constrain the scale of planned borrowing, although the target itself is not the same as a cap on the government’s total debt. ^{[1] [2]}

The target is not necessarily an unchanging long-term number. Israel’s fiscal framework has been amended repeatedly, and a target may be revised through legislation. The Knesset describes changes to the deficit and expenditure rules since the relevant law was enacted. This means that the fiscal ceiling for an individual budget year needs to be read from the law and budget decisions applicable to that year, rather than inferred from a past target. ^[1]

A target set before a budget year is also distinct from the deficit ultimately recorded. Actual outcomes depend on revenues and spending during the year, which may differ from forecasts. In its report on 2024, the Bank of Israel reported a central-government deficit of 6.8% of GDP and noted that the budget had been revised three times to accommodate additional funding, primarily for war-related costs. ^[3]

The expenditure limit

The expenditure limit constrains the amount of expenditure included in the statutory budget calculation. It operates alongside the deficit target: one places a limit on spending, while the other constrains the overall budget balance. The framework’s expenditure calculation does not necessarily equal every headline total published for the state budget, because specific categories—such as debt repayments—may be treated differently in calculating the limit. ^{[1] [4]}

The distinction is visible in the Knesset’s account of the 2025 budget. Its report stated that the expenditure budget was approximately NIS 755.9 billion, while the total used to calculate the expenditure limit was approximately NIS 619.5 billion. The latter figure excluded repayment of debts, except debts to the National Insurance Institute. These figures illustrate why expenditure-rule figures should be compared using the same legal definition and coverage. ^[4]

In March 2025, the Knesset approved the 2025 budget in final readings. Its report described the expenditure-limit calculation as 20.6% higher than the corresponding limit in 2024. That increase reflects the parameters approved for that particular budget year; it should not be read as a general annual growth rate built permanently into the framework. ^[4]

Budget approval and continuation budgets

The numerical rules operate within a budget process governed by the Basic Law: The State Economy. According to the Knesset, the budget must be laid before it no later than 60 days before the beginning of the fiscal year. The law also sets out voting procedures and arrangements for periods when the budget has not been approved. ^[1]

When a new budget is not approved on time, government spending proceeds under a continuation budget. The Knesset explains that amendments made in 2020 changed how the continuation-budget base is determined. Under the amended arrangement described by the Knesset, the base is the lower of government expenditure allowable by law and the legally prescribed expenditure ceiling. The change was made after Israel had operated for an extended period without an approved annual budget. ^[1]

A continuation budget is a mechanism for maintaining government operations; it is not a replacement for the annual budget process. It links interim spending authority to a statutory base and limit, while the government and Knesset continue the process of approving a budget. This makes the expenditure rule relevant not only when an annual budget is passed, but also when approval is delayed. ^[1]

Amendments and exceptional spending

The framework’s limits are legislated constraints, but they can be changed by legislation. This is significant during periods of exceptional spending, when the government may seek a revised deficit ceiling, a higher expenditure limit, or both. An amendment changes the applicable statutory framework for the specified period; it does not mean that the original limit was never in force. ^[1]

Events surrounding the 2025 budget illustrate this process. The Knesset recorded that the annual budget was approved in March 2025, and that a bill to raise the 2025 deficit ceiling to 5.2% of GDP and increase permitted expenditure received approval in its first reading in September of that year. The Knesset’s account described the proposal as a bill at that stage, citing additional security and civilian costs. A first-reading vote is not, by itself, evidence that a bill became law; the legal status of any proposed amendment must be checked against subsequent legislative action. ^{[4] [5]}

The Bank of Israel’s reporting on 2024 shows how extraordinary expenditure pressures can affect budget execution and fiscal outcomes. It reported that war-related budget increments were approved and that the government primarily financed the costs by allowing a higher deficit. The report also distinguished the immediate deficit outcome from the structural deficit, which reflects medium-term policy choices and expectations. ^[3]

Monitoring and interpretation

The Ministry of Finance prepares and administers the government’s budget proposals, while the Knesset legislates and approves the budget and amendments. The Bank of Israel reports on fiscal developments and analyzes their macroeconomic context. These roles should be distinguished: a budget proposal, an enacted annual budget, a proposed amendment, and the final recorded deficit are different stages or measures. ^{[1] [4] [5]}

International datasets provide a way to classify formal rules, but they do not by themselves establish whether a government complied with a rule in a particular year. The IMF’s Fiscal Rules Dataset explicitly focuses on de-jure arrangements—rules as formally established—and separately records design features such as legal basis, coverage, escape clauses, correction mechanisms, and compliance measures. It covers information through 2024 in the version published in September 2025. ^[2]

For this reason, assessments of Israel’s framework commonly distinguish between the rule written in law, amendments approved for a given year, the budget passed by the Knesset, and the eventual fiscal result. They also distinguish the central-government budget balance from the broader general-government balance. For example, the Bank of Israel’s 2024 report gives separate figures for the central-government and general-government deficits. ^[3]

Significance and limitations

The framework provides a statutory structure for setting expenditure and deficit parameters and for maintaining spending authority when budget approval is delayed. Its practical operation depends on the parameters enacted for each period, the treatment of exceptional spending, and the relationship between forecasts and actual revenue and expenditure. Because the rules can be amended, a fiscal ceiling is best understood as a legal limit applicable to a specified budget period, not as an immutable commitment. ^{[1] [1] [2]}

The rules also do not, by themselves, guarantee a particular debt trajectory. The deficit is a flow measured over a period, while public debt reflects accumulated borrowing and other balance-sheet factors. In its 2024 report, the Bank of Israel discussed the relationship between the structural deficit and the debt-to-GDP ratio, noting that the structural deficit was higher than the level it assessed as necessary to reduce debt. This illustrates why compliance with an annual deficit ceiling and the longer-term direction of debt are related but distinct questions. ^[3]

In summary, Israel’s fiscal rule framework combines statutory deficit and expenditure constraints with constitutional budget procedures and continuation-budget arrangements. Its application is year-specific: limits may be changed by legislation, and actual outcomes may differ from original targets when revenues or expenditures diverge from expectations. Analysis therefore requires identifying the relevant legal limit, its coverage and date, and whether the figure being discussed is a proposal, an enacted ceiling, or an outturn. ^{[1] [1] [2] [4]}