Hamas rejects ceasefire proposal in current form; fiscal risks for 2025 rise

ISRAEL - In Brief 03 Jun 2025 by Sani Ziv

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Following the U.S.-backed ceasefire proposal, Hamas has, for now, rejected the offer in its current form. While Hamas sources told Arab media that the proposal was not "categorically" rejected and could serve as a basis for continued talks, both Israel and the United States consider the group's requested changes unacceptable. While diplomatic efforts may resume, the current outlook points to renewed military escalation in Gaza. Israel is expected to intensify operations, and the defense budget for 2025 is now expected to rise significantly above prior estimates. Fiscal and growth forecast implications: higher spending, political constraints This shift in the security outlook is already reflected in updated fiscal and macroeconomic projections, and Israel’s Ministry of Finance has accordingly revised its fiscal and macroeconomic outlook. According to the new forecast, GDP growth in 2025 has been lowered to 3.6%, down from a previous projection of 4.3%, while the growth forecast for 2026 has been revised to 4.4%, compared to an earlier estimate of 5.4%. Although tax revenues have outperformed expectations—leading the Ministry to raise its 2025 forecast from NIS 489.2 billion to NIS 506.1 billion—this improvement is not expected to fully offset the rise in defense and interest spending. As a result, the Ministry now warns that the fiscal deficit is expected to exceed 6% of GDP in 2025. Moreover, given the fragile political environment, there are growing doubts about the government’s ability to execute a fiscal adjustment plan to adjust the budget deficit back to 4.5%-5%. If the security situation continues to deteriorate—particularly in the event of a direct confrontation...