Bank of Israel calls for 2025 budget passage without changes to gain markets’ trust

But Finance Ministry says amendments may be needed in light of recommendations by the Nagel committee that examined defense expenditure in coming years

The Bank of Israel's main offices in Jerusalem, January 2, 2023. (Yonatan Sindel/ Flash90)
The Bank of Israel's main offices in Jerusalem, January 2, 2023. (Yonatan Sindel/ Flash90)

The Bank of Israel monetary policy committee urged lawmakers to approve the 2025 state budget without further changes to ensure confidence in the country’s financial markets.

“It is important that the budget framework for 2025 is approved without additional changes, which will contribute to maintaining the markets’ trust,” the central bank said.

The comments were made at the Bank of Israel monetary policy committee meeting on January 6, the central bank said on Monday.

Earlier on Monday, the Knesset Finance Committee chairman MK Moshe Gafni, had to adjourn a discussion on the passage of the state budget for 2025, after the Finance Ministry director general Shlomi Heizler failied to show up. Upon his arrival at the postponed meeting later in the day, Heizler noted that budget deliberations were running late, which he said was natural under the circumstances, and given the immense burden the ministry has been working under.

“We are halfway there. The budget requires adjustment measures of NIS 37 billion ($10 billion), in order for the country’s debt to GDP to stabilize and decline in the coming years,” said Heizler. “We have already approved most of the significant tax reforms and other adjustments in the Knesset.”

“We are interested in getting the budget approved as quickly as possible,” he added.

Finance Minister Bezalel Smotrich and MK Moshe Gafni attend a Knesset vote on the 2025 state budget, December 16, 2024. (Chaim Goldberg/FLASH90)

The Knesset narrowly approved the 2025 budget in an initial vote last month, but still needs to pass two more votes to become law. It must be passed by the end of March or the government would automatically fall, triggering early elections.

Finance Ministry representatives speaking at the Knesset Finance committee meeting cautioned that the recently presented conclusions of the Nagel committee, tasked with examining the defense budget and IDF force design for the future, may lead to changes in the 2025 budget presented to the Knesset for approval.

The central bank noted that during the ongoing budget discussions, several civilian expenditures of a permanent nature were added, and several adjustments of a permanent nature were removed or reduced.

“Against every change in budget items that increases the deficit after 2025, it is important to adopt alternate measures that will prevent the growth of the expected deficits,” the central bank said. “In this way, the economy will be able to converge to a declining path of the debt to GDP ratio from 2026 and onward.”

At the central bank monetary policy meeting on January 6, all five members of the meeting voted to leave the benchmark interest rate at 4.5%, citing expectations of higher inflation in the first half of the year on the heels of tax hikes, war related supply constraints and excess demand. Such price pressures are expected to moderate in the second half of 2025, the minutes said.

Along with an inflation rate which eased to 3.2% in December, staying above the government’s 1%-3% annual target, policymakers have been reluctant to reduce interest rates due to loose fiscal policies — a spike in spending to finance Israel’s war with the Hamas terror group in Gaza and Iran-backed Hezbollah in Lebanon since October 7, 2023.

Nearly a year after the deadly Hamas attack on October 7, the neighborhood where young people of Kibbutz Kfar Aza used to live remains heavily damaged in the southern Israel border community, September 16, 2024. (AP Photo/Ohad Zwigenberg)

The central bank policy meeting earlier this month took place before Israel and Hamas agreed to a ceasefire last week that will release Israeli hostages held in Gaza in exchange for Palestinian prisoners held by Israel.

Spending on the war pushed the budget deficit to near 7% of GDP in 2024. The central bank and rating agencies, all of which cut Israel’s credit rating last year, had criticized the government for raising military spending without cutting other areas.

The bank expects a 4.7% budget deficit and debt to GDP ratio of 69% in 2025. The government has set a goal of 4.4%.

Bank of Israel Governor Amir Yaron on January 6 held out the prospect of rate reductions, should price pressures start to ease.

“If we see further improvement in the risk premium and inflation surprises for the better we, of course, could… advance this,” he said. “If, on the other hand, should inflation remain sticky we would need to continue with restrictive policy.”

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