Bank of Israel chief warns war against Hamas will cost $67 billion in 2023-2025

Amir Yaron says conflict in south, north a ‘budgetary burden,’ IDF shouldn’t get ‘blank check’ for permanent outlays; Smotrich, Gallant agree on panel to review defense spending

Governor of the Bank of Israel Amir Yaron speaks at the Maariv economic conference in Tel Aviv, March 26, 2024. (Avshalom Sassoni/Flash90)
Governor of the Bank of Israel Amir Yaron speaks at the Maariv economic conference in Tel Aviv, March 26, 2024. (Avshalom Sassoni/Flash90)

The ongoing war with the Hamas terror group is slated to incur NIS 253 billion ($67 billion) in defense and civilian costs between the years 2023 and 2025, Bank of Israel Governor Amir Yaron warned on Thursday.

Speaking at a conference, Yaron cautioned that the security and civilian war costs were “significant” and presented a budgetary burden. In addition, the future security budget is expected to grow permanently and have a macroeconomic impact, he added.

“The government needs to make sure that it makes the right balances and budget adjustments in light of growing permanent security expenses,” he declared.

A breakdown of the latest war cost estimate showed that almost half of the war expenditure, or NIS 118 billion ($32 billion), will be needed to meet defense needs along with NIS 38 billion ($10 billion) for civilian spending until 2025, including the cost of evacuating civilians, providing housing for evacuees, and more. The central bank anticipated another NIS 35 billion ($9 billion) in lost tax revenue due to the war and NIS 23 billion ($6 billion) to compensate for direct war damages.

Another NIS 9 billion ($2.4 billion) in expected expenses were from interest payments as the government debt level increases and borrowing costs rise.

The NIS 253 billion figure has risen from a previous estimate of NIS 210 billion ($56 billion) at the beginning of 2024, less than three months after the war in Gaza erupted with Hamas’s October 7 massacre, which saw some 3,000 terrorists burst across the border into Israel, killing some 1,200 people and seizing 252 hostages amid acts of brutality and sexual assault.

Soldiers walk past houses destroyed by terrorists during Hamas’s October 7 massacre in southern Israel, Kibbutz Be’eri, October 14, 2023. (AP Photo/Ariel Schalit)

Yaron, in his remarks Thursday, backed the establishment of a committee to examine the defense budget, saying the ongoing war should not give the military a “blank check.”

“This is certainly a budgetary burden. In addition, the future defense budget is expected to grow on a permanent basis, with macroeconomic impact,” he said. “The committee should examine these processes from an overall multi-year perspective, with an ongoing requirement for the defense system to increase efficiency.”

Yaron has been urging such a step since January, when lawmakers approved an amended wartime budget that added tens of billions of shekels to finance fighting in Gaza and on the northern border with Lebanon, now in its eighth month.

He has long called on the government to make fiscal adjustments to prevent the budget deficit from spiraling out of control due to the spike in defense and other war costs.

“A prosperous economy requires security, and security requires a prosperous economy. Therefore, the war should not bring with it a blank check for permanent defense expenditures, and proper balances have to be found,” Yaron said at a conference at the College of Management Academic Studies.

Prime Minister Benjamin Netanyahu has said Israel’s defense spending as a percentage of gross domestic product has fallen in recent years — and that this will now change, with an increase of NIS 20 billion ($5.4 billion) a year in additional outlays.

This handout picture released on May 30, 2024 shows a tank during military operations around Jabaliya in the northern Gaza Strip. (Israel Defense Forces/AFP)

With the budget deficit at seven percent of GDP in April, above a 6.6  percent target for 2024, and rating agencies cutting Israel’s credit rating, Finance Minister Bezalel Smotrich had sought a panel to monitor defense spending. However, this was opposed by Defense Minister Yoav Gallant until the two agreed Wednesday to form a committee, according to Smotrich.

The defense budget spat — which has included Smotrich seeking a review of US fighter jet purchases — fueled already high tensions within Netanyahu’s cabinet, which has been strained by divisions over the handling of the Gaza war.

Smotrich said that Hamas’s October 7 onslaught and the subsequent war in Gaza have undermined many basic assumptions of how the defense budget was managed. As such, defense spending needs to adapt to current threats, while maintaining a balance between security and the economy as a whole, he said.

Gallant was not available for comment.

On Tuesday, the Israel Hayom daily reported that the ongoing budget battle had prevented the transfer of almost $1.7 billion in funds needed for the ongoing war in Gaza.

Smotrich called the report “fake news.” Both the IDF and Gallant’s office declined to comment.

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