Bank of Israel head urges government to set ‘appropriate’ fiscal priorities in budget
Central bank chief tells lawmakers the need for higher defense spending during war requires fiscal adjustments to prevent debt from rising further and to help economy recover
Sharon Wrobel is a tech reporter for The Times of Israel.

Bank of Israel Governor Amir Yaron on Sunday urged the government to establish “appropriate” fiscal priorities in the state budget while keeping its eye on the need for higher defense spending in the coming years, and stressed the importance of “responsible” economic policy amid the challenges of the ongoing war.
“During the war, the government implemented an expansionary policy, which included marked increases in combat costs, programs supporting households from conflict areas, and assistance for workers and businesses across the country,” Yaron said in a letter sent to the government alongside the Bank of Israel’s annual report for 2023.
“Looking forward, the economy is facing significant challenges deriving from the war, in addition to structural challenges related to its fundamental problems that have existed for some time already.”
In the annual report, the Bank of Israel noted that budget expenditure for the years 2023-2024 had increased by NIS 100 billion due to the costs of the war that broke out October 7 following the Hamas onslaught.
It said the budgetary adjustments enacted by the government so far to maintain fiscal responsibility and the credibility of fiscal policy among global markets and the public were insufficient.
“It is important to reduce budgets that may impair incentives to integrate new population groups in the labor market and other long-term objectives,” the Bank of Israel said.
Financing the costs of the war through increasing the deficit will end up transferring the burden to the public in the coming years and will impact the economy’s resilience, the central bank warned.

“Financing through reducing civilian consumption will impair government services, and may narrow programs that support future growth engines — meaning that it will impair growth and the standard of living of all Israelis,” it stressed.
“As such, it is necessary to be cautious when increasing expenditures — particularly those that are prolonged. They should be allocated in a way that supports sustainable growth.”
The bank said that going forward, Israel is expected to need to increase its defense budget by at least NIS 20 billion ($5.5 billion) per year, which may impair economic growth if other expenditures suffers.
To determine the size of the required defense budget in light of growing security challenges, Yaron called for the establishment of a committee with the participation of defense and civilian representatives.
“It should delineate Israel’s defense needs in the coming years and formulate an appropriate multiyear budget program that will take into account all the ramifications on the economy,” demanded Yaron. “It is important that if there is an additional increase in that budget, beyond what was already decided, it should be accompanied by fiscal adjustments that will at least prevent an enduring increase in the public debt-to-GDP ratio.”
Commenting on the report, Prime Minister Benjamin Netanyahu said Israel needs to adapt the security budget to the needs that have arisen during the war.
“We need to be much more independent in the ability to manufacture the war materiel that we need,” Netanyahu said. “We will do this but we will do so very responsibly and prudently, so that Israel will be independent.”

“One of the ways to do this is through the strong economy that we have built and will continue to build,” he added.
Earlier in March, the Knesset passed an amended wartime budget which includes additional government expenditure of more than NIS 70 billion ($19 billion) compared with the original 2024 budget approved in May 2023. About NIS 55 billion ($15 billion) of this sum has been allocated to financing the military, while the rest will go toward civilian wartime needs.
As a result, the government has set a budget deficit of 6.6 percent of gross domestic product (GDP) in 2024, up from the target of 2.25% before the outbreak of the war. In February, the deficit swelled to 5.6% of GDP year on year, as the government poured billions of shekels into the fighting, while tax revenue continued to decline.
The amended budget has been criticized for not cutting enough from non-essential expenditure to finance the costs of the war. One of the most controversial parts of the budget was its allocation of billions of shekels in funding for ultra-Orthodox educational institutions that fail to teach the state-mandated core curriculum, which is the basis for developing skills necessary to enter the job market.
The funds are part of a package of special interest funds set aside by the government to make good on political promises made during coalition negotiations in 2022.
Last year, the government budget deficit stood at 4.1% of GDP, compared with a small surplus in 2022. The ratio of public debt-to-GDP increased from 60.5% to 61.9%. Had it not been for the war, the deficit had been expected to total about 2% of GDP, and the debt-to-GDP ratio had been expected to decline to below 60%, the Bank of Israel said.

Yaron also spoke about the manpower needs of the Israeli army and the repercussions on the labor market of the government’s plan to increase the amount of time conscripts and reservists serve in the IDF.
“Extending the period of compulsory military service will delay young people’s entrance into the labor market, and increasing the number of reserve duty days will also limit the supply of labor in the business sector, which in turn has a negative impact on the economy,” Yaron said.
Meanwhile, in the annual report the central bank suggested that “expanding the circle of military personnel to include the Haredi (ultra-Orthodox) population, as part of an agreed-upon outline with regard to the nature of the process, will make it possible to answer the increasing defense needs while moderating the impact to personnel and to the economy.”
Yaron noted that Israel’s economy entered the war with good economic fundamentals, such as a relatively low public debt-to-GDP ratio and high foreign exchange reserves, as well as a full employment environment.
“The low debt-to-GDP ratio in Israel is a strategic asset, and the level of this ratio just before the war facilitated the economy’s dealing with the immediate fiscal ramifications of the war and illustrated once again its importance in the economy’s resilience to shocks,” Yaron said.
Among the fundamental challenges Israel’s economy faces, Yaron cited low labor productivity, low basic skills of weaker population groups, including ultra-Orthodox and Arabs, and a much higher poverty rate than in other advanced economies.