The Bank of Israel warned on Wednesday that the Treasury’s proposed cuts to the 2023 state budget are not enough and that the government needed to free up additional non-war-related spending, including discretionary coalition funds, to tackle the costs of the ongoing fighting with the Hamas terror group.
In addition to the Finance Ministry’s plan to shave about NIS 4 billion ($1.06 billion) from the 2023 state budget to fund war expenses, there is room to cut another NIS 8 billion to NIS 10 billion in non-war expenditure from next year’s state budget, including planned coalition fund payments, according to a review by the central bank.
“There must be a balance between the necessity to allocate large budgets to deal with the security situation and the necessity to show fiscal responsibility,” said Adi Brender, director of the research division at the Bank of Israel, noting this is needed “in order to establish the confidence of the markets, which examine the developments in the economy, including the budget.”
“An important means of ensuring this balance is a mandatory change in the priorities in the budget, while avoiding planned expenses that are not necessary,” Brender urged.
The scope of the budget cut currently proposed is not “large, and as such its contribution to strengthening the credibility of the government’s commitment to fiscal adjustment for the costs of the war is limited,” the central bank said in its review.
The central bank is indirectly raising concern that the government’s new fiscal plan could harm its standing in international markets and negatively impact future decisions by credit rating agencies, which in turn could lead to higher costs for raising debt by the State of Israel.
The Bank of Israel’s warning comes after Prime Minister Benjamin Netanyahu late on Tuesday gave initial backing to modifications to the 2023 budget presented by Finance Minister Bezalel Smotrich. The war budget will be financed by increasing the deficit, channeling funds from government ministries, and cutting discretionary coalition money, the Treasury said. The budget changes still need to be brought to the cabinet and the Knesset for approval.
The 2023-2024 state budget, passed in May, included almost NIS 14 billion in discretionary spending, much of which is allocated to educational programs for the ultra-Orthodox community. Finance Minister Bezalel Smotrich’s decision last week to divert only NIS 1.6 billion to the war effort out of a total of an estimated NIS 9 billion from the coalition fund pool that has not yet been paid out from the 2023-2024 budget, has already come under attack in recent days.
War cabinet minister Benny Gantz said Wednesday that he will fight against diverting coalition funds to any non-war use, putting him at odds with Smotrich’s updated budget plan.
“I think that all of the available resources of the State of Israel should be concentrated in this matter [war management], and I am not prepared to use coalition funds for purposes unrelated to this matter, unequivocally,” Gantz, said in response to reporter questions during a Tel Aviv press conference.
“No political deals of any kind will be made during the war, on any issue or by anyone,” he added, as Smotrich is said to have protected coalition funds previously promised to priorities in the West Bank and to funding private ultra-Orthodox education.
To finance the costs of the war with the Iran-backed group, which broke out after the October 7 atrocities perpetrated by Hamas, the Finance Ministry is proposing amendments for an increase in the 2023 budget of about NIS 31 million — NIS 22 billion for defense spending and NIS 9 billion for civil expenses — alongside a cut of NIS 4 billion in other expenses.
The Bank of Israel emphasized that it estimates that the total fiscal cost of the war in 2023 will not amount to just the NIS 35 billion currently presented by the Finance Ministry. Additional war expenditure will likely be required later in the year or in 2024, and the government will have to finance them from its budget.
Looking ahead to the aftermath of the war, the central bank noted that government expenditure is likely to become bigger due to a permanent increase in defense spending and interest payments as the level and cost of its public debt rises.