Central bank head urges lawmakers to avoid non-war spending with defense costs growing
Governor Amir Yaron calls for fiscal restraint as prime minister says Israel must bolster defense spending by at least NIS 20 billion a year amid Hamas war
Sharon Wrobel is a tech reporter for The Times of Israel.
Bank of Israel Governor Amir Yaron on Monday urged the government to show fiscal discipline by cutting less-essential spending as the country looks set to bump up its defense expenditure by at least NIS 20 billion ($5.48 billion) a year to meet its security needs in the aftermath of the war with the Hamas terror group.
“During this period, more than at any other time, and as investors, rating agencies, financial markets and the public as a whole are carefully examining policymaking in Israel, it is necessary to manage economic policy – fiscal and monetary – with great responsibility,” said Yaron. “The government will have to find the right balance between financing war expenses and the expected increase in the defense budget and the need to continue investing in other civilian budgets, which are already low, in particular in growth engines such as infrastructure and education.”
Speaking at a ceremony to mark the start of his second term as central bank governor attended by Prime Minister Benjamin Netanyahu and Finance Minister Bezalel Smotrich, Yaron reiterated that part of maintaining fiscal and economic responsibility is for the government to make budgetary adjustments and cut expenses that are not related to the war effort or that do not promote growth.
Commenting on security and military expenditure, Netanyahu noted that while the defense budget has grown in recent years, it has shrunk as a percentage of GDP. Over the past decade the share of military expenditure as part of gross domestic product (GDP) has gradually decreased from 5.64% in 2012 to 4.51% in 2022.
“We cannot continue this policy,” Netanyahu announced.
“From now on, we need to significantly increase the security budget by at least NIS 20 billion a year and also as a proportion of GDP,” said Netanyahu, adding that the defense supplement is likely to be 1% of GDP or more in order to meet the country’s security needs in the future.
As part of next year’s budget, Yaron also suggested that all military and civilian expenses directly related to the war should be included in a “temporary budgetary box,” which would be added to the original expenditure ceiling for 2024.
In parallel, the governor cited the need for budgetary adjustments of about NIS 20 billion by both reducing other government expenses and raising revenues, so that the “deficit ceiling will be set at a level that will lead to a decrease in the debt-to-GDP ratio after the war.”
“It is desirable that these adjustments be made as quickly as possible, to make it clear to the markets that Israel will be able to meet the increased security burden while maintaining fiscal responsibility,” he argued.
Last week, a supplementary budget for 2023 of NIS 28.9 billion to cover the costs of the ongoing fighting with Hamas and Hezbollah was passed, in the face of opposition from parties on both sides of the aisle because it included some funding allocated to projects not connected to the war effort.
The supplementary budget included increased military expenditure and money for civilian expenses, such as accommodation for evacuees from the north and south. But, controversially, it also included hundreds of millions of shekels in so-called “coalition funds,” which are discretionary funds earmarked for pet projects of MKs and ministers.
Also speaking at the governor’s ceremony, Smotrich said that “many types of economic policy, capitalist, or socialist, expansionist or restrained, professional or populist,” are discussed, while he argued that a “unifying economic policy is the correct and professionally required economic policy at such a time for Israel’s economy.”
Smotrich did not comment on the need to maintain a policy of fiscal responsibility.
“We must take a step back from controversy and rise above rivalries and coalition and opposition games, and manage a unifying economy to respond to the many security challenges,” said Smotrich. “We are required to stand together with courage, to resist divisive and conflicting pressures and campaigns, to ignore background noise and to do what is right.”
