Higher defense spending in coming years will take toll on citizens, Treasury warns
NIS 10 billion more spent annually on defense would cost the average household NIS 4,000 due to higher taxes and reduced public services, says Finance Ministry chief economist
Sharon Wrobel is a tech reporter for The Times of Israel.
The potential increase in defense spending to secure Israel’s security needs over the coming years will worsen the financial burden on households, the Finance Ministry’s chief economist cautioned, urging the government to strike a balance between security needs and the economy.
In a position paper published on Monday, Finance Ministry chief economist Shmuel Abramzon estimated that a permanent increase of NIS 10 billion ($2.67 billion) in the defense budget will mean an annual increase of about NIS 4,000 to be paid by the average household.
The analysis by the ministry’s chief economist was submitted to the Nagel committee, which was formed to examine the need for higher defense spending and IDF military force design for the future. The committee is expected to present its final recommendations in December, including a new concept of operations, goals for military force design, and the budgetary implications for the coming years.
The recommendations are reportedly poised to translate into additional tens of billions of shekels per year in defense spending and with that will come a higher tax burden to pay for the increased cost of security.
“A permanent increase in defense spending will create a new fiscal burden and may impact economic activity and its growth potential,” said Abramzon. “To finance the fiscal burden resulting from an increase in defense spending over time, proper balances have to be found to make the required adjustments either in spending cuts or tax hikes because Israel’s current structural deficit is already high and the debt-to-GDP ratio needs to be stabilized.”
An increase defense expenditure of an additional NIS 10 billion will require adjustments of a total of about 1.5% of GDP, or about NIS 30 billion, according to Abramzon.
The cost to households will be felt across three main channels: direct and indirect tax increases, a reduction in public services as there will be less available funds for civilian spending, and damage to income due to a slowdown in economic activity.
At the beginning of November, the cabinet approved the Finance Ministry’s proposal for the 2025 budget, which does not include potential additions following the conclusions of the Nagel committee. The committee, chaired by Brig. Gen. (Res.) Prof. Jacob Nagel, comprises representatives of the Prime Minister’s Office, Finance Ministry, Defense Ministry and IDF, and is tasked with determining the directions of Israel’s military force design for the next decade, the budgetary implications, and the economic impact.
The ongoing war with the Hamas terror group is slated to incur more than NIS 250 billion ($67 billion) in defense and civilian costs between the years 2023 and 2025, according to Bank of Israel estimates. With the budget deficit at 7.9% of GDP in October, above a 6.6% target set for 2024, and rating agencies cutting Israel’s credit rating, the Nagel committee was established to prevent the deficit from spiraling out of control due to the hike in defense and other war costs.
“Without balanced fiscal adjustments, the country’s debt-to-GDP ratio will increase, and with it the economy’s risk premium and the interest rate the government pays on financing debt, and as a result investments decline, which in turn leads to a slowdown in economic activity,” Abramzon warned.
The ministry’s chief economist proposed a list of measures for the government to bolster state income from taxes to finance the increase in security expenditure. One is taking steps to combat black capital and tax evasion, which is estimated at tens of billions of shekels per year. Another is the cancellation of tax exemptions amounting to an estimated NIS 90 billion a year. And only after that, if needed, an increase in tax rates should be examined, according to the Finance Ministry.
In the position paper it was also recommended to give preference to the deployment of soldiers in regular service and support the recruitment of ultra-Orthodox population to reduce the burden borne by reservists and the cost to the government. The economic cost of a month of reserve duty service is estimated at NIS 48,000 per soldier, compared to NIS 27,000 for a soldier in regular service.
