Bank of Israel chief: Government needs to hike taxes in 2027 to pay for defense, reduce debt

Bank of Israel Governor Amir Yaron cautions that the government will need to hike taxes next year to finance the country’s growing defense needs, and return to a downward debt trajectory after more than two and a half years of hostilities on multiple fronts.

“The economy shows impressive resilience and strength, but looking ahead, there are clear challenges for any government that will come in next,” Yaron says at a conference in Tel Aviv. “We need to reduce debt, defense expenditure is expected to be higher than before October 7, 2023, in light of Israel’s threat map, and at the same time it is necessary to invest in growth engines, including education, infrastructure, transportation and housing.”

“I have called this the fiscal trilemma and in order to achieve all of its three objectives the government will have to increase its sources of income and raise taxes,” Yaron says. “Nobody likes to pay taxes but as the government acts to encourage more population groups to join the labor market, the burden will be spread over a wider population.”

Yaron reiterates that the government also needs to cut expenses, including coalition funds, that do not support growth, and become more efficient.