Bank of Israel chief says gov’t will have to raise taxes to finance rising defense needs

Bank of Israel Governor Amir Yaron cautions that the government will need to raise taxes to finance the country’s rising defense needs, and return to a downward trajectory of debt payments amid an ongoing war with Iran.

“Nobody likes to pay taxes,” says Yaron at a press conference in Jerusalem. “But looking ahead, we need to ask ourselves how we manage, on the one hand, a budget that finances security needs and on the other hand directs budgets for expenditure that support the engines of future economic growth.”

“The need to reduce the debt-to-GDP ratio, maintain it at a prudent level over time, and create fiscal space to respond to future shocks—alongside relatively low civilian spending — underscores the difficulty of securing funding sources for these expenditures and the potential need to increase government revenues to achieve these objectives,” Yaron adds.

Yaron reiterates that the government needs to cut expenses that do not support growth while increasing state revenues.

The governor’s recommendations come as the government faces criticism over its wartime decision to significantly boost the allocation of funds to coalition priorities while simultaneously slashing the budgets of all ministries, which will harm public health, education, and other public services.

“Lowering the debt-to-GDP ratio alongside high defense spending, investing in growth engines, will require budgetary adjustments that also include cuts in spending that don’t support growth, and therefore the government needs to increase the revenue side,” says Yaron.

Speaking at a presentation of the central bank’s 2025 annual report, Yaron notes that civilian public spending in Israel is already low by international comparison.

“If we want to increase productivity, which is low and public services, it will be necessary to increase investment in growth-supporting items such as infrastructure and education,” says Yaron.