Central bank chief says budget must boost economic growth to offset war costs

Bank of Israel Governor Amir Yaron is urging the government to make changes to its planned annual budget to bolster economic growth in light of higher defense spending.

“The past year was undoubtedly one of the most difficult and complex that Israel has known, in every possible respect,” Yaron says at a conference in Tel Aviv. “In addition to the heavy human cost, the war that began on October 7, 2023, also brought with it a significant economic shock, of a magnitude and scale we had never known before.”

Yaron emphasizes that the 2025 budget arrangements bill passed overnight includes significant adjustments to build market confidence, but calls on the government to go further by focusing on increasing labor productivity. He suggests reducing negative incentives to go to work, investment in the education system to improve the quality of education, and reducing expenditures that do not contribute sufficiently to the economy’s future growth potential.

“There is no such thing as a free lunch – fiscal priorities in the present must be paid for in the future, and in light of the significant increase in current and expected defense spending, we recommended that the government take significant adjustment steps,” he says. “Alongside the important fiscal adjustment measures, there is room to change the composition of the budget to drive the growth engines of the economy.”

The Arrangements Law passed overnight sets spending priorities for the upcoming year, paving the way for the government to pass the full 2025 budget before a March 31 deadline, which if not met would force new elections.

Yaron says the past year also illustrated how “central and significant” the Bank of Israel has become as the economic adviser of the government.