Bank of Israel Critiques Revised Budget Amid Ongoing War

The Israeli government has approved an amended budget for 2026, which includes a significant increase in defense spending amid the ongoing war with Iran. The budget allocates an additional NIS 32 billion (approximately $10.3 billion) for defense, raising the overall budget deficit target to 5.1% of GDP from the previous 3.9%. This revised budget is projected to lead to a further increase in Israel's debt-to-GDP ratio, potentially reaching 70% by 2026, according to the Bank of Israel.

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The Bank of Israel has expressed strong disapproval of the amended budget, urging the government to reconsider its fiscal strategy. The central bank warned that the current fiscal decisions could significantly widen the national deficit and negatively impact economic growth, estimating a potential reduction in GDP growth by 0.5%. The Bank emphasized the need for careful fiscal management, particularly in light of the heightened uncertainty in global markets due to the war and fluctuating energy prices.

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In its recommendations, the Bank of Israel called for a reduction in coalition funds and cautioned against introducing new programs that are not directly related to the war effort. It specifically advised against expanding income tax brackets and increasing VAT exemptions on personal imports, which could further strain the budget. The Bank noted that the increase in the deficit target, coupled with tax reductions, is inconsistent with the goal of stabilizing the debt-to-GDP ratio.

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The Bank of Israel stated, "It is important to mitigate the increase in the deficit as much as possible, so that it will be possible to return to a path that converges to a debt-GDP ratio lower than the current one." The Bank also highlighted the importance of ensuring that the newly approved reserves for security and civilian needs are utilized strictly for their intended purposes.

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Critics of the budget amendments argue that the government's approach may lead to long-term economic instability. They contend that the decision to raise the deficit target while simultaneously allowing tax increases undermines fiscal credibility. The Bank of Israel's position, while legally designated as the government's economic adviser, was not presented during the cabinet meeting that approved the budget, raising concerns about the transparency of the decision-making process.

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The revised budget must be approved by the Israeli Parliament by the end of March 2026, or new elections will be triggered. As the geopolitical landscape remains volatile, the Bank of Israel's recommendations will likely play a crucial role in shaping future fiscal policies and addressing the economic challenges posed by the ongoing conflict.

The Jerusalem Post