More clarity needed on future defence spending, Israel’s central bank chief says

Israel’s central bank chief on Sunday called on the government to enact responsible fiscal policy by reining in non-defence spending to offset any further expansion in the military budget.

Lawmakers this month approved an amended 2024 state budget that added tens of billions of shekels to fund Israel’s war against the Islamist Palestinian group Hamas in Gaza, as the conflict nears six months.

Amir Yaron, governor at the Bank of Israel, said that in order to establish the size of the defence budget in an informed manner, a committee should be established soon, with the participation of defence and civilian functions.

“It should delineate Israel’s defence needs in the coming years and formulate an appropriate multi-year budget program that will take into account all the ramifications on the economy,” he said in a letter to cabinet ministers and parliament members in the central bank’s 2023 annual report.

“It is important that if there is an additional increase in that budget, beyond what was already decided, it should be accompanied by fiscal adjustments that will at least prevent an enduring increase in the public debt to GDP ratio.”

Israel intends to add some 20 billion shekels ($5.4 billion) of spending towards defence a year going forward.

The amended budget also allows for compensation payments to households and businesses hurt by the war, which was sparked by Hamas’ shock attack on Israel on Oct. 7.

It sets a deficit of 6.6% of gross domestic product (GDP) in 2024, revised from a pre-war level of 2.25%. In February, the deficit rose to 5.6% over the previous 12 months from 4.8% in January.

Yaron said Israel’s economy faces significant challenges, particularly low labour productivity and weak basic skills that prevent ultra-Orthodox Jewish men and Arab women from integrating into the labour market.

Israel’s economy grew 2% in 2023, with zero per capita GDP.

The governor said Israel’s economy entered the war with good economic fundamentals and has in the past rebounded rapidly from crises.

“The implementation of responsible economic policy while dealing with current challenges, concurrently with handling the fundamental challenges to the economy and encouragement of its growth drivers, will help achieve sustainable growth,” Yaron said.