Israel’s Central Bank Chief Advocates for Fiscal Discipline Amid Defense Spending Surge
In the wake of the escalating conflict in Gaza, which is approaching its six-month mark, Israel’s central bank governor has issued a call for prudent fiscal management. This appeal emphasizes the necessity of moderating non-defense expenditures to balance the projected surge in military spending.
Amir Yaron, the governor at the Bank of Israel, has underscored the urgency of strategically planning defense budgets. He suggests the formation of a committee that integrates both defense and civilian insights to meticulously chart out Israel’s defense requisites for the forthcoming years. This committee’s goal would be to craft a multi-year budget framework that carefully considers the economic implications of such allocations.
Yaron’s recommendations were highlighted in a letter to cabinet ministers and members of parliament, featured in the bank’s 2023 annual report. He stressed that any additional rise in the defense budget, beyond the existing allocations, should be counterbalanced by fiscal adjustments. These adjustments are crucial to maintain the public debt to GDP ratio at a manageable level.
Prime Minister Benjamin Netanyahu, addressing the insights shared in the central bank’s annual report, reaffirmed the resilience of Israel’s economy. He noted the economy’s recovery trajectory, an aftermath consistent with prior periods of security crisis and warfare. Netanyahu acknowledged the need for adjusting the security budget to align with emergent war-time and global necessities, emphasizing Israel’s commitment to making sovereign decisions, buoyed by a robust economic foundation.
The government plans to inject an additional 20 billion shekels (approximately $5.4 billion) into defense spending annually. This adjustment in the budget also encompasses provisions for compensating households and businesses impacted by the ongoing conflict, which was triggered by a surprise attack from Hamas on October 7.
This revision modifies the 2024 deficit projection to 6.6 percent of the gross domestic product, a stark increase from the 2.25 percent forecasted pre-conflict. Notably, the deficit surged to 5.6 percent over the trailing 12 months in February, up from 4.8 percent in January.
Addressing the economic landscape, Yaron highlighted the challenges of low labor productivity and the underemployment of key demographic groups, such as ultra-Orthodox Jewish men and Arab women. These challenges stem from inadequate fundamental skills, restricting these populations’ integration into the workforce.
Despite these hurdles, Israel’s economy expanded by 2 percent in 2023, a growth that was neutral on a per capita basis. Yaron commended Israel’s strong economic fundamentals at the war’s onset and its historical resilience in bouncing back from crises. He concluded that a commitment to responsible economic policies, coupled with efforts to tackle core economic challenges and foster growth drivers, is essential for achieving sustainable growth in the long term.
As Israel navigates through these turbulent times, the call for fiscal prudence and strategic planning in defense spending echoes the broader goal of sustaining economic stability and growth amidst ongoing conflict.
