Bank of Israel Governor Amir Yaron on Wednesday criticized the country's 2025 budget, cautioning that it would not bring down debt levels enough to offset a spike in spending caused by Israel's war against Palestinian terrorist group Hamas in Gaza.
Controlled by Prime Minister Benjamin Netanyahu, parliament gave its final approval on Tuesday of the long-delayed budget for 2025 that is heavy on tax increases intended to rein in the budget deficit that reached nearly 7% of gross domestic product in 2024 due to war costs. The budget targets 4.9% in 2025.
"The government implemented significant fiscal adjustments, mainly on the revenue side, which took effect in early 2025 and are expected to offset the permanent increase in war-related expenses," Yaron said in the central bank's 2024 annual report issued on Wednesday.
"However, these measures do not guarantee a sustained reduction in the debt-to-GDP ratio, partly because some are temporary, and other structural government expenditures are expected to grow."
Bank projects spending of another 86 b. in 2025
After spending some 170 billion shekels ($46 billion) on war costs between October 7, 2023 and the end of 2024, the bank projects spending of another 86 billion in 2025.
"The war has once again demonstrated the crucial importance of maintaining a low public debt-to-GDP ratio and fiscal space, which enhances the economy’s resilience to shocks and its ability to finance extraordinary expenses," Yaron said.
The bank noted that while there have been spending adjustments of 30 billion shekels, which were significant, that was insufficient to fully offset the total increase in expenditures of 50 billion shekels while simultaneously reducing the debt ratio.
Yaron later told a press conference that the government missed an opportunity to incorporate more growth engines and implement steps for improving productivity, while it was also prudent to hold off on any tax reductions in the 2026 budget until there was clarity on the state's revenue.
Many opposition lawmakers believe the budget gives too much to the ultra-Orthodox and nationalistic parties in the coalition, which Netanyahu relies on for his political survival.
On Tuesday, Moody's – which cut Israel's credit rating last year – said it was unlikely to raise the rating, but it could raise the outlook to "stable" from "negative" if the war wound down, leading to an economic recovery and improved public finances. Another ratings cut, it said, could come in the event of an escalation of the conflict.
Citi economist Michel Nies said a key positive in passing the budget was that it removed the near-term possibility of the government collapsing, but the composition of spending was not ideal.
"The budget does not sufficiently prioritize civilian investment or incentives for low participation groups to join the labor force," he said. "This could weigh on potential output prospects, which are already uncertain." ($1 = 3.6670 shekels)
