Bank of Israel governor warns next government must curb defense spending and invest in growth
Amir Yaron says Israel’s debt trajectory, an expanded defense budget and weak investment in education and infrastructure will be among the biggest challenges facing the next leadership.
Whoever wins Israel’s next election will need to rein in defense-driven government spending that has expanded sharply in recent years and redirect resources toward education, infrastructure and other engines of economic growth, Bank of Israel Governor Amir Yaron said at Calcalist’s National Economic Conference on Wednesday.
Israel is scheduled to hold a general election on October 27, with current polling showing Prime Minister Benjamin Netanyahu’s governing coalition facing significant challenges.
Yaron said fiscal policy would be one of the main challenges facing the next government, particularly as defense spending has climbed to around 8% of GDP, roughly double the level before the October 7, 2023 Hamas attack that triggered the war in Gaza.
"We face a clear challenge for any government that enters office," Yaron said. "First, our debt cannot continue to increase. Currently, we are on a path of rising debt."
Israel’s debt-to-GDP ratio has risen to around 70%, up from approximately 60% in 2023.
"The second challenge is the defense budget, and the third is investing in growth engines such as education and infrastructure," Yaron added.
Yaron also said Israel needs to accelerate the integration of population groups, including ultra-Orthodox Jews, into the labor market in order to support long-term economic growth.
Finance Ministry Budget Director Maharan Frozenfar said the ministry was working on a multi-year plan designed to boost growth and that he hoped the next government would adopt it.
"We need to take difficult actions to maintain the momentum and achieve even stronger growth," he said.
Frozenfar added that Israel’s economy must also adjust to the possibility of a persistently strong shekel against the dollar, which could weigh on exporters.
With defense spending expected to remain elevated due to Israel’s ongoing security challenges, Yaron said the government would likely need to consider tax increases in 2027 to help stabilize public finances.
"Realistically, we will likely have a higher budget than before October 7," he said.
Frozenfar, however, opposed tax increases, arguing that stronger economic growth could help reduce the debt burden.
The comments came after easing inflation pressures following the wars in Gaza and Iran allowed the Bank of Israel last week to cut its benchmark interest rate by 25 basis points to 3.5%, its second consecutive reduction.
Yaron said that if Israel avoids renewed conflict and inflation remains under control, interest rates are likely to continue declining. However, he stressed that monetary policy must remain cautious due to continued price pressures, particularly in wages and housing rents.
The central bank has forecast that its benchmark rate could fall to 3% by June next year.
Yaron also said that while Israel’s economy has demonstrated resilience, growing negative global sentiment toward the country has created an additional economic burden.
"Negative sentiment toward Israel acts like a tax on trade," he said, warning that the long-term consequences should be taken into account in economic policymaking.
