Bank of Israel Governor Amir Yaron urged government leaders and lawmakers to maintain responsible fiscal policies during the war with Palestinian militant group Hamas, as Prime Minister Benjamin Netanyahu promised to boost defence spending.
Speaking on Sunday at an inauguration for his second five-year term as central bank chief, Yaron said that Israel needs to adapt its economic policy to the war since investors, ratings agencies, financial markets and the public “are currently keeping a close eye on policy in Israel”.
Last week, parliament approved a special war budget for 2023 of nearly 30 billion shekels ($8 billion) to help fund the war and compensate those impacted by the Oct 7 attacks by Hamas gunmen as well as rockets attacks from Gaza into border towns.
This budget was controversial since it included hundreds of millions of spending on “coalition funds”, money promised to Netanyahu’s allies to join his ruling coalition. The central bank, the opposition and some of Netanyahu’s own party members contested the approval of these funds.
“It is important to… avoid expenses that are not connected with the war effort or that do not advance growth,” Yaron said, adding the state must find a balance between financing expenses for the war and the expected growth of the defence budget with continuing to spend of civilians.
Netanyahu said that in recent years the defence budget as a percentage of gross domestic product (GDP) declined since the economy grew rapidly.
“We cannot continue this policy,” he said. “From now, we need to significantly raise, by leaps and bounds, the defence budget by 20 billion shekels a year and also as a percentage of GDP.”
The defence budget for 2023 was 63 billion shekels out of total state spending of 484 billion. It is set to rise to 64 billion in 2024 out of 514 billion shekels.
Yaron said that in 2024, “all military and civilian expenditures that are directly connected with the war should be included in a temporary special budget that would come in addition to the original expenditure ceiling for 2024.”
At the same time, and using a boost of 20 billion shekels for defence next year, there should be budget adjustments of a similar scope by cutting other spending or raising revenue to allow the debt burden to decline after the war, he said.
Yaron, the target of some lawmakers who opposed his hawkish monetary policies, said it was crucial to maintain the central bank’s independence.
“We have recently heard repeated statements and attempts to intervene in market mechanisms with regard to banking and finance, and even in matters of monetary policy, through legislative proposals,” he said. “It is important to understand that a blow to these areas is a blow to the Israeli economy.”
($1 = 3.6448 shekels)
(Reuters)