Israel’s recent budget approval has sparked significant debate, particularly from the nation’s central bank governor, Amir Yaron. Following an intense 18-month period of conflict, which has put immense strain on the economy, Yaron expressed concerns that the new budget may not effectively address the soaring national debt. Prime Minister Benjamin Netanyahu‘s plan, approved by the Knesset, aims to implement crucial fiscal measures, but critics argue it lacks the depth needed for long-term financial stability.

Critique of the Government Budget

In comments released on Wednesday, Yaron highlighted that while the budget includes "significant convergence measures," primarily on the revenue side, these initiatives fall short of guaranteeing a sustainable reduction in Israel’s debt-to-GDP ratio. The adjustments may only balance out the increased fixed costs resulting from the ongoing war.

• Key Concerns:
  • Temporary nature of some fiscal measures.
  • Anticipated rise in structural government expenditures.

Yaron, who also serves as the chief economic advisor to the government, has consistently urged a reassessment of financial priorities, especially after the Hamas attack in October 2023, which escalated tensions with Iran-backed groups. He criticized Netanyahu’s coalition for focusing too heavily on religious causes, sidelining essential economic growth strategies.

Need for Strategic Investments

Yaron pointed out potential improvements in the budget’s composition. He emphasized the importance of investing in long-term growth drivers, enhancing productivity, and reforming the education system. Additionally, he noted the necessity of reducing disincentives for workforce participation to foster a healthier economy.

• Recommended Areas for Focus:
  • Long-term economic growth.
  • Productivity enhancement.
  • Education system improvements.

Since the onset of the conflict, Israel has experienced a sharp rise in spending and borrowing, leading to several downgrades in credit ratings. The economy faced its most sluggish growth in over twenty years last year, excluding the pandemic period. This downturn is largely attributed to labor shortages, exacerbated by restrictions on Palestinian workers and a large-scale mobilization of military reservists, which adversely affected sectors like technology, construction, and agriculture.

Economic Outlook

Yaron cautioned that the economic repercussions of the conflict are far from over and will likely linger for years. He stated, “The economy has not yet returned to its pre-war state, and the effects will continue to influence it moving forward.”

The budget, totaling 620 billion shekels, was approved by a vote of 66 to 52 in the Knesset. Opposition members echoed Yaron’s sentiments, arguing that the budget does not adequately address the pressing economic challenges. Finance Minister Bezalel Smotrich, however, defended the budget, asserting that it would foster growth and help maintain economic strength.

• Budget Highlights:
  • Target deficit set at 4.9% of GDP, down from 6.8% the previous year.
  • Fiscal adjustments include 35 billion shekels in new taxes and spending cuts.

With Israel’s debt-to-GDP ratio climbing to 68%—the highest in over a decade—Yaron reiterated the potential long-term consequences of the war, hinting at impacts on both the economy’s risk premium and its credit rating. As the nation grapples with these pressing issues, the need for a balanced and forward-thinking budget has never been more crucial.