Bank of Israel Warns Netanyahu's Defense Independence Plan Will Skyrocket National Debt
Prime Minister Benjamin Netanyahu's "Defense Independence" plan, aimed at bolstering Israel's domestic military production, is projected to significantly increase the national debt, according to warnings from the Bank of Israel and the Ministry of Finance. The plan, which involves an estimated NIS 350 billion addition to the defense budget over a decade, could push Israel's debt to over 80% of its GDP, a level considered unsustainable by the Bank of Israel. Officials also caution that the initiative might erode investor confidence in the defense industry.
Netanyahu announced the ambitious plan without consulting relevant professional bodies. Despite its name, the strategy appears to rely on the continuation of U.S. military aid, as its implementation alongside a cessation of aid would create severe fiscal damage. The Prime Minister initially outlined the plan last September, envisioning an expansion of Israel's military industry to independently meet the IDF's needs, with an investment of approximately $108 billion (around NIS 330 billion) over ten years. He has also expressed a desire to gradually reduce U.S. military aid over the next decade.
Economists and analysts, briefed by Netanyahu's associates, suggest that if enacted, the plan could lead Israel to cease receiving its annual $3.8 billion in U.S. aid, of which $3.3 billion is earmarked for spending primarily with American companies. However, economists are raising alarms about the potential negative impact on the Israeli economy. The Bank of Israel and the Ministry of Finance are particularly concerned about a dramatic rise in public debt, which has already grown substantially in recent years. They also argue that the plan's success is contingent on continued U.S. aid, and that its implementation without this aid, especially if U.S.-Israel relations deteriorate, would place Israel in a dire financial and fiscal situation.
Bank of Israel Governor Professor Amir Yaron quantified the economic risk, stating that the government debt could enter a continuous upward trajectory, reaching 81% of GDP by 2035 if the plan is realized. If U.S. aid is completely halted, the debt-to-GDP ratio could soar to 83%. This increase represents a structural shift, as the ratio stood at a moderate 60% before the war in September 2023. Post-war coalition spending and government expenditures have already pushed the debt to 68.5%, with the direct fiscal cost of recent conflicts estimated at NIS 450 billion, plus an additional NIS 200 billion in lost GDP and $26 billion in increased U.S. aid.
The Ministry of Finance echoed these concerns, warning of a "dangerous fiscal path" if the plan proceeds. Tamar Levy-Bona, Deputy Budget Commissioner, cited Greece's 2010 economic collapse as a cautionary tale against "irresponsible policy leading to overnight loss of debt repayment capacity." Such a surge in public debt would necessitate billions of shekels annually for interest payments, diverting funds from infrastructure, health, education, and growth engines. International rating agencies closely monitor the debt-to-GDP ratio, and exceeding the 80% threshold risks further credit rating downgrades.
Financial markets reacted negatively to Netanyahu's initial statements about self-sufficiency, with sharp declines on the Tel Aviv Stock Exchange following his "Super Sparta" speech in September 2025, which called for adapting to an "autarkic" economy. The TA-35 index dropped below 3,000 points, prompting Netanyahu to hold a rare economic press conference to reassure investors that his remarks were solely directed at the defense sector and that the broader economy would remain open. The Manufacturers Association of Israel also warned that an autarkic economy poses a direct threat to Israel's primary growth engine: exports and openness to foreign trade and investors.
