NIS 40 Billion Gap: Dispute Between the Finance and Defense Ministries Escalates
The renewed exchange of blows between Israel and Iran, which has pushed security tensions to a new high, has also reopened the fragile budget front between the Finance Ministry and the Defense Ministry. The security establishment is entering the current round of fighting with a budget gap of NIS 40 billion. ● The Treasury: “A haredi household generates a monthly deficit of NIS 10,000 for the state” ● The fighting has again exposed the gaps in the compensation framework
For scale, the defense budget agreed only recently following the previous round, “Operation Rising Lion,” had already jumped to NIS 143 billion, an unusual figure that amounts to 8% of Israel’s GDP, far above the OECD average. But after one day of fighting with Iran yesterday, it is clear to everyone that this is only the starting point. The cost of one day of fighting in “Operation Rising Lion” was estimated at NIS 1 billion, and as the days of fighting pass, the intensity declines, and accordingly so does the security spending. From the start of the current fighting until noon on Monday, the cost was estimated at hundreds of millions for munitions, without taking into account the expanded reserve call-up.
Even before this short campaign, the state budget included a framework for calling up 40,000 reservists at any given time, but in practice, since the start of the year, about 80,000 to 100,000 reservists have been on duty at any given time. This follows political decisions to effectively maintain three security belts, in Lebanon, Syria and Gaza, alongside the exchanges of blows with Iran and the system’s heightened alert for renewed escalation.
“The oversight does not exist”
Last week, at the Eli Hurvitz Conference, the Budget Director, Mahran Pronzper, spoke about the need to hedge and limit defense spending, and argued that reservist mobilization had spiraled out of control. He said, “Calling people up for hundreds and dozens of days a year cannot be sustained over time. The costs are enormous, and the oversight does not exist. This is complete loss of control, and it is a central component of spending, with serious implications for the economy.”
However, the reserve issue, although the Treasury is trying to emphasize it, is only one issue. It was originally budgeted at about NIS 30 billion, and estimates are that it has grown by at least NIS 20 billion. In any case, it seems the main debate is only part of the broader dispute.
Within the Finance Ministry, there has long been a desire to increase supervision and oversight of defense spending, even though the defense establishment has a comptroller appointed by the Finance Ministry’s Accountant General, as in any other government ministry. The Treasury’s claim, however, is that he is often required to approve orders after the fact. Treasury officials told Globes that, “The question of whether the defense establishment should be budgeted with an additional NIS 20 billion, 40 billion or 80 billion is only a secondary question. The main issue is that there do not appear to be senior officials in the defense establishment who know how to manage the money and stay within the agreed budgets,” thereby taking a swipe at Defense Ministry Director General Amir Baram.
Officials in the defense establishment were shocked by the harshness of the remarks and their timing, against the backdrop of the renewed fighting with Iran. The defense establishment had initially requested a budget of NIS 144 billion even before “Operation Rising Lion,” but was allocated only NIS 111 billion, and the gap has remained even after the additional budgetary allocation received following “Operation Rising Lion,” which raised the defense budget to NIS 143 billion. Now, the defense establishment believes that to implement the political echelon’s directives, a massive budget of NIS 188 billion is required. By comparison, this cost is similar to the annual budget for the Tel Aviv metropolitan metro system over a decade.
The defense establishment rejects the Treasury’s and the Budget Director’s claims regarding budget oversight, because although the budget is agreed upon, it is subject to Cabinet directives and not the Treasury’s position.
2026, just the tip of the iceberg
Looking deeper, it becomes clear that the dispute between the ministries is much broader than this. On the table is Prime Minister Benjamin Netanyahu’s directive to increase the IDF munitions budget by NIS 350 billion over a decade. However, over the months since he announced it, a dynamic has developed linking this munitions budget to defining the “new normal” in the defense budget and to the issue of oversight of the defense budget. As long as the latter two remain unresolved, the procurement budget is also stuck, even though parts of it have already begun to be implemented due to the need to order fighter jets and various other means.
Thus, regarding the defense budget, the current dispute over 2026 is only the tip of the iceberg. Before the outbreak of the October 7 war, the gaps between the ministries amounted, as in any year, to several billion shekels, but since then the annual budget has doubled and the gaps have grown. To put an end to the arguments, the Nagel Committee was established at the height of the war in Gaza to examine the defense budget, and it set it at more than NIS 110 billion a year. Since then, however, major changes have occurred, including the rounds of fighting with Iran. For comparison, before the war, reservist mobilization stood at about 6,000 soldiers at any given time.
The second issue that is surfacing again now is oversight of defense spending. In this context, the Treasury’s remarks about the way the defense budget is managed can be read in a different light. For years, the Treasury has wanted to improve and expand oversight of defense spending. At the same time, the oversight task is not simple given the frequent changes in the geopolitical situation and in Cabinet directives. On the other hand, writing a blank check for the defense establishment and updating the level of defense spending several times during a budget year is also not a sustainable solution.
Economists, security experts and senior figures on both sides of the dispute believe that a multi-year budget, a defense concept and reference scenarios should be established, but those will be left to the next government.
A complicated three-way dispute
Finally, the massive procurement issue is tied to all of this. Some of the figures familiar with the budget battle believe that the other issues are being delayed not by chance, in an effort to influence the next government to reduce the amount. The Budget Director also addressed this last week, saying that these would certainly lead to an increase in Israel’s debt-to-GDP ratio.
Bank of Israel Governor Prof. Amir Yaron also referred to the possibility that such budgeting would raise the debt-to-GDP ratio from 60% before the war and 70% now to 80% within a decade. Such a situation would increase the state’s interest expenses along with defense spending, at the expense of civilian services.
Thus, the complicated triangle of disagreement, which includes the annual defense budget, oversight of defense expenditures and orders, and the procurement plan, if it remains in force, will accompany relations between the government ministries and, more than that, shape the entire state budget. Only after the defense budget is finalized and the deficit is set, which determines interest expenses, can the government turn to budgeting for “life itself.”
In the wake of the recent exchanges, the Israeli economy has shown impressive resilience and strength, and the OECD noted this especially last week. However, it also cited the renewed fighting as a threat to forecasts for the Israeli economy. The organization also called on Israel to rebuild its fiscal buffers by maintaining revenues and reducing defense spending. In that sense, an escalation of the campaign against Iran and continued heavy defense outlays are the reference scenario for the Israeli economy, as reflected in the Treasury’s own assessment. In the Treasury’s forecast published as part of the three-year budget, the “normator,” it said that risks to the growth forecast are related, among other things, to a return to intense fighting and a breach of the defense budget.
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