Bank of Israel Denies Involvement in Netanyahu’s Plan to Boost Defense Budget by 400 Billion Shekels

The Bank of Israel issued its first official response following a Globes report revealing that Prime Minister Benjamin Netanyahu instructed officials in the Finance, Justice, and Defense Ministries to prepare a proposal to break the state budget and allocate 400 billion shekels for a military buildup program. On Sunday, the Bank clarified that while Governor Professor Amir Yaron has previously outlined the fiscal and macroeconomic impacts of increasing the defense budget by approximately 350 billion shekels over the next decade, and emphasized the need to return to a declining debt-to-GDP ratio, the Bank was not involved in the decision-making process for this budget increase.

The Bank of Israel has recommended establishing a committee to review the defense budget, balancing security needs with civilian economic considerations, and was a participant in the Nagel Committee. It stressed that any significant and sustained increase in defense spending should be accompanied by clear financing plans. However, it explicitly stated it was not a partner in the recent decision to add 350-400 billion shekels to the defense budget.

About a year ago, Netanyahu approved a 350 billion shekel military procurement budget in addition to the annual defense budget. So far, the defense establishment has committed to spending 130 billion shekels, including urgent purchases such as 40 billion shekels worth of aircraft. Recent reports indicated a need to increase military procurement by 2 billion shekels this year, which has since escalated to about 20 billion shekels, necessitating a budget break.

The plan reportedly includes convening the Knesset after its dissolution due to elections and recess, to pass a new state budget incorporating these commitments. Netanyahu has highlighted the military buildup and the hundreds-of-billions plan as key achievements of his current term. The legal advisor to the government, Gali Baharav-Miara, faces a challenging task preventing the Knesset’s convening and budget break during the election period, a highly unusual move.

Unlike previous budget openings during active combat rounds, this initiative would occur amid elections, potentially signaling a political campaign move to markets. Credit rating agencies and the International Monetary Fund have already flagged the defense budget increase and rising debt-to-GDP ratio as risks to Israel’s economic recovery. Since the war’s outbreak, the defense budget has been repeatedly increased, from 60 billion shekels pre-war to 158 billion shekels currently, including a recent 15 billion shekel addition. The Bank of Israel’s statement underscores the economic and political complexities surrounding this unprecedented budget expansion.