Bank of Israel Governor Says Next Government Must Cut Defence Spending and Raise Taxes

Bank of Israel Governor Amir Yaron said on July 15 that whoever forms Israel's next government after the October 27 election must reduce defence-driven state spending and increase investment in education, infrastructure and other growth areas. Speaking at a Calcalist newspaper conference in Jerusalem, Yaron identified fiscal policy as the central challenge.

He noted that the defence budget has reached as much as 8% of GDP, double the level before the October 7, 2023 Hamas attacks, while the debt-to-GDP ratio has risen to 70% from around 60% in 2023.

Yaron stated that debt must stop increasing and that the country is currently on a path of rising debt. He listed three main fiscal tasks for the incoming government: containing the defence budget, halting the debt increase, and directing resources toward growth engines such as education and infrastructure.

He also called for greater integration of groups including ultra-Orthodox Jews into the labour market and advocated higher taxes to keep debt in check while defence spending remains elevated.

Yaron said Israel will likely maintain a higher overall budget than before October 7, 2023. Polls indicate that Prime Minister Benjamin Netanyahu's ruling coalition is trailing ahead of the October vote. Last week the Bank of Israel cut its benchmark interest rate by 25 basis points to 3.5%, the second consecutive reduction.

Yaron said short-term rates would probably continue to decline provided Israel avoids renewed war and inflation stays stable, though he added that monetary policy must remain cautious because of price pressures in wages and housing rents.