Key facts
- Israel's next government must control defense spending and invest in growth areas, according to Bank of Israel Governor Amir Yaron.
- The defense budget has doubled to 8% of GDP since the Hamas attacks on October 7, 2023.
- Israel's debt-to-GDP ratio has increased to 70% from approximately 60% in 2023.
- Yaron suggested raising taxes to manage the rising debt burden.
- The Bank of Israel recently cut its benchmark interest rate to 3.5%.
Whoever wins Israel's upcoming general election must address the rising debt burden, driven by increased defense spending, Bank of Israel Governor Amir Yaron stated. Speaking at a conference, Yaron highlighted that the defense budget has doubled to 8% of GDP since the October 7 attacks, contributing to a debt-to-GDP ratio that has climbed to 70% from 60% in 2023.
Yaron urged the next government to prioritize investments in education and infrastructure, alongside controlling defense expenditures. He suggested that tax increases would be necessary to manage the fiscal challenge, acknowledging that the budget will likely remain higher than pre-war levels. The central bank recently reduced its benchmark interest rate by 25 basis points to 3.5%, its second consecutive cut, and Yaron indicated further reductions are possible if inflation and geopolitical stability permit, though he cautioned about persistent pressures in wages and rents.
The Bank of Israel anticipates the key rate will reach 3% by June of next year. Yaron also commented on the economy's resilience but noted that negative global sentiment towards Israel acts as a de facto tax on trade, a factor that should inform policy decisions.