Israel's next government must curb rising debt, central bank chief warns

Bank of Israel Governor Amir Yaron stated that any incoming Israeli government must reduce defense spending and increase investment in education and infrastructure. Yaron also highlighted the need to integrate ultra-Orthodox Jews into the labor market and suggested raising taxes to manage rising debt.

The defense budget has doubled to 8% of GDP since the Hamas attacks on October 7, 2023, 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.