Bank of Israel Governor on Globes exposé: We were not partners in the decision to hike the defense budget

The Bank of Israel has issued its first response to the Globes exposé: last Friday, it was revealed that Prime Minister Benjamin Netanyahu instructed the professional echelons in the Ministry of Finance, the Ministry of Justice, and the Ministry of Defense to prepare a proposal to breach the state budget in order to earmark a force buildup plan at a cost of 400 billion shekels over 13 years.

Today (Sunday), the Bank of Israel published its response:

"Bank of Israel Governor, Prof. Amir Yaron, has previously presented the fiscal and macroeconomic implications of increasing the defense budget by approximately 350 billion shekels over the coming decade, and highlighted the need and importance of returning to a downward trajectory of the debt-to-GDP ratio.

"The Bank of Israel had even previously recommended the establishment of a committee to examine the defense budget - which, among other things, was required to balance security needs with civilian-economic ones, and was even a partner in the Nagel Committee. In particular, the Bank of Israel emphasized that decisions on a significant and sustained increase in the defense budget must be accompanied by decisions on how the additional expenses will be financed. However, the Bank of Israel was not a partner in the decision-making process regarding the 350-400 billion shekel addition to the defense budget."

Will the state budget be breached?

Recall that about a year ago, Netanyahu decided on funding military procurement in the amount of 350 billion shekels, in addition to the annual defense budget. Meanwhile, the defense establishment has committed to expenditures of 130 billion shekels, of which, as part of urgent procurement, aircraft were purchased for 40 billion shekels. A few weeks ago, it was claimed that military procurement needed to be increased already in the current year by about 2 billion shekels, but since then the amount has soared to about 20 billion shekels, in a way that requires breaching the state budget.

The plan, as learned by Globes, includes convening the Knesset after it was dissolved due to the election and recess period, and passing a new state budget that will include the commitment.

Part of an election campaign?

Alongside security challenges, this may negatively impact the economy. The state budget has been opened several times since the outbreak of the war, but such a move was made as part of the intensification of the fronts. The last time, last March, in the midst of Operation "Lion's Roar", the Knesset amended the budget proposal that was on its table, and the defense budget jumped from 111 billion shekels to 143 billion shekels.

Since then, the defense establishment has claimed a gap of 40 billion shekels between the approved defense budget and the required budget, and it was decided to transfer an additional sum of 15 billion shekels to the defense budget, bringing it to 158 billion shekels. For comparison, before the outbreak of the war, the budget stood at about 60 billion shekels.

Unlike previous times when the budget was opened in the midst of fighting rounds, now the plan is to do so again - but during an election period, in a way that could signal to the markets that this is part of an election campaign. This comes after rating agencies and the International Monetary Fund have already listed the increase in the defense budget and the increase in the country's debt-to-GDP ratio as a threat to the economy's recovery forecast.