A reminder from the Bank of Israel: funding needs a source

Benjamin Netanyahu wants to be Donald Trump: he wants a war but is not prepared to fund it. He just forgot one small detail: what is permitted for the USA is not necessarily permitted for Israel. The Prime Minister is asking to increase the defense budget and anchor it for 13 years ahead without mentioning funding sources. That is the point, not the amount. All this is happening on the eve of elections, while the Knesset is on recess.

Increasing defense spending is a legitimate decision. An elected leader is entitled to determine that security comes first. However, such a decision requires an answer: taxes or cuts? Both options are unpopular 81 days before elections, so a third was chosen: a deficit, which is essentially debt. This is the Trump pattern that Benjamin Netanyahu has adopted since the coronavirus era. A policy that produces an immediate result passes the bill to the next term.

The decisive difference is that the USA issues debt in the world's reserve currency. Israel is measured by a risk premium, debt yield, and credit rating. The country has already suffered five downgrades, losing between one and three notches. Two of the three rating agencies have a "negative" outlook, warning that further deterioration will lead to another downgrade. In Israel, passing the bill forward is not free; it is priced immediately.

The revenue side tells the same story. Tax collection rose above the forecast, mainly due to one-time revenues (high-tech exits). At the beginning of the year, Bezalel Smotrich decided to direct the "surplus" not to reducing the deficit or funding defense, but to tax breaks. The government is simultaneously increasing spending and giving up income. There is no way to bridge this gap other than increasing debt.

The new decision will only exacerbate the credibility problem. Last year, the government approved an orderly plan for defense budget additions (Nagel Committee), but less than two years later, those figures are irrelevant. If the framework evaporates within a year, it serves as a starting point for negotiations, not a ceiling.

The professional echelon in the Treasury, which should set the red line, is not heard. The Minister of Finance is silent, which is understandable given his intermittent electoral success. Internal oversight of spending relies on a mechanism intentionally weakened by Bezalel Smotrich. The Bank of Israel, whose role is to advise the government on economic matters, was not in the room. The Bank did not hide that they were not partners in the decision-making process regarding the addition, nor were they asked to estimate the macroeconomic significance of the move.

The Prime Minister does not need the Governor's approval, but a decision involving hundreds of billions of shekels is as much economic as it is security-related. In the Treasury, they say the figure the defense system demands "changes every minute," while the Bank explained they are still "optimizing the numbers." Both bodies, whose job is to price Israel's fiscal path, do not know the cost of the decision that has already been made.

The Bank of Israel formulated the direction in one dry line: "Any increase of 10 billion in spending (without a correction in revenues) will lead to an increase of 10 billion in debt." This is not a forecast but a calculation. Benjamin Netanyahu's political exercise has another layer: it is a trap for the next government. The new administration will receive an inflated defense budget, a growing deficit, and a narrowed tax base, forcing it to cut spending. Once it cuts, the infrastructure will be created for the claim from Benjamin Netanyahu's bloc that the new government weakened the defense system. This is not a side effect; it is the purpose.