Israel's central bank chief, Amir Yaron, has called on the government to enact responsible fiscal policy in order to offset any further expansion in the military budget. The recent approval of an amended 2024 state budget that added funds for Israel's conflict with Hamas in Gaza has raised concerns about fiscal responsibility. Yaron highlighted the need for a committee to establish the size of the defence budget and formulate a multi-year budget program that considers the economic impact.
Defence Budget Increase
Israel is set to increase its defence spending by around 20 billion shekels per year, with additional funds allocated for compensation payments to households and businesses affected by the conflict. The amended budget has raised the deficit to 6.6% of GDP in 2024, compared to a pre-war level of 2.25%. This increase in spending poses challenges for fiscal sustainability and could lead to a rise in the public debt to GDP ratio.
Economic Challenges
Yaron highlighted significant challenges facing the Israeli economy, including low labour productivity and weak basic skills that hinder certain segments of the population from fully integrating into the labour market. Despite these challenges, Israel's economy grew at a modest rate of 2% in 2023, with zero per capita GDP growth. Yaron emphasized the importance of implementing responsible economic policies to address current challenges while promoting sustainable growth.
Israel's central bank chief has urged the government to exercise caution in its fiscal policy decisions, particularly regarding the military budget. By implementing responsible economic policies and addressing fundamental challenges in the economy, Israel can achieve sustainable growth and overcome the obstacles posed by the recent conflict with Hamas. It is crucial for policymakers to consider the long-term economic implications of their decisions and work towards ensuring fiscal stability and growth in the years to come.