Israel's Fiscal Tightrope Amidst War Spending: Balancing Defence and Economic Risks

The Bank of Israel warns the government on maintaining disciplined fiscal management while funding the air war against Iran. The cabinet has approved a revised 2026 budget, raising defence spending significantly. The central bank cautions against non-essential budget allocations that may not support long-term growth.

The Bank of Israel on Wednesday urged the government to exercise 'careful fiscal management' as it finances the ongoing air war against Iran. This caution comes amid broader economic considerations, emphasizing the necessity of allocating resources primarily for war-related expenses.

Israel's cabinet recently approved a 2026 budget revision, boosting defence expenditure by 32 billion shekels ($10.3 billion), raising the budget deficit target to 5.1% of GDP. Total spending is slated to hit 699 billion shekels, necessitating a 3% cut in civilian spending to manage the increased defence budget.

The central bank has advised that the war budget should not include items unrelated to long-term economic growth or tax reductions. This advisory highlights concerns over potential economic risks due to the geopolitical tensions. The revised budget still requires parliamentary approval by March's end to avoid triggering new elections.

(With inputs from agencies.)