Israel Advised to Maintain Fiscal Prudence Amidst Defense Spending Surge

The Bank of Israel warns against unrestrained fiscal spending amid escalating defense costs due to the air war against Iran. It urges the government to refrain from initiating non-essential programs as it raises the budget deficit target. The geopolitical tension poses economic risks.

The Bank of Israel issued a stern warning to the government on Wednesday, emphasizing the necessity of 'careful fiscal management' as the nation finances its air war against Iran. The central bank advised against funding new programs unrelated to the war effort.

On Tuesday, Israel's cabinet made a controversial decision to significantly increase defense spending by tens of billions of shekels in 2026. Alongside this, the government raised the nation's budget deficit target to 5.1% of the gross domestic product, up from the previous 3.9%.

Responding to these developments, the central bank stated that the war budget must exclude items that do not contribute to long-term economic growth or involve tax cuts. The central bank warned that the current geopolitical climate resulting from the conflict increases the likelihood of economic challenges in the short term.

(With inputs from agencies.)