The Bank of Israel has slammed the amended budget of Minister of Finance Bezalel Smotrich and has called for a reduction in coalition funds.
Following cabinet approval of the amended budget yesterday, the Ministry of Finance estimated that growth would be hit by 0.5% of GDP. The Bank of Israel said today that “In our assessment, the damage to activity could be even more severe. The war is still in full swing, and the level of uncertainty in world markets has risen, due in part to the volatility of energy prices and developments in the international arena.”
Last night, the cabinet decided to increase the defense budget for this year by NIS 32 billion and allocate an additional reserve of about NIS 13 billion for defense and civilian needs in the event of a prolonged war. The deficit target will rise to 5.1% of GDP. The revised deficit target approved for 2026 is expected to lead to a further increase in the debt-GDP ratio, following its increase in 2023-2025, and it may reach about 70% in 2026, according to the Bank of Israel.
“On the eve of the war, Israel’s debt-GDP ratio was about 60% – a level similar to that of a group of small, open, and advanced countries. These countries are relatively exposed to global shocks and therefore tend to maintain a moderate debt level that will allow them a fiscal margin in times of crisis. In recent years, most of these countries have even recorded a further decrease in the debt ratio, while in Israel it has increased due to the exceptional security events.”
“To mitigate the increase in the deficit as much as possible”
The Bank stressed, “It is important to mitigate the increase in the deficit as much as possible, so that it will be possible to return to a path that converges to a debt-GDP ratio lower than the current one, which will reduce the burden of interest payments and allow fiscal flexibility in dealing with future shocks.”
However, according to the Bank of Israel, the deficit target set in the original budget for 2026 – which was built on the assumption that 2026 would be the year of “return to normality” – was from the outset higher than the deficit needed to reduce the debt to-GDP ratio, and has since climbed following the war.
Among the adjustments required, the Bank of Israel notes, “In this regard, it is desirable, inter alia, to reduce some of the coalition budgets and the budgetary supplements approved this year and to avoid spacing the tax brackets and expanding the VAT exemption on personal imports. New budget initiatives can be revisited as part of the 2027 budget debate, once the macroeconomic and geopolitical picture becomes clearer.
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“The fact that the increase in the deficit target was approved while allowing the tax brackets to be raised, which has a lasting impact on the debt-to-GDP ratio, is inconsistent with this need.
“In addition, in order to strengthen fiscal credibility, it is important to ensure that the reserve approved for security and civilian needs will indeed be retained only for the needs for which it was defined and will not be diverted to other purposes,” the Bank said in a statement.
Published by Globes, Israel business news – en.globes.co.il – on March 11, 2026.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2026.
