Bank of Israel warns deficit could widen amid wartime spending

The Bank of Israel has urged the government to reduce coalition funds and avoid introducing new programmes unrelated to the war effort, warning that recent fiscal decisions could significantly widen the national deficit.

The warning came after the Israeli government approved budget amendments and an increase in the deficit to finance the ongoing war with Iran.

According to the business newspaper The Marker, the central bank expressed concern that expanding the deficit while simultaneously approving tax reductions could lead to a rising public debt ratio in the coming years. This, it said, could increase the burden of interest payments and limit the government’s fiscal flexibility.

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Despite being legally designated as the government’s economic adviser, the Bank of Israel’s position was not presented during the cabinet meeting held on Tuesday night. The bank later published its recommendations separately, calling for measures to limit the widening deficit.

Among its recommendations was a reduction in coalition funds, despite the government’s approval of transfers amounting to roughly 5 billion shekels, in addition to about 1 billion shekels already included in the base budget.

The bank also advised against expanding income tax brackets, a move that would cost approximately 5 billion shekels annually and primarily benefit individuals earning more than 16,000 shekels per month.

In addition, the central bank warned against expanding VAT exemptions on personal imports, referring to a proposal by Finance Minister Bezalel Smotrich to raise the exemption threshold to 130 US dollars.

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