3/26/2025–|Last update: 3/26/202507:15 PM (Mecca time)
In an annual report that is the most tone for years, the Bank of Israel warned that the steps included in the 2025 budget are not sufficient to address the serious economic challenges facing the country after the war, calling for rearranging government priorities and stopping the reduction of spending in vital areas such as education, transportation and infrastructure.
“The economy is no longer yet to its previous situation of the war, and the consequences of the war will accompany us for many years,” said the report, which was reported by the Calist newspaper -written by the bank’s governor, Amir Yaron,. He pointed out that the costs of the accumulated war will exhaust the public budget and lead to an increased structural deficit, which requires radical amendments to fiscal policy.
An increased deficit and the costs of war
According to the report published by the “Calist” website, the Bank of Israel expects the additional costs of the war to reach about 50 billion shekels (13.6 billion dollars), including:
- Security spending.
- Reconstruction costs.
- Payment for benefits.
On the other hand, the permanent amendments approved by the government in the budget amounted to about 30 billion shekels (8.13 billion dollars), which creates a financing gap that threatens to raise the deficit to about 3.6% of GDP.
The report considered that this deficit is not sufficient to stabilize the percentage of debt to the local product, which jumped to 68% after the war, warning that if the deficit is not concluded concretely, Israel may face difficulties in financing public debt and a threat to its credit classification.
https://www.youtube.com/watch?v=q6xgpix9wn4
Credit classification is threatened
The bank pointed out that reducing the credit rating of Israel by international rating agencies is not only related to the war, but also to the government’s mismanagement of the budget, and its delay in approving the budget in 2025, and its refusal to reduce the expenses that do not contribute to growth or financing the war.
The report added that the markets began to confront the risks on the basis of a classification between the BBB and the BBB, which are much lower than what is currently given by agencies such as Moody’s or Fitch. He also revealed that a mission from Fitch was recently in Israel to collect information about the political and financial crisis, and that the recent escalation may lead the agencies to take negative steps.
Warning against spending in vital sectors
The most prominent thing in the report is the explicit warning that reducing spending on civil sectors such as education, transportation and infrastructure will have a direct negative impact on economic growth. The bank pointed out that investing in these sectors in Israel is among the lowest compared to developed countries, and that any additional reduction will increase the existing deficiency.
The report emphasized that the attempts of previous governments to reduce civil spending were easier because it started from high levels, but now, civil spending is already low, which makes it difficult to make additional discounts.
Long -term structural challenges
The Bank of Israel stressed that the current crisis must be an opportunity to reform the deep structural challenges in the Israeli economy, noting:
- Relatively high poverty levels.
- Low productivity.
- A weak general investment.
- Low employment rates in the ranks of the Haredim and Arab women.
- Gaps in basic skills and education.
https://www.youtube.com/watch?v=huywjquun6c
The report called for strengthening the participation of all segments of society in the labor market, especially in the technology sector, through educational reforms and removing bureaucratic barriers.
Necessary reforms
The bank indirectly criticized the current policies of the government, explaining that “the status quo witnessing huge and increasing public funding for educational institutions that do not teach the basic curriculum unacceptable and must be corrected.”
He also stressed that young people in Israel are a rare development opportunity in light of the aging of other advanced societies, warning that this opportunity may be lost if it is not invested in training and qualifying these young people, especially with the entry of artificial intelligence into the labor market.
The Bank of Israel concluded its report with a clear message to the decision makers: The 2025 budget (approved by the Knesset yesterday) in its current form is insufficient, and requires a comprehensive reassessment of the state’s financial and economic priorities. And if there are no urgent corrective steps, Israel may face a more fragile economic future in a tense geopolitical and financial environment.
