Governor of the Bank of Israel Prof. Amir Yaron on Monday told the Knesset Finance Committee the direct war expenses in the years 2023–2025, including interest expenditures, compensation, and other civilian expenditures related to the war, would reach about NIS 215 billion ($57.3 billion), in addition to NIS 40 billion ($10.6 billion) in loss of tax revenues, totaling NIS 255 billion ($68 billion) over these years.
Regarding the war, the Governor said: “We entered this matter fairly well, Israel has a pretty good record in recovering from previous security events. At the start of the war, credit card activity dropped to 70%, and now it is over 100%.” On Israel’s risk premium, the Governor noted that it had “increased and slightly moderated, but it’s not where it was. We are in a category of countries that we were not with before.”
Prof. Yaron also noted that it was clear to everyone there would be a long-term increase in the defense budget due to the war, stemming from an increase in the defense establishment’s buildup and associated interest expenditures, as well as expenditures for the Tkuma Directorate that was established to rehabilitate the Gaza envelope communities and care for the thousands of war evacuees.
The Bank Governor called on the Government to adjust its expenditures to converge to the amount that was due to be spent in this context, saying that such measures had been taken in the 2024 budget: “If you have an additional NIS 20 billion ($5.33 billion) annually in defense spending, let’s, first of all, reduce the spending to NIS 20 billion,” he told the committee.
“There should be a committee to examine the needs; we have to sharpen pencils but also to understand the needs of the defense establishment. If you have an additional expenditure of 20 billion every year, you don’t want to show that your debt-to-GDP ratio is diverging; if not converging, at least not diverging. You have to converge to an amount close to 20 billion, and that is what we will do with the Government. It’s possible that more could have been done, and perhaps the VAT increase (from 17% to 18% – DI) should have already been activated in 2024, but all in all, these are the adjustments as I understand them. Significant adjustments were made for convergence,” Prof. Yaron said.
As to the economic growth forecast for the coming years, the Governor of the Bank of Israel told the committee: “The forecast for the years 2023 and 2024 is for a 2% growth rate in each of the years, and a 5% growth rate in 2025, based on a reference scenario of a decrease in the scale of the war in the first quarter of 2024.”
However, he noted, “This is based on an assumption of maintaining the size of the budget, and that’s why it is so important for us to maintain the budget framework. We predict that inflation will continue to moderate, but there is a great deal of uncertainty in this regard, including the situation in the north and more, so we are advancing in very measured steps.”
Regarding Committee Chair MK Gafni’s call to lower interest rates, Prof. Yaron told the MKs, “The exchange rate is also an important parameter. On average, we see a good process that is converging, but there are risks for the future. As the process converges, and we see that economic activity is receiving what it needs, the process of further lowering the interest rate can continue, but it is a process that is contingent on these things. We are dependent on the data that come in, and there is great uncertainty. So, the process has to be very cautious and measured.”
He reminded the committee members that “some of the measures have enabled us to lower inflation. We understand the pain you addressed at the start of the debate, Mr. Chairman. All studies show that inflation harms the weaker sectors, and for this reason, dealing with inflation today, versus dealing in the future with higher inflation—that is what these measures are for. When it comes to the issue of inflation, and we know this full well, we are in a fairly good situation regarding inflation, but this has to be maintained. It mainly harms the weaker sectors. If we weren’t dealing with it, this would have an even greater effect on the weaker sectors.”
