Next Israel government must halt rise in debt burden, central bank chief says

Israel's next government must prioritize fiscal discipline and invest in growth engines like education and infrastructure, according to Bank of Israel Governor Amir Yaron. Speaking at a Calcalist newspaper conference, Yaron identified fiscal policy as the primary challenge, particularly with defense spending having doubled to 8% of GDP since the October 7 attacks.

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We face a clear challenge for any government that enters office. First of all our debt must not continue to increase. Currently, we are on a path of rising debt

Yaron warned that Israel is on a path of rising debt, with the debt-to-GDP ratio increasing to 70% from around 60% in 2023. He stressed that the debt must not continue to climb. "We face a clear challenge for any government that enters office," Yaron stated, emphasizing the need to address the defense budget and invest in areas that drive economic expansion.

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The second is the defense budget ... and third is investing in growth engines like education and infrastructure.

To manage the debt burden, especially with expected continued high defense spending due to regional threats, Yaron advocated for tax increases in 2027. He also pointed to the need for better integration of groups like ultra-Orthodox Jews into the labor market. Budget director Maharan Frozenfar, however, expressed opposition to raising taxes, suggesting that stronger economic growth could be sufficient to lower the debt burden.

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We need to take difficult actions to keep the momentum going and achieve even greater growth

The central bank recently reduced its benchmark interest rate to 3.5% amid easing inflation. Yaron indicated that rates could continue to fall if the country avoids further conflict and inflation remains stable, but cautioned for continued monetary policy vigilance.

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Realistically, we will likely have a higher budget than before October 7