Bank of Israel Warns of Rising Economic Risks amid War, Criticizes Revised Budget

The Bank of Israel has sharply criticized the revised budget proposed by Finance Minister Bezalel Smotrich, calling for a reduction in so-called “coalition funds” earmarked for political spending amid escalating pressures on public finances.

The criticism follows cabinet approval of the amended budget, which increases the defense ministry allocation from ₪111 billion in the original 2026 budget to approximately ₪140 billion.

The central bank warned that rising military expenditures and mounting fiscal pressures expose Israel’s economy to increasing risks that could negatively impact short-term economic activity.

“The tense geopolitical environment stemming from the war with Iran is tilting economic risks toward the negative direction in the near term,” the bank said, highlighting the high costs of military operations and the strain on government finances.

The Bank of Israel urged caution in expanding non-war-related spending programs or cutting taxes at this sensitive time. Officials noted that raising the targeted budget deficit to 5.1% of GDP in 2026 could push public debt to around 70% of GDP, reflecting the high economic costs of the ongoing conflict.

The Ministry of Finance estimates that the revised deficit could reduce GDP growth by 0.5 percentage points, while the central bank warns that the overall economic impact may be more severe due to the ongoing war and heightened global market uncertainty, including energy price volatility.

Consequently, the Ministry of Finance has lowered its 2026 growth forecast from 5.2% to 4.7%, citing disruptions caused by the war in Iran.