Globes Exclusive: Netanyahu demands to transfer 400 billion shekels to defense during the election period
Globes has learned that the Prime Minister ordered last night at a multi-participant meeting to convene the Knesset to vote on breaking the budget, which would allow for an additional 400 billion shekels for military procurement. This may lead to a breach of the deficit target and undermine market confidence in the economy.
Globes Exclusive: Prime Minister Benjamin Netanyahu ordered at a multi-participant meeting held yesterday (Thursday) to break the budget, convene the Knesset, and vote on an additional state budget that will anchor his promise of an additional 400 billion shekels for military procurement, with the amount to be spread over 13 years. The danger: this may lead to a breach of the deficit target and undermine market confidence in the Israeli economy.
About a year ago, Netanyahu decided to budget military procurement in the amount of 350 billion shekels, in addition to the annual defense budget. Meanwhile, the defense establishment has committed to spending 130 billion shekels, of which, within the framework of urgent procurement, among other things, aircraft were purchased in the amount of 40 billion shekels. A few weeks ago, it was claimed that military procurement needed to be increased already in the current year by about 2 billion shekels, but since then the amount has risen to about 20 billion shekels, in a way that requires breaking the state budget.
The plan, as Globes has learned, includes convening the Knesset after it was dissolved due to the election period and recess, and passing a new state budget that will include the commitment.
An election campaign that will cost the Israeli economy dearly
Netanyahu wants to break the budget to transfer 400 billion shekels to the defense establishment, while he emphasizes military procurement in his election campaign. However, the move, for which it is difficult to find justification at this time, could lead to a downgrade of Israel's rating and a significant tax increase next year.
Prime Minister Benjamin Netanyahu has instructed to break the state budget in the midst of an election period. Despite the security need for buildup after the outbreak of the October 7 war and the many failures associated with it, it is difficult to ignore the fact that the plan has become a significant part of the election campaign.
In a post uploaded by Prime Minister Netanyahu, in which he boasted about the budgets transferred in the last term, it was noted, among other things, that "we are promoting Israel's armament independence with an investment of 350 billion shekels in the coming decade." In an interview for Gadi Taub's "Shomer Saf" podcast, he said in a clip uploaded yesterday that "within a decade I want our own unmanned stealth aircraft because we can never know if important platforms that we are currently receiving from abroad will be denied to us. I am doing everything to maintain the alliance with the USA, but I think we need to cultivate our armament independence. I have allocated 400 billion shekels for this in the coming decade as an addition to the defense budget so that we build weapons industries here that will cancel or reduce our dependence on external supply or most of the external supply."
During a discussion held last Thursday, the Prime Minister said that he intends to anchor and fix this plan for the coming years and therefore intends to initiate the breaking of the budget to bring this about. The official reason for the urgent decision during the election period: urgent military procurement that grew from 2 billion shekels to 20 billion in a few weeks. However, the defense establishment has already committed to spending 130 billion shekels out of the plan that grew from 350 billion to 400 billion, and within the framework of urgent defense procurement, 40 billion shekels were even allocated from them for the purchase of aircraft. That is, even if the budget was not broken, and the next governments were only partially constrained, solutions were found in the last year for urgent cases.
Therefore, it is not certain that this is a "hanger" strong enough to hang such a large expense on and during an election period. In any case, that "hanger" may be used by the government vis-à-vis the legal counsel, as it will justify the exceptional budget breaking with operational urgency.
This decision did not come in a vacuum and it comes against the background of soaring war expenses. Before October 7, the army budget stood at 60 billion shekels and has jumped dramatically since then. It has almost tripled, standing at 158 billion shekels this year; the procurement budget is in addition to these amounts. For comparison, the Bank of Israel estimated the cost of the war so far at 405 billion shekels, an amount almost identical to that which the Prime Minister is now asking to add to state expenditures in the coming years.
How will Moody's react?
International rating agency Moody's published its semi-annual review of the Israeli economy last month. The announcement does not constitute a rating action, nor is it an indication that such a change is expected to happen soon. In any case, its next decision is expected to be made in November, after the Knesset elections. The company's credit rating for Israel remains Baa1, with the rating outlook remaining stable. In its announcement, the company gave special emphasis to geopolitical risks and noted that the Israeli economy has demonstrated high resilience to security shocks.
Moody's methodology includes various criteria: economic strength, quality of state institutions, and fiscal resilience. Economic strength received a relatively high score of A1. Regarding state institutions and their quality, the score is also high and stands at A3, while fiscal resilience received a lower score of Baa3, following the government's high deficits and the rise in debt and defense expenditures, but alongside a high ability to raise funds from the capital market.
From the announcement, it appears that fiscal resilience is the category where the most significant opportunities and risks for the Israeli economy lie, particularly around the defense budget and high costs. The company estimated that defense expenditures would stand at about 6%, but already now these are higher amounts, and certainly if the plan in question is implemented and sets extensive costs in the coming years.
In order to avoid a rating downgrade and a lack of market confidence in the economy, and given the fact that during an election period it is likely that the state budget breaking will not be accompanied by cuts at all, the next government will apparently have to impose heavy taxes on the public in Israel to finance the procurement plan.
In interviews given by the Prime Minister, he noted among his achievements in the current term the intensification of military procurement and the hundreds of billions plan that he now intends, it seems, to turn into a fait accompli. Due to the security need for procurement already this year, it will not be easy for Attorney General Gali Baharav-Miara to prevent the convening of the Knesset and the breaking of the state budget during an election period and in a very exceptional manner.
Alongside security challenges, this may negatively affect the economy. The state budget has been opened several times since the outbreak of the war, but such a move was made as part of the intensification of the fronts. The last time, last March, in the midst of Operation Lion's Roar, the Knesset amended the budget proposal that was on its table and the defense budget jumped from 111 billion shekels to 143 billion shekels. Since then, the defense establishment has claimed a gap of 40 billion shekels between the approved defense budget and the required budget, and it was decided to transfer an additional 15 billion a few weeks ago to the defense budget in a way that brings it to 158 billion shekels. For comparison, before the outbreak of the war, the budget stood at about 60 billion shekels.
According to Bank of Israel estimates, the cost of the war to the state since the outbreak of the war is 405 billion shekels. That is, the Prime Minister's proposal is to add a similar amount in direct expenses for defense procurement in the coming years.
Unlike previous times when the budget was opened in the midst of rounds of fighting, now the plan is to do it again but during an election period in a way that may signal to the markets that it is part of an election campaign. This is after rating agencies and the International Monetary Fund have already listed the increase in the defense budget and the increase in the country's debt-to-GDP ratio as a threat to the economy's recovery forecast.
