An election campaign that will cost the Israeli economy dearly
Globes has learned that Benjamin Netanyahu wants to break the budget to transfer 400 billion shekels to the defense system, while emphasizing military procurement in his election campaign. However, this 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.
Globes revealed this morning that the Prime Minister has ordered a breach of the state budget in the midst of an election period. This is to anchor his promise of an additional 400 billion shekels for military procurement, with the amount spread over 13 years. Despite the security need for buildup following the outbreak of the October 7 war and the many failures associated with it, it is hard to ignore the fact that the plan has become a significant part of the election campaign.
In a post uploaded by Prime Minister Benjamin 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 segment uploaded yesterday that "within a decade I want our own unmanned stealth aircraft because we can never know if they will deny us important platforms that we are currently receiving from abroad. 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 a budget breach to bring it 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 as part of urgent defense procurement, 40 billion shekels were even allocated from it for the purchase of aircraft. That is, even if the budget was not breached, and future governments were only partially constrained, solutions were found in the last year for urgent cases.
Therefore, it is not certain that this is a "hook" strong enough to hang such a large expense on during an election period. In any case, that "hook" may be used by the government vis-a-vis the legal counsel, as it will justify the exceptional budget breach with operational urgency.
This decision did not come in a vacuum and it comes against the background of astronomical 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, a sum 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 placed special emphasis on 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.
It emerges from the announcement 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 in view of the fact that during an election period it is likely that a state budget breach will not be accompanied by any cuts at all, the next government will need, it seems, to impose heavy taxes on the public in Israel in order to finance the procurement plan.
