Bank of Israel chief urges Netanyahu to keep fiscal discipline

Bank of Israel Governor Amir Yaron on Wednesday made a final plea to Prime Minister Benjamin Netanyahu to maintain fiscal discipline ahead of a cabinet vote on a revised 2024 budget to incorporate enormous funding increases for the war with Hamas.

Ministers are slated on Thursday afternoon to start debate on a 2024 wartime budget that would add tens of billions of extra spending, and a vote could come in the middle of the night on Friday.

Yaron, who just started a second five-year term as central bank chief, has for weeks been urging the government not too spend excessively and offset any spending increases needed for the war with reductions elsewhere, along with tax hikes - items that government leaders have dismissed.

"There is no free lunch," Yaron wrote in a letter to Netanyahu that was seen by Reuters, stressing that markets are watching fiscal policymakers.

Yaron said the letter encompassed what he told Netanyahu at a meeting between the two on Jan. 3.

He estimated the Gaza war would cost 210 billion shekels ($56 billion) for defense and compensation, excluding loss of income, for residents near the Gaza and Lebanese borders who have been displaced by months of cross-border rocket fire.

Israel last year approved a two-year budget for 2023 and 2024, but the war against Hamas in Gaza has shaken government finances, requiring budget changes and additional spending.

In December, the Israeli parliament approved a special war budget for 2023 of nearly 30 billion shekels to help fund the war and compensate those impacted by the Hamas' Oct. 7 attacks that sparked the war.

The Finance Ministry has said the war will likely cost at least another 50 billion shekels in 2024 and result in a near-tripling of its budget deficit to around 6% of gross domestic product, in a projection that fighting will last through February.

Netanyahu, Finance Ministry held meeting regarding budget, Yaron not invited

On Tuesday, Netanyahu and Finance Ministry officials held a professional meeting regarding the budget, but Yaron was not invited. Yaron's spokesman said the governor, though, was invited to the cabinet meeting on Thursday.

Netanyahu's office did not immediately respond to a request for comment.

Yaron noted that one-time increases in debt are expected, but with defense spending projected to jump, "without making the required adjustments in the budget it may harm the growth of the economy and lead to a deterioration of the debt-to-GDP ratio over the years to come, which will have a negative impact on the way in which the solidity of the Israeli economy is perceived."

Last week, the central bank lowered its short-term interest rate for the first time since 2020 to support the economy, but policymakers warned that loose fiscal policy could slow the pace of future rate cuts.