Bank of Israel warns wartime changes to 2023 budget can harm economy

The Bank of Israel warned on Tuesday that some elements of the proposed amendments to the 2023 budget could damage Israel’s economic standing.

Prime Minister Benjamin Netanyahu approved an amended budget for the end of 2023 presented to him on Tuesday by Finance Minister Bezalel Smotrich.

The budget was approved during a meeting between Netanyahu and Smotrich along with the Prime Minister’s Office director-general Yossi Shelly, Finance Ministry director-general Shlomi Heizler, National Economic Council chairman Avi Simchon, and other officials in the Finance Ministry.

Due to the war, Israel’s budgetary needs have changed, and as such, the rest of the year’s budget will be supplemented by rerouting funds from various ministries and from cutting down on coalition funds.

Netanyahu and Smotrich agreed to bring the amended budget for Knesset approval as soon as possible and to begin working on amending 2024’s budget as soon as possible.

Why does the Bank of Israel warn about the 2023 budget changes?

The Bank of Israel’s research department analyzed the proposed amendments to the 2023 budget and warned that some elements of the changes could damage Israel’s economic standing.

According to the analysis, the new budget was supplemented by NIS 31 billion. Of this, NIS 4b. was being funded by cutting costs elsewhere like coalition funds, but the bank warned that more than half a billion shekels were due to come from an unspecified source, and it isn’t clear if they exist.

The analysis added that the NIS 4b. that would come from cutting down coalition funds was not enough and, therefore, the government would need to think ahead to 2024 and cut more costs for next year to allow a higher budget for the sake of the war and the country’s recovery.

Furthermore, the bank warned the government about the compensation plans it had drawn up that amount to NIS 15b. by the end of the year. This sum will use up the vast majority of the country’s compensation fund, meaning that any compensation plans for 2024 will have to be funded by the state budget.

“The security situation requires great responsibility in the management of the government’s budget to establish the confidence of the markets that are testing the developments in Israel’s market and budget,” said Bank of Israel’s research department manager Adi Brender. “Therefore, we must create a balance between the need to assign large budgets for the security situation and the need to exhibit fiscal responsibility. An important way to ensure balance is a change in the budget’s priorities while refraining from unnecessary planned expenses.”

Smotrich has faced heavy criticism from both sides of the Knesset as well as from within his own ministry for his decisions as finance minister since the war began.

From the beginning, opposition MKs demanded that all the coalition funds be made available for the war effort, but Smotrich has refused to release all the money.

The finance minister also clashed with his ministry’s legal counsel who advised last week against setting up a team to manage the war budget. Smotrich responded to the opinion saying that it “interests the tip of my belly button”.

In response to the Bank of Israel analysis, Minister Benny Gantz said that all available resources needed to be used for the needs of the war.

“In the face of claims that the coalition funds are being used for routine uses, we’ll open the budget and regulate it within it,” he said. “You don’t make shady political business plans of any kind during a war.”

Opposition leader Yair Lapid accused the government of not learning its lessons and demanded the coalition funds be diverted immediately for the war.

“The blatant disregard of the officials’ recommendations risks the lives of Israeli citizens during a war,” he said.