The Bank of Israel's Annual Report for 2024 contains harsh criticism of the government's fiscal policy. The budgets for the war years, the most recent of which was approved only on Tuesday, did contain convergence measures to deal with the increasing defense spending, but as Governor, Prof. Amir Yaron wrote in the opening remarks to the report: "These measures are not enough to ensure a sustained decline in the debt-to-GDP ratio."
The Bank added, "Alongside the macroeconomic responsibility expressed in the budget, the composition of the adjustments taken by the government did not contribute to the economy's coping with the damage caused by the war and the growth potential when it ends."
The Bank of Israel stressed that the government has not focused on reducing spending in important items, such as those that harm or finance activities or that harm employment and labor productivity, and especially coalition funds.
The report provides the government with much food for thought, also makes a number of recommendations to benefit the economy. It notes that cutting civilian spending that contributes to long-term growth, namely investment in education, transport, and physical infrastructure, should be avoided. The data indicate that Israel lacks sufficent investment in these areas. The report also emphasizes that, "An important way to increase GDP and the tax base for financing public needs is to increase the earning capacity and participation of all parts of society in the labor market in general, and in the high-tech sector in particular."
"The more institutions are harmed, the more it will be reflected in the economy"
At the press conference, following publication of the report, the Governor was asked about the government's latest moves and concerns in the markets about the dismissal of the Attorney General. He replied that the Israeli economy is indeed resilient, but "All along, since February 2023, I have spoken about the fact that there is extensive literature on the connection between the strength of institutions and their independence, and economic growth. The more institutions are harmed, the more it will be reflected in the economy." On the dismissal of the Attorney General, he said, "I cannot imagine a situation in which there is a Supreme Court ruling and they (the government) will not obey it."
On the ratings agencies latest criticism of Israel, the Governor said that they had affirmed the Bank of Israel's growth forecasts (Moody's expects 3.8% this year) and stressed, "We should listen to the ratings agencies. The risks they indicate affect the economy, and reducing them could support economic recovery."
Published by Globes, Israel business news - en.globes.co.il - on March 27, 2025.
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