Netanyahu’s Cabinet to expand Israel budget by $16 billion to fund war

JERUSALEM – Israel is set to expand its defence budget by almost 40 billion shekels (S$16.4 billion), about 2 per cent of its gross domestic product, to fund the war with Iran, according to a Finance Ministry official, who requested anonymity discussing plans that are not yet public.

The supplement is part of a revised 2026 budget that will be debated and possibly voted on late on March 10 by Israeli Prime Minister Benjamin Netanyahu’s Cabinet.

It will then need a sign-off from Parliament by the end of the month.

The defence budget will be expanded by 28 billion shekels, with an additional 10 billion put aside as reserves for possible military needs, the official said.

“This war is costing lots of money,” Mr Netanyahu said in a recorded video statement late on March 10.

“Therefore, we are in need of a special budget including tens of billions of shekels to boost defence expenditure.”

Standing by Mr Netanyahu was Finance Minister Bezalel Smotrich, who revealed that the government decided to shelve a highly controversial Bill that would exempt ultra-Orthodox men from serving in the military.

The ultra-Orthodox parties, who constitute a large part of Mr Netanyahu’s coalition, had previously hinged their support for the budget on the government approving this Bill.  

“War is a time for unity, for national responsibility,” Mr Smotrich said.

The latest development may not only pave the way for the budget’s approval, but could also grant Mr Netanyahu’s government a significant lifeline: failure to approve a budget by March 31 would have automatically collapsed the government.

Otherwise, elections are scheduled for October. 

Defence, the largest item in the spending programme, will total 140 billion shekels – 115 per cent higher than in 2023, before the Gaza war. The overall spending plan will now be close to 700 billion.

The extra money is mostly for replenishing military inventory and paying reserve soldiers.

The previous budget proposal set a limit of 40,000 reserve soldiers for 2026, with a maximum 55-day service for each.

But since the start of the Iran war at the end of February, the military has called up more than 100,000 reservists.

The target deficit, previously set at 3.9 per cent, will probably be raised, although it has not yet been decided by how much, and is likely to be determined at the March 10 Cabinet meeting.

The government’s borrowing has soared since the start of the military retaliation to Hamas’ October 2023 attack, peaking at almost 280 billion shekels in 2024 and remaining high at 200 billion in 2025.

The surplus interest Israel is paying for its war loans is estimated by the Finance Ministry to be at 10 billion shekels annually; a larger deficit could further increase that.

A deficit higher than 3.9 per cent could see an expansion of Israel’s debt-to-GDP ratio, which currently stands at almost 69 per cent.

Any portion of the supplement not funded via additional debt will require cutbacks elsewhere or additional new taxes.

The government had already announced austerity measures totalling about 30 billion shekels to fund Israel’s wars in Gaza, Lebanon and Iran.

They will remain in force through the end of 2027. BLOOMBERG