U.S. President Donald Trump’s term was characterized by U.S. pressure on allies within NATO to increase their defense budgets to a certain portion of their GDP. Trump justified this by arguing that the United States was spending too much to defend its NATO partners, and that this was unfair to U.S. taxpayers.
Trump didn’t pressure Israel in this regard, but it’s true that during the last four years, Prime Minister Benjamin Netanyahu advanced a plan stating that Israel’s defense budget should be set as a percentage of GDP – and thus grow along with the country’s economy.
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Should Trump win a second term, it will likely mean a continuing global arms race, particularly for Israel versus the Arab nations. Under such an environment, it’s unlikely that civilian spending in Israel will be able to grow.
In Israel on Monday, far from the U.S. campaign trail, officials from the Finance Ministry, Defense Ministry and Prime Minister’s Office held a telephone meeting to discuss Israel’s defense budget. As far as Israel is concerned, this may be the U.S. election’s greatest impact on the country.
The meeting was held to discuss the Defense Ministry’s request to delay repaying a $2 billion loan to U.S. defense company Lockheed Martin and U.S. bank Citibank. The loan was taken out six years ago to acquire F-35 aircraft. The Finance Ministry’s legal adviser objected to the loan at the time as it went against the policy of having the Finance Ministry’s accountant general be responsible for loans, as opposed to letting individual ministries take out their own loans. Now, delaying the loan repayment will cost the country another $217 million.
The Defense Ministry wants to delay paying it back for the reason it took it out in the first place – it wants to buy more weaponry from the United States right now, more than it can afford with just the United State’s dollar-denominated defense aid.
This may sound like an internal Israeli issue, but defense giants in the U.S. – including Boeing and Lockheed Martin – have been following it with great intent, knowing that it will have a direct impact on their business from the Defense Ministry over the next few years.
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Finance Minister Yisrael Katz and other ministry officials presented a united front, explaining why the repayment couldn’t be put off. “This would be an artificial delay of payment that doesn’t make business or economic sense, and this is a loan that wasn’t intended to provide financing, but rather to create an extra budgetary allocation for the Defense Ministry,” stated Finance Ministry Budgets Department head Yogev Gardos in a document explaining the treasury’s opposition. “The transaction goes against the limits on acquisition ... and circumvents the government’s system for setting priorities and the Knesset’s oversight capacity.”
The debate did not address whether Israel needed the aircraft themselves – that’s decided by a ministerial committee, and you’d be hard-pressed to think of a case when the United States offered Israel weaponry and Israel declined.
Rather, it’s more important to consider the Finance Ministry’s proposals as to how the Defense Ministry could find funding. The main option, which the Defense Ministry may unfortunately embrace, would be a budget-wide cut for all the other ministries – in other words, cuts to heath care, education and welfare.
According to Finance Ministry legal adviser Assi Messing, this cut could range from 1% (some 550 million shekels) in 2022 to 8% (some 4 billion shekels) in 2027. Should the state decide not to go ahead with some potential defense acquisitions, the budget cut could be a more limited 0.7% for 2022 to 3.4% for 2027.
Another option the Finance Ministry presented to the Defense Ministry included spreading acquisitions out over a longer period. Yet another option is that Israel use part of the U.S. defense aid that it’s entitled to convert from dollars into shekels to make dollar-delineated purchases instead. Should Israel choose to use that money to buy from U.S. contractors instead – or use its budget from the Israeli government, and not U.S. defense aid, to make purchases from U.S. contractors – it would be a blow to Israel’s local defense industry, which is going to be cut out of U.S. defense aid funding entirely by 2028 under the latest defense aid agreement between Israel and the United States that took force this year and will require all aid money to remain in dollars.
Regardless of which option is chosen to fund defense expenditures – hitting local Israeli defense industries or hitting civilian budgets – Israel’s civilian ministries are likely to see budget cuts over the next year. This has to do with Trump’s term in office, and should he win another term, the effect will be even more pronounced.
The diplomatic developments of the past few months, which ultimately included a U.S. agreement to sell F-35 aircraft to the United Arab Emirates, after which Defense Minister Benny Gantz secured an American promise to sell Israel armaments that would maintain the country’s defensive edge, are all due to Trump.
The Defense Ministry’s pressure over the last few days to close and finance these deals stems from its concerns regarding a new U.S. administration. These deals were secured with a string of officials who may not keep their jobs after the election. If we go a step forward: Should Joe Biden be elected, he may decide not to follow through with the F-35 sale to the UAE, which would make the promise to Gantz unnecessary to fulfill. As far as Israel’s civilian expenditure is concerned, the best-case scenario under a Biden win would be that all these deals be delayed.