Reversing Policy, Netanyahu Seeks Long-term Rise in Defense Spending

Announcement spurs concerns over budget deficit, credit rating for bill that could reach an extra $1 billion annually

File photo: Prime Minister Benjamin Netanyahu at the border fence between Israel and Jordan.
Marc Israel Sellem

In a move signaling the end of a long-standing policy of reducing Israel’s defense expenditures relative to the size of the economy, Prime Minister Benjamin Netanyahu is calling for sizable increases in the military budget over the next decade, starting in 2019.

The plan, called “Security Concept 2030,” was unveiled by the prime minister on Wednesday and immediately aroused concerns about how the government would pay the extra allocations that could reach as much as 4 billion shekels ($1.1 billion at the current exchange rate) annually and the risk to the country’s credit rating.

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The broad outline of the plan, most of whose details are in a classified document, calls to increase overall nation security spending – a figure that includes not just the Israel Defense Forces, but the Shin Bet, Mossad and other bodies) to 6% of gross national product, up from about 5.8% today.

He said the new standard would remain in force until Israel GNP, now about $320 billion, had reached $500 billion, and then would be reconsidered. He said the government was targeting economic growth of 3-4% annually.

The additional outlays will to go toward strengthening the country’s offensive capabilities, cyber capabilities, upgrading its anti-missile defense systems, protective measures on the home front, and the completion of security barriers.

In a video address on Wednesday, then prime minister didn’t frame the increase as deigned to address to immediate or changing security threats but as a structural need. “Due to our small territory, concentrated population and the many threats we face, Israel will always have security needs that are much greater than any other state of similar size,” Netanyahu said.

On Thursday, a Finance Ministry official, whose asked not to be named, told TheMarker that the defense increase would not be as large as implied by Netanyahu. He said the 2015 accord between Finance Minister Moshe Kahlon and then Defense Minister Moshe Yaalon to restrain the growth of the army’s budget wasn’t being abandoned.

“There won’t be a simple increase of 2 billion to 4 billion shekels to the defense budget. We have to provide a solution to defense needs but everything will be done through organized deliberations with the Prime Minister’s office and the defense establishment,” the treasury official said.

Lower defense spending, relative to the size of the economy, has been a critical part of Israel’s ability to run modest budget deficits and bring down its debt relative to the size of the economy. As a result, its credit rating – and its ability to borrow money at lower rates of interest – has improved.

Two weeks ago, Standard & Poor’s raised Israel’s rating to AA-minus, its highest ever, from A-plus.

For his part, Netanyahu said Israel’s economy could afford to pay for the extra spending nor would the move undermine the policies of fiscal restraint that the government has enforced over the last two decades. He even suggested it would be an economic boost.

“The combination of our security and economic strengths will increase Israel’s status as an asset in the eyes of other countries and thereby increase our diplomatic strength,” he said.

That still leaves open the question of how to pay for the increase if it goes into effect in 2019. The current budget is for two years, so that an increase would involve changes to the existing state budget.

Prof. Avi Simhon, who heads the PMO’s National Economic Council, said on Thursday in an interview with TheMarker that it would come in part from increasing the deficit, not from spending cuts in other parts of the budget. He said he wasn’t concerned about Israel’s credit rating.

But increasing the deficit would require the Knesset to change the law, which would be difficult for Netanyahu to achieve. Treasury officials said the army would trim 1 billion shekels form its budget just by trimming fat, but the rest would have to come from budget cuts in the civilian sector.

“As far as our fiscal policy is concerned, the Israeli economy should be rated AAA and not AA-minus as it’s currently ranked, “ SImhon said. “The only reason for our current ranking is our geopolitical situation and that’s what this announcement takes care of. I’m confident that Israel’s decision to reexamine its [defense spending] policy won’t bring down the rating.”