Bank of Israel Governor Prof. Amir Yaron, speaking at the cabinet meeting on the 2026 State Budget, called for rebuilding Israel’s fiscal buffer by beginning fiscal consolidation and approving a 2026 deficit target of 3.6% of GDP to put the debt-to-GDP ratio on a declining path as hostilities continue to subside. He also flagged areas in the proposed budget and the accompanying Economic Arrangements Bill that, in his view, could undermine medium-term debt reduction and asked for changes to financial-sector legislation to ensure reforms deliver effective competition and stability outcomes. The remarks highlighted the pre-crisis debt-to-GDP level of around 60% as a key buffer, the war’s impact on GDP and public debt, and the need to adopt revenue and expenditure measures to meet the 3.6% target. He cautioned that a one-off revenue source of about NIS 10 billion and permanent tax reductions could widen the structural deficit, noting that widening income tax brackets is expected to be deficit-generating by several billion shekels in 2026 because the offsetting property tax measure would be phased in gradually, and that raising the VAT exemption threshold on personal imports would reduce revenues by NIS 1 billion and create tax distortions. Looking beyond 2026, he warned that a high multiyear defense spending trajectory, alongside current civilian spending and tax rates, could push the debt-to-GDP ratio toward 80% by the end of the period, and argued that any such trajectory should be paired with offsets to reach a debt ratio of around 65% by 2030. He welcomed several Economic Arrangements Bill measures, including dairy market reform, digitalization and cloud adoption, long-term rental housing promotion, improved administrative data, and VAT on tourism, while opposing proposals that would effectively cancel the five-year plan for Arab society, citing cuts that would halt activity in areas such as education, employment, transportation, and local authorities. On financial-sector reforms, he pointed to proposed steps to ease licensing for small banks and to create a business credit database at the Bank of Israel, while urging a careful review of supervision for bank holding companies and requesting that amendments sought by the Bank of Israel be incorporated so the database can include all relevant information, integrate data swiftly, and allow credit bureaus and lenders to build borrower-quality models using anonymized information across business and retail databases. He also referenced the shift of the Tel Aviv Stock Exchange to Monday to Friday trading, called for faster progress on securitization and factoring legislation, and said he expects a memorandum to be published soon on payment-system finality to meet Israel’s CLS commitments and reduce the risk of disruption if a ZAHAV participant seeks to reverse or cancel a clearing transaction.

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