Israel risks fiscal crisis as war costs, defense demands soar, analysis says

Israel is being pushed toward a dangerous debt path as the cost of its multi-front attacks and rising defense demands place heavy pressure on public finances, according to Israeli Ynetnews on Tuesday, the English-language news outlet of the Yedioth Ahronoth media group.

Ynetnews, citing an analysis by Calcalist, said Prime Minister Benjamin Netanyahu's government is struggling to contain defense spending after Oct. 7, 2023 with a proposed $95 billion defense plan, while continuing military operations are raising concerns over higher debt and weakened fiscal stability.

The report said Netanyahu’s classified “Doctrine and Policy Guidelines for 2025-2026,” prepared in late 2025, reshaped the country's security strategy by instructing the military to prepare for multiple arenas and scenarios.

The document effectively amounted to an open-ended procurement list, with Netanyahu reportedly approving every military demand, according to the analysis.

Defense officials estimated that the broadest interpretation of the policy sought by Netanyahu would cost about 800 billion shekels ($271 billion).

Two alternative plans were later presented to Netanyahu, one costing $152.6 billion and another $84.8 billion.

Following negotiations between the Finance and Defense ministries, a compromise was reached for $94.5 billion over a span of 10 years, the report said.

Part of the plan, including the purchase of two new air force squadrons, was approved Sunday by the ministerial procurement committee.

The report warned that the economic implications of the plan are “dramatic,” noting that Bank of Israel Governor Amir Yaron has already said the country is on a rising debt path.

With the $118.7 billion plan and efforts to reduce dependence on US aid, Israel’s debt-to-GDP ratio is expected to reach 83% by 2035, according to the report.

The projection is also based on the assumption that the war ends soon, an assumption the report said should be treated with skepticism given that similar expectations have persisted since early 2024.

It warned that a prolonged war would carry far more severe consequences for living standards, including physical and psychological casualties, the cost of reserve duty days, and broader damage to the economy and public finances.

The Finance Ministry and Defense Ministry have also been locked in a budget dispute, with the Defense Ministry demanding an additional 30 billion shekels for 2026 unrelated to the war, the report said.

The two ministries had agreed in December 2025 on a defense budget of $37.6 billion, plus an additional $1.3 billion to be transferred later, while the Defense Ministry had sought nearly $48.85 billion.

Following the war, the budget was revisited and another $10.8 billion was allocated for war needs, alongside a $2.3 billion reserve still awaiting a decision, according to the report.