The incoming Israeli administration must restrain defense-driven public outlays that have expanded sharply in recent years and direct greater resources toward education, infrastructure and other engines of expansion, Bank of Israel Governor Amir Yaron said on Wednesday.

Israel is scheduled to hold national elections on October 27. Surveys indicate Prime Minister Benjamin Netanyahu's present coalition is trailing.

Addressing a Calcalist newspaper gathering, Yaron described fiscal policy as the central test, noting the defense budget has climbed to as much as 8 percent of gross domestic product, double the share recorded before the October 7, 2023 Hamas attacks that sparked the Gaza conflict.

"Any incoming government confronts a clear task. Above all, our debt must stop rising. We are currently on an upward debt trajectory," he said, adding that the debt-to-GDP ratio has moved to 70 percent from roughly 60 percent in 2023.

"Next comes the defense budget, followed by investment in growth drivers such as education and infrastructure."

'Difficult decisions' are needed to achieve growth as a country

Yaron further stressed the need to integrate groups such as ultra-Orthodox Jews more fully into the workforce.

Budget director Maharan Frozenfar noted that the Finance Ministry is preparing a multi-year growth plan it hopes the next government will implement.

"We must adopt tough measures to sustain momentum and secure stronger expansion," he said.

He added that the broader economy should adjust to the likelihood of a firmer shekel versus the dollar.

Given sustained high defense needs amid regional threats, Yaron supported tax increases in 2027 to restrain debt. "Realistically, we will likely have a higher budget than before October 7," he said.

Frozenfar, however, voiced strong opposition to tax hikes, arguing that faster growth could ease the debt load.

Following reduced inflation pressures from the Gaza and Iran conflicts, the Bank of Israel last week lowered its benchmark rate by 25 basis points to 3.5 percent, marking the second consecutive cut.

Yaron indicated that, absent renewed war and with stable inflation, short-term rates would probably keep declining, though policy must stay prudent amid wage and housing-rent pressures.

The central bank projects the key rate will reach 3 percent by next June.

Yaron also observed that while the economy has shown resilience, unfavorable global views of Israel function like a tax on trade and could produce longer-term effects that warrant attention in policy choices.