Extensive debt raising because of the war and the high interest-rate environment have led to a dramatic rise in the State of Israel’s interest payments.
According to Ministry of Finance figures, by 2027 annual interest payments will have risen to NIS 64 billion, from NIS 43 billion in 2022. This means tens of billions of shekels in higher taxes, less investment in civilian spending, and less room for maneuver in the event of future wars, disasters, and crises.
The 50% jump in interest payments within five years is causing unease at the Ministry of Finance. The Bank of Israel too repeatedly recommends entering into a declining debt:GDP ratio, which stands in contradiction to the high fiscal deficit (currently 3.9% of GDP).
At the end of 2024, the State of Israel’s debt amounted to NIS 1.3 trillion, 18% more than at the end of the previous year. In the course of the war, the Ministry of Finance Accountant General’s Department raised unprecedented debt of some NIS 500 billion to pay for the extra defense expenditure. The Ministry of Finance’s budget documents state that “this growth was caused by exceptional debt-raising needs for the sake of financing the war, its prolongation and intensification, and the budgetary consequences of all these factors.”
The documents also state: “As a result of the increased debt raising, and in the light of the accompanying rise in Israel’s risk premium and the downgrading of its credit ratings, the war and its fiscal results have substantial consequences for interest payment levels.” In other words, not only did the war cost money, it also added to Israel’s risk premium. Although the risk premium has fallen in the past few months, it has not been completely eradicated.
The Ministry of Finance estimates that Israel’s debt:GDP ratio at the end of 2025 will be 68-69%, slightly higher than at the end of 2024, when it was 67.9%. The ratio was at higher levels during the Covid pandemic, but Israel recovered from that crisis swiftly, and the debt:GDP ratio was 60% at the end of 2022. Now, the Ministry of Finance warns that it will take a decade to get back to that kind of level, and that is on the fragile assumption that there will be no wars or other crises in that period.
The situation restricts the government’s ability to carry out counter-cyclical policies during economic downturns without raising taxes. Meanwhile, the government’s planned deficit for 2026 keeps rising. With a deficit of over 4% of GDP, it will no longer be possible to reduce the debt:GDP ratio, unless there is a huge rebound in the economy.
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Another reason for the growth in the cost of servicing the government’s debt is the rise in interest rates. Despite recent cuts in the US and in Israel, the interest rate environment remains high. New debt will cost more, as will recycling existing debt. According to the Bank of Israel, whereas a few years ago Israel raised ten-year debt at 2% interest or even less, the rate now touches 4%. Inflation also weighs on debt servicing, as a considerable part of the debt is linked to the Consumer Price Index.
The capital market is concerned at the trend. Leader Capital Markets writes that the government’s decision to set a high fiscal deficit target “does not broadcast fiscal credibility,” that is to say, it makes it harder for the markets to believe in Israel’s ability to repay its debt, which is liable to send the risk premium higher. “Under-performance on the revenue side is liable to push the actual deficit in the direction of 4.5%,” Leader warns.
Bank of Israel will find it hard to act
One of the consequences of the expansive fiscal policy is difficulty on the part of the Bank of Israel in reducing interest rates. This is especially important in the light of the fact that the high interest rate in Israel is part of the reason for the high interest payments on government debt in the first place. The prime minister and the minister of finance are pressing the governor of the Bank of Israel to cut interest rates, but it is precisely their fiscal policy that makes it hard for him to do so. “An expansive fiscal policy will be taken into account by the Bank of Israel and will make reducing the interest rate difficult,” Leader writes.
This is one reason that the Ministry of Finance would like to see “adustments,”, that is, spending cuts or tax hikes. In practice, as the Ministry of Finance acknowledges, there is little room for further measures on the revenue side, which means the government needs to cut spending, something that it will have difficulty in doing in an election year.
The beneficiaries of the increasing interest payments are of course those holding government bonds, who are mainly Israelis, despite the rise in debt raising overseas. Most of the Israeli debt (85%) is denominated in shekels, and the rest in foreign currency. Of the external debt, 74% is denominated in US dollars and is mainly issued in the US, 24% is denominated in euros, and the rest in other currencies.
Published by Globes, Israel business news – en.globes.co.il – on December 10, 2025.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2025.
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