Last week, the Ministry of Finance and the Ministry of Defense found a compromise on the defense budget. Between the NIS 90 billion recommended by the Nagel committee and the NIS 144 billion demanded by the defense establishment, they agreed on NIS 112 billion, which is 5.2% Israel’s GDP. Round the corner, however, awaits another strategic challenge for the IDF and the politicians: extension of the military aid agreement with the US, which will expire in 2028.
The memorandum signed by President Barack Obama in 2016 assures Israel of Foreign Military Financing (FMF) of $3.3 billion. In addition, a sum of $500 million was granted for collaboration on air defense. This was the largest annual aid package Israel had ever received from the US.
America first policy
Talks on a new aid package have already begun with the US administration. The Israeli side is aware that US President Trump puts the US economy as top priority. Some of the questions over the new memorandum therefore center on the Off-Shore Procurement (OSP) clause that allows part of the annual grant to be converted to shekels for procurement within Israel’s local defense industry. At the beginning of the period of the current agreement the OSP clause amounted to $815.3 million, 24.7% of the total, but the agreement provided for gradual reallocation of this amount to procurement in the US.
This year, the OSP amount fell from $725.3 million (21.9%) to $450.3 million (13.6%). Next year it will be cut further to $250.3 million (7.5%), and in 2028, the final year of the agreement, it will be zero. It is not inconceivable that Trump and US Secretary of Defense Peter Hegseth will want zero OSP in the next memorandum from the beginning.
Jacob (Yaki) Dayan, former Israeli consul general in Los Angeles, explains that as part of its “America First” policy, the Trump administration seeks to reduce the flow of money outside the country to a minimum. “The Americans wish to define the next agreement not as annual aid but as cooperation. There are many joint Israeli-US projects, such as the Arrow and David’s Sling systems, in which the Americans are full partners. They therefore seek to create a series of collaborative projects that will increase American involvement.”
Israel’s problem is that the next memorandum has not yet been dealt with in depth, which creates a race against time. Israel has a fairly comfortable political position in Washington. The White House is occupied by a Republican president who is considered one of the friendliest towards Israel, and there are Republican majorities in the House of Representatives and the Senate. The mid-term elections are, however, due to take place in the US in November, and so the Israeli side understands that negotiations need to be speeded up.
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“We can’t know what sort of Congress we will have to deal with afterwards,” a senior source n Israel’s defense establishment told “Globes.” “With the Republicans, things will be easier, and so it’s necessary to close the memorandum of understanding with the administration in order to move swiftly to approval in Congress.” The memorandum of understanding requires a legislative process: approval in the House of Representatives, approval in the Senate, and the president’s signature. The next president will have the power to suspend the aid, but it should be remembered that the Biden administration, for example, did not touch the memorandum of understanding and preserved the existing order.
Dr. Kobby Barda, an expert on Israel-US relations and a lecturer in multi-disciplinary studies at the Holon Institute of Technology, sees the approval process in Congress taking place only after the mid-term elections. “Israel and AIPAC (the Israel lobby in Washington) face a considerable challenge: to persuade the American public that the memorandum of understanding is for its benefit, despite the opposition from both sides of the political map. On the left, Democratic senators are demanding an end to ‘financing of genocide’. On the right, Tucker Carlson and the rest of the MAGA people oppose sending money outside the US, and see Israel as a parasite.”
Israel’s qualitative edge
Israel is the country that has received the most aid from the US over the years – $330 billion, of which $244 billion is military aid. Egypt is second with $179 billion (of which $96 billion is military aid), which well illustrates the principle of maintaining Israel’s qualitative military edge, which has guided US policy in its various measures.
The question of Israel’s qualitative military edge arose recently in relation to President Trump’s decision to allow the sale of F-35 fighter aircraft and a civilian nuclear program to Saudi Arabia. Even before that, Saudi Arabia was the largest buy of US weaponry between 1950 and 2024, with deals totaling $182 billion. Israel is in third place, on $63 billion.
According to a study by the Council on Foreign Relations think tank in the US, despite the huge spending, Israel’s dependence on US arms is greater than that of Saudi Arabia. Since 2000, US weaponry has represented 78% of Israel’s total defense imports, which compares with 62% for Saudi Arabia. Among other countries in the region, the proportion is even lower. In Egypt it is 49%.
The three memoranda of understanding signed between Israel and the US over the years were only a prologue to the unprecedented aid that Israel received during the Swords of Iron war. A report by the Council on Foreign Relations dated October 7 this year states that since the war broke out the US has approved military aid to Israel amounting to at least $16.3 billion, equivalent to 2.4% of Israel’s GDP.
Aid or cooperation?
Given the high importance of US military aid to the Israeli economy, Dr. Barda proposes a unique program entirely different from previous memoranda of understanding. “Let’s say that the agreement will amount to $4 billion annually, but not as support but rather as a partnership. The Knesset will pass an ‘America First Law’ obliging Israel to buy US goods to the value of $4 billion, and the Israel sovereign wealth fund will be obliged to invest in Nasdaq. We must understand that if, God forbid, there is no US aid or if it is cut dramatically, that will not just lead to a loss of important revenue in a period of fiscal deficits and the aftermath of war. A situation like that will also lead to the loss of connections that include thousands of routine joint operations of the Ministry of Defense and the US Department of Defense.”
In April this year, Israel had 751 active deals with the US worth a total of $39 billion. The operational and economic benefits to Israel are critical, but in fact they are mutual. Besides the revenue that flows to the US economy, the US gains operational experience from the sales to Israel in every aspect of warfare, at an unrivaled intensity. This is true of the F-35 planes that Israel buys for $80 million each, of tank shells, and of the munitions that the Israel Air Force dropped on Iran in Operation Rising Lion.
“The operational experience that the Israelis acquired with the F-35, and the upgrades that were introduced into the aircraft, are worth tens of billions of dollars to the Americans,” Dayan says. “It could be argued that the description ‘cooperation’ instead of ‘aid’ is chiefly a matter of semantics, but Israel contributes many inputs and much added value to American weapons. The idea is to base the next agreement on this. In any case, most of the aid already has to be allocated to weaponry made in the US, and that is the main driver in the formulation of the next agreement.”
Published by Globes, Israel business news – en.globes.co.il – on December 9, 2025.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2025.
