Nagel C’ttee calls for higher defense budget, avoids financing issue

The Nagel Commission on Evaluating the Security Budget and Force Building, chaired by Prof. Jacob Nagel (a reserve general and former chairperson of the National Security Council) , has published its final recommendations, which include a NIS 133 billion supplement to the defense budget over the next decade. The supplement, which is intended for rearming and for routine security, is lower than the minimum requested by the defense establishment, and also lower than earlier estimates of the committee’s recommendations, which were around NIS 200 billion.

Although the committee had a mandate to do so, it decided to refrain from recommending a tax hike to finance the additional costs, relying mainly on growth in Israel’s GDP to provide a budgetary source.

The 2025 defense budget will be NIS 123 billion, which compares with NIS 117 billion in the budget proposal currently before the Knesset. A supplement of NIS 9 billion will be given for rearming, of which NIS 3 billion will come from the increased defense budget already approved, and the rest from the Ministry of Finance’s budget.

“The numbers that the defense establishment asked for were higher by a two-digit sum than the minimum we set,” Nagel said at a press conference on the release of the committee’s report, “but we determined the supplement in a measured way so as not to cause economic damage.”

Passing on responsibility

The committee recommends an annual NIS 15 billion supplement to the defense budget from 2026 to 2030. From 2031 onwards, the annual supplement will gradually be reduced, to NIS 13 billion in 2031, and NIS 12 billion from 2032 to 2034.

Nagel said that the only part of the committee’s mandate he did not like was the one about recommending budgetary sources for financing the extra money for the IDF, a point that Minister of Finance Bezalel Smotrich insisted on. The committee has indeed passed responsibility for that back to the Ministry of Finance, and recommends not raising taxes beyond the tax increases already in the 2025 state budget. “In 2025, the supplements can be financed from existing reserves in the budget, assuming that there is no full-scale war,” Nagel said. He said that in the coming years the financing would come from predicted economic growth per the Bank of Israel’s forecasts, with NIS 10 billion on average from other sources besides taxes.

“The committee recommends that the government should at the same time approve the sources required, in part from the range of potential sources that the Ministry of Finance presented to the committee, and in part from other sources, as far as possible without imposing additional taxes beyond those determined for 2025,” the committee’s report, which contains 110 publicly available pages and another 20 classified pages.

“The committee chose not to prioritize the Ministry of Finance’s recommendations or to change them, mainly because of the limits of its capabilities, and out of the understanding that the Ministry of Finance and the Bank of Israel see the economic picture as a whole and the ability to implement each proposal.”

The committee presents a series of recommendations for strengthening the career army and the reserves, the main one being to raise the pay of those serving in the career army to match the civilian labor market. “The pay of those serving in the career army needs to be attractive and fair in relation to other sectors,” the report states, in order to attract high-quality manpower. The report recommends an additional 250 job slots at the Ministry of Defense, with an emphasis on the rehabilitation and bereaved families divisions. It also recommends abolition of the linkage between other security services such as the police to pay in the army.

Over the decade, the defense budget is expected to stabilize at an average of about NIS 96 billion annually. This compares with just over NIS 60 billion in the year before the present war. The basic budget, which includes security projects, will be between NIS 64 billion and NIS 69.5 billion, with a NIS 10 billion a year force building supplement between 2025 and 2027, falling gradually to NIS 7.4 billion in 2031.

A special supplement is allocated to the rehabilitation and families division, growing gradually from NIS 3 billion in 2025 to NIS 8.1 billion in 2033.

The conflict that will hurt the economy

While the committee refrains from going into depth on the issue of drafting haredim and equal sharing of the burden, it does express a general stance on the matter. “The committee is of the view that equal compulsory service for all citizens is a formative principle in Israeli society, one that simultaneously fulfils security, social and civil goals, especially when the State of Israel faces continual security threats,” the report states. It recommends introducing the required change gradually, “in accordance with the IDF’s recruitment capability and its needs,” but avoids setting timetables or numerical targets, or even expressly mentioning the word “haredim”. The avoidance of any in-depth discussion of the issue, despite its significant consequences for the defense budget, reflects its political sensitivity.

“The developments vis-à-vis Iran, which led to a downgrade of our credit rating, do not in our opinion reflect the real economic situation,” Nagel said. The committee believes that the end of the war and a reduction in the number of mobilized reserves will help in lessening the risk and in recovery, but it warns that a direct conflict with Iran will be liable to harm the economy.

The committee determines that, every January, a discussion should be held between the Ministry of Defense and the Ministry of Finance to set a framework for “permission to commit” that will allow the defense establishment flexibility in managing the future budget. “That will enable them to start things at the expense of future things, which will make it possible to utilize the budget fully,” Nagel explained.

According to estimates by the chief economist at the Ministry of Finance, Shmuel Abramzon, the upshot of the planned additional defense spending is a cost of about NIS 8,000 a year for the average family for every NIS 20 billion given to the IDF. The Ministry of Finance recommended three main sources of finance: boosting the fight against the shadow economy; cancellation of tax exemptions; and higher tax rates.

Are there any winners?

In the end, who won in the battle over hundreds of billions of shekels between the Ministry of Finance and the defense establishment? Nagel did say that the supplements given to the defense establishment were less than the minimum demanded by the army, but the Ministry of Finance is not happy with the bottom line. Its officials believe that the recommendations are higher by billions of shekels a year than the need on the ground. Ministry of Finance sources even say that that the recommendations will not ultimately be accepted because of the size of the supplements.

The Ministry of Finance has also expressed disappointment at the fact that the committee did not place sufficient emphasis on efficiency measures within the defense budget, and refrained from presenting substantial sources of finance. The Ministry of Finance’s stance was that there was room for adding NIS 10 billion a year for strengthening the armed forces beyond the amounts already agreed with the IDF in the course of the war. The defense establishment, on the other hand, presented demands that at their height reached an additional NIS 220 billion over four years, that is, almost a doubling of the defense budget in comparison with its size before the war.

Published by Globes, Israel business news – en.globes.co.il – on January 7, 2025.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2025.