Israel: higher defence spending hasn’t raised fiscal risks

Israel has absorbed a large increase in defence spending without a destabilising effect on the public finances, thanks in part to offsetting tax increases and strong fiscal fundamentals prior to its recent wars. We think the public finances will remain sound, even with a gradual withdrawal of US military aid. The bigger risks would be an abrupt loss of US funding during another conflict or, arguably worse, a deterioration in relations with the US that restricts Israel’s access to advanced US military technology and intelligence.