IMF Criticizes Israel's Bank Tax and Mortgage Plans

Published on Everythiiing.com | February 5, 2026

The International Monetary Fund (IMF) has delivered a nuanced yet cautionary assessment of Israel's economy, highlighting its remarkable resilience in the wake of the Gaza ceasefire while raising red flags over the government's fiscal strategies. In preliminary findings from a recent staff visit, the IMF forecasts slower growth for 2026 and urges bolder measures to tame public debt, specifically targeting controversial proposals like a surtax on bank profits and mortgage subsidies.

Israel's Economic Resilience Meets IMF Caution

Israel's economy has shown impressive fortitude, rebounding swiftly after the conflict in Gaza. The IMF acknowledges this recovery, noting the nation's ability to navigate heightened defense spending and mobilization efforts. However, the global financial watchdog tempers its optimism with a more conservative growth projection: 4.8% for 2026. This is notably lower than the 5.2% anticipated by both the Bank of Israel and the Ministry of Finance.

Looking further ahead, the IMF's medium-term outlook is even more restrained, predicting annual growth of just 3.5%—a downgrade from pre-war estimates of 4%. This pessimism stems from lingering war effects, including elevated risk premiums, reduced foreign labor availability, and persistent structural issues like a shrinking working-age population and low labor participation among certain demographics, particularly ultra-Orthodox (haredi) Jews and Arab Israelis.

For U.S. observers, this report underscores the interconnectedness of global economies. Israel's tech-driven innovation hub, which attracts significant American investment, could face headwinds if these fiscal missteps erode confidence. The IMF's insights also serve as a broader lesson in balancing post-crisis recovery with prudent policymaking.

Fiscal Policy Under Scrutiny: Debt and Deficit Concerns

At the heart of the IMF's critique is Israel's fiscal trajectory. The draft 2026 budget sets a deficit ceiling at 3.9% of GDP, which the IMF views as a positive but insufficient step. Public debt, which surged to 68.6% of GDP by the end of 2025 from 60% in 2022, needs a firmer downward path. The IMF advocates slashing the deficit to 2.4% by 2029 to restore pre-war debt levels—a timeline far more aggressive than the Ministry of Finance's decade-long plan.

To achieve this, the IMF calls for tax hikes, starting with adjustments to lower income tax brackets. This directly contradicts Finance Minister Bezalel Smotrich's flagship proposal to cut income taxes as a voter perk in the 2026 budget. Additional recommendations include curbing tax exemptions, taxing polluters more heavily, and elevating the value-added tax (VAT) rate. A comprehensive tax system overhaul is urged to boost simplicity, efficiency, and fairness.

The Bank Surtax: A Blow to Investor Confidence?

One of the IMF's sharpest rebukes targets Smotrich's surtax on banks' super-profits, set at 15%—exceeding the 7-10% suggested by his own advisory team. Slated to run through 2030 and projected to generate NIS 1.5 billion annually, the tax is intended to fund mortgage relief. Yet, the IMF warns it could undermine investor trust in Israel's financial sector, potentially deterring foreign capital at a time when stability is paramount.

This proposal comes amid government plans to impose the tax even if interest rates decline, a move that has already sparked tensions. For context, Israel's banking sector has been a pillar of economic stability, and any perceived punitive measures could ripple through global markets, affecting U.S. firms with stakes in Israeli fintech and banking.

Mortgage Subsidies: Moral Hazard in the Making

Equally contentious is the mortgage subsidy scheme championed by Prof. Avi Simhon, economic advisor to Prime Minister Benjamin Netanyahu and chair of the National Economic Council. The plan would compensate borrowers impacted by rising interest rates, costing an estimated NIS 3 billion yearly. The IMF decries this as regressive, fiscally burdensome, and disruptive to monetary policy transmission. With mortgage delinquencies remaining low, the subsidies introduce 'moral hazard'—encouraging risky borrowing without accountability.

The Bank of Israel echoes this opposition, labeling the idea 'devoid of economic logic.' In a U.S. parallel, this mirrors debates over housing subsidies during inflationary periods, where interventions can distort markets and prolong recovery challenges.

Structural Reforms: Urging Deeper Integration

Beyond fiscal tweaks, the IMF emphasizes long-standing structural hurdles. It repeats calls for greater workforce integration of haredi men and Arab citizens, but with heightened urgency. Despite various initiatives, progress on haredi employment remains 'limited,' the report states. Enforcing core curricula in subjects like mathematics in religious schools is recommended to build skills and boost participation rates.

These reforms are crucial for sustaining growth amid demographic shifts. Israel's falling working-age population growth exacerbates labor shortages, a issue compounded by war-related disruptions in foreign worker inflows. For American policymakers and investors, Israel's push for inclusive growth offers valuable insights into addressing similar inequalities in diverse societies.

Broader Implications and Outlook

The IMF's report arrives as Israel celebrates record forex reserves in January, signaling underlying strengths like its high-tech exports and Nvidia's expanding presence. Yet, the warnings are clear: without addressing these fiscal and structural vulnerabilities, the post-war boom risks fizzling out.

Smotrich's budget, blending tax cuts with revenue-raising measures, walks a political tightrope. While politically appealing, it may clash with economic imperatives. As Israel navigates this, global watchers—including in the U.S.—will monitor how these tensions play out, potentially influencing regional stability and investment flows.

In summary, the IMF's ambivalent tone reflects an economy at a crossroads: resilient yet fragile. Adopting even a fraction of these recommendations could solidify Israel's recovery, but political realities may dictate otherwise. Stay tuned to Everythiiing.com for updates on this evolving story.

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