According to a report by Reuters, Israel will need tax hikes of up to 14 billion shekels ($3.6 billion) in the next few years to meet rising defense costs if it is to hit its budget deficit targets, the Bank of Israel said on Wednesday.
Before a snap election was called in December, Israel's cabinet had approved a 2015 budget draft that boosted spending, mostly on defense, by raising the deficit target to 3.4 percent of GDP from 2.5 percent - a move that angered the central bank.
Israel paid for a 50-day Gaza war in 2014 without exceeding its 2.8 percent budget deficit target only by cutting public spending, the central bank said. That, the bank said, allowed it to cut interest rates in July and August, narrowing the gap with other countries' rates.
The next government - to be elected on March 17 - will face pressure to raise spending to help ease the rising cost of living and boost education and healthcare.
It will have to decide whether lowering the deficit will be based on further cuts to public spending as a share of GDP - which is lower than most other advanced economies - or raising taxes, also lower than in other countries.
A new 2015 budget is not expected to be approved until the middle of the year, after a new governing coalition is in place.