Bank of Israel Governor Stanley Fischer talks during the session "Redesigning Financial Regulation" at the Annual Meeting of the World Economic Forum in Davos, Switzerland, January 30, 2010. Photo: World Economic Forum.

Outgoing Bank of Israel Governor Stanley Fischer sounded the alarm Wednesday over the growing deficit and national debt, issuing a troubling report on the economic challenges Israel is facing. The report was the first time the bank commented on the larger-than-expected budget deficit in 2012, which stood at 4.2 percent of gross domestic product or 40 billion shekels ($10.9 billion) last year.

In its report, the Bank of Israel warned that the deficit could climb to as much as 4.9 percent of GDP unless the government scales back expenditures by NIS 13 billion ($3.5 billion) and raises an additional NIS 6 billion ($1.6 billion) in new taxes.

According to the report, the government will have to reduce spending by as much as NIS 10 billion ($2.7 billion) in 2014 and by an additional NIS 5 billion ($1.35 billion) in 2015. Overall spending cuts in 2013-2015 must amount to NIS 28 billion ($7.6 billion), which should be complemented by NIS 7.5 billion ($2 billion) in new tax revenue if Israel is to meet its target deficit, the report says.

Unless the government takes these measures, the deficit’s share of the GDP will reach 6 percent or NIS 60 billion ($16 billion) in 2015, a record figure.

The report also says Israel’s debt-to-GDP ratio could reach 100 percent by 2020. The Finance Ministry and the Bank of Israel have been able to rein in debt so that it hovers at 74 percent of GDP, but the geopolitical situation and the potential rise in defense spending make it imperative to continue lowering that figure, the report says. It also warns that without making significant adjustments to the state budget by cutting spending and raising taxes, the proportion of the debt is unlikely to shrink in the coming years.