Israeli Prime Minister Benjamin Netanyahu plans to shift funds designated for civilian purposes to military spending to meet any threats from Iran, a government official said yesterday.
Mr Netanyahu did not specify the amount of the funds but said they needed to be moved "now". Asked about the prime minister's remarks, the official made clear that no such shift was imminent.
"Until a (2020) budget is passed, no changes can be made to expenditure. Future budgets will have to take the moving of funds into account," the official said.
It is also still unclear whether Mr Netanyahu or his political rival Benny Gantz will form a new government or if a new ballot will be needed after inconclusive elections in April and last month.
Limited in power, Mr Netanyahu's caretaker government has been unable to rein in a budget hole, delaying a parliamentary vote of approval on next year's budget into 2020.
Mr Netanyahu, who heads the right-wing Likud party, has cited growing security considerations in urging Mr Gantz, leader of the centrist Blue and White party, to join in a broad governing coalition.
Israel's president asked Mr Gantz last week to try to put together a government after Mr Netanyahu failed.
In his speech, Mr Netanyahu accused Iran of seeking the means to turn Yemen into a staging ground for launching precision-guided missiles at Israel and said budgetary priorities needed to change.
"To be strong militarily, we have to shift now money from the civilian areas to the military areas," Mr Netanyahu said.
Israel's economy has been in a holding pattern amid the political uncertainty for months, and analysts believe the next government will need to trim spending to stick to fiscal targets but more likely, taxes will rise.
"When it comes to civilian spending to a very large extent his (Netanyahu's) hands are tied," said Leader Capital Markets chief economist Jonathan Katz. "It sounds like a great slogan but what's more realistic in interpreting his statement is that defence spending will grow more rapidly than civilian."
He said that about 80pc of civilian spending is public sector salaries and those will not be touched. Instead, infrastructure projects might be delayed while subsidies to after-school care for toddlers may be suspended, along with raising taxes.
Cutting civilian spending could also harm growth, since at 30pc of economic output, Israel is second to last in such expenditures out of OECD countries. As such, the Bank of Israel said that with civilian spending so low, "it is difficult for the government to allocate resources to policy measures that will entrench long-term economic growth".