U.S. Security Assistance and the Israeli Budget

The current U.S.-Israel Memorandum of Understanding (MOU) is set to expire in 2028, and significant public debate has taken place in the U.S. over the strategic, economic, and political arguments for and against the $3.8 billion annual U.S. security assistance to Israel spelled out in the agreement. Independent of the decisions the Trump administration and U.S. policymakers come to regarding these questions, Israel has its own evolving calculus about direct American security assistance: namely, whether Israel needs U.S. aid at all, or if weaning off of American grants will yield benefits such as enhancing Israel’s own advanced defense industry and allow diverse defense procurement. U.S. security assistance has played a significant, though not dominant, role in Israeli defense budgeting and procurement for decades: a major change or reduction in it will necessitate complex choices and tradeoffs.

Before October 7, Israel was clearly capable of covering its regular peacetime defense expenditures relatively easily without the baseline U.S. security assistance spelled out under the MOU. This has become much more challenging after three years of multi-front warfare, however, and a higher baseline level of military and related expenditures is likely to remain necessary for at least the next few years. However, the financial challenge of a reduction of or end to U.S. security assistance is still surmountable assuming budgetary tradeoffs are made, certain domestic revenue issues are resolved, and economic and fiscal policy choices are made that can accommodate a sharp expansion of the defense budget.

A reduction in or the end of U.S. security assistance would likely yield limited changes in Israeli procurement habits in the near-to-medium term, at least with major weapons systems. While procurement of basic munitions and some platforms could shift away from the U.S. due both to Israel’s new defense indigenization drive and burgeoning partnerships with countries like India and Romania, the continued benefits of partnership with the U.S.—cutting-edge systems, high trust and interoperability, and joint research and production—remain clear.

U.S. Security Assistance in Proportion

Under the current MOU, which runs from 2019 to 2028, Israel receives $3.8 billion in annual security assistance from the U.S.: $3.3 billion in Foreign Military Financing (FMF) and $500 million in missile defense funding. The vast majority of the FMF Israel receives must be spent on purchases from U.S. defense companies or directly from the government.

For most of the last 15 years, the $3.3 billion Israel receives annually in FMF made up roughly 20% of Israel’s defense budget, which was itself 5-6% of Israel’s GDP in the same period. Both Israeli defense spending and the share coming from U.S. aid slowly declined amid major economic growth throughout the 2010s, and then spiked in 2023 following the October 7 Hamas attack on Israel and ensuing wars. 

After October 7, Israel sharply increased defense spending (both within the regular budget framework and in extraordinary expenditures) to 8-9% of GDP, and the U.S. gave Israel several large supplemental security assistance packages between late 2023 and early 2026 in addition to the MOU-directed security aid. The net result, taking into account both much higher Israeli spending and large amounts of  American aid, is that in 2024 U.S. assistance briefly accounted for more than one third of Israel’s defense budget. In 2025 this figure dropped to close to 10%, with Israel spending an estimated NIS 168 billion ($52 billion) on defense in that year.

Direct U.S. security assistance now paradoxically makes up a lower share of Israel’s defense budget than at any point in the past 20 years. However, this calculation excludes indirect U.S. assistance to Israel, such as the deployment of naval and missile defense units and personnel to help Israel defend against Iranian, Houthi, and Hezbollah attacks after October 7, as well as the cost of munitions expended in those operations.

While MOU-directed U.S. security assistance is a sizable amount of money, it is roughly equivalent to NIS 13 billion, or 0.6% of Israel’s GDP. Israel can reasonably expand its annual defense budget to absorb the loss of this aid in a year, with difficult tradeoffs elsewhere. 

Israel’s Fiscal Constraints

Israel faces several challenges that make losing American aid more challenging than the nominal total would suggest: limits on the deficits the government can run and the debts it can safely accumulate; systemically higher medium-term defense and defense-related spending; and longstanding structural economic and fiscal issues that threaten sustained economic growth.

Debt Feasibility

Fiscal policy management is a delicate balancing act between providing for the country’s needs, fostering economic growth, and managing budget deficits and the stock of government debt. As a small country that faces major geopolitical instability and took repeated hits to its credit rating in recent years, Israel faces structural limits on how much sovereign debt it can take on without interest payments becoming risky or prohibitively large. Israeli policymakers have traditionally viewed 70% debt-to-GDP ratio as an undesirable upper threshold. Prior to 10/7, Israel targeted a roughly 60% debt-to-GDP ratio, well below the OECD average, and had effectively achieved this figure via some revenue-increasing reforms after a COVID-era spike.

Since October 7, Israel’s debt-to-GDP ratio has risen to nearly 70% as a result of consecutive large deficits and mid-year budget adjustments, largely due to war-related expenditures and despite some revenue-increasing efforts. While the ratio is expected to stabilize there and most Israeli debt is held domestically, returning to a healthier situation requires reducing deficits and increasing revenue collection. With conflict likely to continue to hamper economic growth and interfere with Israel’s investability and credit ratings, deficit control remains critically important for the health of government finances and the broader national economy.

Higher Expected Defense Expenditures

Israel has radically restructured its security doctrine and assessment of its needs following October 7. The Hamas attack and wars that followed revealed holes in missile and drone defense and vulnerabilities in homeland defense and catalyzed a desire for greater self-reliance. Longstanding issues such as smuggling from Egypt and Jordan also took on renewed urgency. 

Accordingly, Israel is planning to maintain its elevated levels of security-sector spending for the medium-term at least. This includes:

• Ongoing major arms purchases, prominently for the air force. Most recently, Israel announced it would purchase 25 F-35s and 25 F15-EX fighter jets from the U.S., and it is also in the process of replacing its aging helicopter and refueler plane fleets. 
• New defense indigenization initiative. In December 2025, Israel announced it would spend some NIS 350 billion ($118 billion) over the next decade to strengthen its domestic arms industry. Many critical munitions, ranging from basic artillery shells to the Tamir interceptors for the Iron Dome, come largely from abroad, and Israel’s difficult experience procuring these during the war initiated the indigenization push. 
• Infrastructure. Buffer zones established during the fighting in Gaza and Lebanon are being fortified with barriers, outposts, and sensors, the West Bank security barrier is requires continual repair and expansions are planned in an attempt to stop infiltrations and smuggling, and a new fence has been approved for construction in the northern Jordan valley to stop smuggling. 

• Personnel. The IDF continues to rely heavily on reservists, who are much more expensive than conscripts, to fulfill its manpower needs. Several IDF divisions are deployed permanently in both Gaza and Lebanon, and the West Bank continues to require additional IDF deployments amid rising Jewish extremist violence and significant existing counterterrorism needs. 
• Anti-drone and anti-missile tech. The IDF’s difficulties in handling drone attacks, especially those from wire-guided first-person view (FPV) drones, revealed the need for tactical air defense for ground forces. The defense establishment is continuing to invest in anti-drone and new anti-missile platforms, including the Iron Beam directed-energy (laser-based) defense system, implying significant future R&D and procurement costs. 

Beyond new spending, many of the “bills” of Israel’s post-October 7 conflicts have yet to come due. These include wide-scale maintenance of military equipment and assets, replacement of less urgent equipment and defense articles due to ongoing conflict, replenishment and potential expansion of interceptor and munitions stocks, and fulfillment of delayed payments on arms purchased during the war. 

Other indirect but defense-related expenses create further budgetary pressures. These include:

• Reconstruction of buildings and infrastructure damaged in missile and drone attacks;
• Compensation of and care for injured and disabled soldiers and civilians;
• Ongoing efforts to increase the number of bomb shelters and protected spaces across Israel, particularly along the northern border, Galilee, and Golan Heights;

In other words, Israel has limited space to run large and persistent deficits but will have higher defense expenditures for the foreseeable future, including some very large up-front costs with multiple conflict arenas still active. That implies a need for reduction in other spending or an expansion of government revenues.

Structural Fiscal and Economic Challenges

Israel faces a number of structural challenges to its economic and fiscal situation, driven both by demographics and policy choices. 

Israel has a relatively narrow tax base. Roughly half of Israeli citizens do not pay any income tax under Israel’s highly progressive direct taxation system since they do not meet the income threshold. Meanwhile, the top 20% of earners pay over 93% of total income tax revenue, which makes up roughly 55% of total Israeli government revenues. While Israel’s indirect tax burden, including an 18% value-added tax (VAT), is higher than most developed countries, this only does so much to spread out the tax burden. 

The tax base is also divided along demographic boundaries. 90% of both Haredi and Arab-Israelis are net recipients of government support, compared to 60% of non-Haredi Jewish Israelis. These sectors generally exhibit high rates of unemployment or underemployment. In the case of the Haredim and segments of Israeli-Arab society like the Bedouin, have high population growth rates, with the Haredim expected to make up some 25% of Israel’s population by 2050.

Some economic analysts posit that Israeli economic success is largely driven by a relatively small pool of highly educated workers, fewer than 300,000 people, many of whom work in high tech. This relatively narrow high human capital and high-tax base is of particular concern amid anecdotal and contested reports of brain drain, driven both by domestic political challenges and years of war.

In the long-term, most economic analysts argue that Israel will need to better integrate the Haredim and Israeli Arabs into the economy to enable sustained economic growth. 

Israeli expenditures outside of defense also bear scrutiny. Israeli government spending is often focused on sectoral priorities. Two controversial examples stand out:

• Subsidies to the settlement project in the West Bank. Almost all settlements are net recipients of government funding, since most do not have economic engines and are often isolated from the rest of Israel. The government also incurs significant costs to expand West Bank infrastructure for settlements, including the road and highway network, utilities, and municipal construction. The security cost of securing over 300 settlements, outposts, and settlement farms across the West Bank, which includes increased deployments for an already strained IDF, rebasing of troops to accommodate settlements, and exposure to attacks at checkpoints and on patrols, is significant.  
• Subsidies to the Haredi population. These range from direct support, such as funding for yeshivot gedolot and kollelim (religious academies for unmarried and married Haredi men, respectively) and childcare subsidies, to lost revenue or increased expenses, such as the draft exemption (requiring more activation of more-expensive reservists) and foregone additional taxes on items commonly used by Haredim like disposable plates, utensils, sugar, etc.  

The two examples outlined above are high-profile and politically sensitive, but others exist. Israel’s long-term economic and fiscal challenges, if not properly addressed, will inhibit its ability to sustain higher defense spending, both due to increased need and the loss of U.S. FMF.

Effects on Israeli defense procurement

Removing FMF from the MOU would not necessarily mean the end of FMF overall, though it would end the predictability of such assistance. FMF could still be provided in smaller amounts on a case-by-case basis for purchases, and Congress may still choose to provide annual FMF through the appropriations process. Nor would an end to FMF imply an end to U.S. arms sales to Israel. Rather, it would mean that Israel would use its own funds for purchases, rather than a combination of mostly FMF and some Israeli funds. However, a decline in the amount or predictability of FMF or an outright end to direct U.S. security assistance is likely to have an effect on long-term Israeli defense procurement decisions. 

Some Israeli analysts have argued that an end to U.S. FMF would give Israel the ability to diversify its defense procurements, because Israel would no longer be bound as tightly to U.S. equipment or requirements. While there is some truth to this, it is likely that the U.S. will remain Israel’s most important arms provider for the foreseeable future. Israel purchases nearly 70% of its military and defense equipment from the U.S., including effectively all airframes, most of its advanced aerial munitions, and some armored vehicles, excluding tanks, which Israel makes domestically. With or without FMF, purchases in these categories and others are almost certain to continue in the near-term. 

Israel’s arms procurement will certainly diversify, both due to its new defense indigenization initiative and burgeoning partnerships with countries like India and Romania. But this diversification in the near- to medium-term will likely focus more on munitions, interceptors, and basic platforms, not marquee systems like the F-15 or F-35. America and Israel have jointly researched and produced key systems like David’s Sling and Arrow, and American restrictions to prevent strategic and technical espionage would prevent Israel from changing suppliers for key platforms. Beyond that, Israel has been using a range of American systems for decades: soldiers are well-trained on American platforms and they have complete interoperability with Israeli systems. Attempting a serious switch away from reliance on advanced American platforms would, at least in the near- to medium-term, incur major retraining costs, inhibit systems interoperability, and could easily run afoul of U.S. requirements surrounding its high-tech weaponry, all for likely inferior products.