"Israel's" ongoing war on Gaza is causing the Israeli economy significant losses, estimated at about $260 million daily, Galit Altstein wrote for Bloomberg News.

Yet, it's not just the financial toll that's causing concern for Prime Minister Benjamin Netanyahu. The conflict, already devastating in terms of lives lost, is proving to be more costly than initially anticipated, straining public finances.

However, it's the controversial allocations for ultra-Orthodox schools and other favored causes championed by extremist groups in the ruling coalition that have sparked a national debate and unsettled markets.

Finance Minister Bezalel Smotrich is gearing up to unveil a new budget for the remainder of 2023 and lay out plans for the following year.

Read more: Israeli minister Smotrich admits with 'pain, bowed head': We failed

Within "Israel's" expenditure plans are discretionary spending designated for the five parties in Netanyahu's government, including a record 14 billion shekels approved for religious schools, some of which are exempt from teaching core subjects like English and math.

These funds also support projects in illegal settlements in the occupied West Bank.

Despite constituting a fraction of the overall budget, these allocations reflect conflicting priorities at a time when "Israel" is facing one of its most severe wars in decades.

Israeli coalition funds impact market perception

The utilization of coalition funds in "Israel" has significant implications for market perception, particularly amid the economic toll of the ongoing war on Gaza.

The regime's reliance on these funds could potentially increase its debt burden. Global traders' responses matter as the regime resorts to bonds for war financing, with the deficit ballooning significantly.

While Israeli assets have largely recovered, concerns persist over the regime's debt, reflected in increased bond insurance costs and a higher risk premium.

The substantial funding directed towards religious programs and settlements, criticized for potential growth suppression even before the conflict, now stands out as the regime commits to bearing the economic costs of the war.

Finance Minister Smotrich's proposed budget foresees a substantial spending increase, primarily in military expenses funded by increased debt.

Read more: War costs a lot of money that we spend every day: Netanyahu

Despite the urging of economists and analysts to reevaluate funding priorities, the regime remains firm, causing growing concern about "Israel's" economic outlook.

This comes after a brief positive economic turn last year, now facing a potentially higher deficit than previously forecasted.

What Bloomberg Economics Says

The allocation of funds holds crucial political weight for Netanyahu and his allies, as certain parties had threatened to dismantle the coalition if the spending wasn't approved in May.

Tension within the Finance Ministry is evident, creating a divide between Smotrich and a faction overseen by technocrats perceived to be less influenced by political motivations.

The Finance Ministry's budget department recommended more stringent measures to cover increased spending and reduced revenue, proposing actions such as diverting coalition funds and closing certain government ministries.

The department head cautioned Smotrich about the scrutiny of fiscal decisions by credit rating agencies.

The responsibility of crafting a new budget falls on Smotrich. While he aims for growth-oriented reforms, he also advocates for preserving funds for orthodox schools and increasing spending on settlements, which he deems essential for security amid rising tensions in the West Bank.

However, the perceived favoritism towards certain groups, especially where employment rates are low and military service exemptions are common, has drawn criticism.

Former central bank governors expressed concern, warning that a lack of significant budget adjustments might indicate weak governance and could potentially lead to a credit rating downgrade for "Israel."

Read more: Israeli central bank chief warns of economic impact of war on Gaza