The Ministry of Finance’s fiscal deficit target for 2026 will be 3.6% of GDP, according to the budget proposal distributed to ministers. This means a widening of the deficit by NIS 8 billion in comparison with the latest declaration by Minister of Finance Bezalel Smotrich that the budget would be based on a planned deficit of 3.2% of GDP.
The widening of the deficit is explained by large supplements to the defense budget, beyond what had been planned by the Ministry of Finance. The deficit target is liable to rise further over the next 24 hours if some of the Ministry of Finance’s proposals fall by the wayside by the time the budget is approved by the government.
The government meeting on the budget began this morning, and on the basis of past experience, particularly given the disagreements that remain unresolved, it can be expected to continue until the small hours of Friday morning.
Smotrich presented the main points of the budget at a press conference today.
“The basic principle of the budget is that the cost of living is not a decree of fate,” Smotrich said. “It can be cheap here, and we shall demonstrate in this budget that there are four elements: food, the bank account, clothing purchases, and basic products.
“The milk reform is a very simple decision: we don’t work for the monopolies but for you. I have imposed a tax and taken money from the banks to return it to you, and we shall tax the banks. There are those who profiteer from the high interest rate, and you won’t pay twice, both interest and fees. We are finally opening the banking market to genuine competition. Small banks with minimum bureaucracy will come in and you will pay less interest on overdrafts and credit.
“The third step is cutting taxes. You will pay less income tax. Those who go out to work and contribute to the economy will be left with more money in their pockets.
“The final thing is personal consumption. We want you to be able to buy more, and more cheaply, and if the monopolies don’t cut prices drastically, simply order the clothes you like for less money. We are simply breaking those that try to break you.
“These reforms are the core of the budget, and there won’t be a state budget without them. If we succeed, the monopolies will realize that their immunity and the surrender to expensive and violent campaigns is over, and the surrender to political pressures that preserve their power to continue oppressing us is finished.
“A final word to my reserve soldier brothers. You are the great victors. I have transferred twenty billion for a huge support program for reservists. We shall continue to give you maximum support. You will see more money in your bank accounts. Tax benefits will yield up to NIS 1,000 extra to net income monthly, and we shall continue to do everything possible. You are our national pride, and the entire nation of Israel says thank you.”
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On the bill currently under discussion in the Knesset regularizing exemption from military service for yeshiva students, Smotrich said, “We will vote only for a conscription law that will being haredim into the IDF and enlarge our army and reduce the burden on those who serve in the reserves. This has no connection to the budget. The budget will ensure that the great achievements find their way to the pockets of every citizen.”
After the budget is passed by the government the test of the Economic Arrangements Bill accompanying it will be in the Knesset committees. History teaches us that changes will be introduced, and that important reforms are liable to be rejected and split off into separate legislative processes, a scenario that the Ministry of Finance tries to avoid every year.
The most difficult issue facing the government is the defense budget. It was agreed between the ministries months ago that the base budget would be NIS 93 billion, but the increased budget for the cost of keeping 60,000 reserve soldiers mobilized at any given moment was left to one side.
The IDF is asking for NIS 37 billion for this budget, plus NIS 7 billion for dealing with the threat from Iran, and another NIS 7 billion that is in dispute between the Ministry of Finance and the Ministry of Defense. The defense establishment’s demands for 2026 total NIS 144 billion.
Besides that, Prime Minister Benjamin Netanyahu has made clear to both ministries his intention of securing a supplement to the defense budget now for the decade 2027-2037 of NIS 350 billion, an immense sum that restricts in advance any possibility of financing multi-year civilian programs. This week, the Ministry of Finance called on the other government ministries to implement streamlining measures in view of the especially high spending on defense.
The minister of finance takes personal pride in two reforms in the Economic Arrangements Bill, One is the reform of the milk market, which mainly consists of dismantling the concentrated marketing model in the sector, against the opposition of the dairy farmers, the major dairies, and the Ministry of Agriculture. The other is the widening of income tax brackets to ease the tax burden.
That, however, is conditional on passing a property tax on vacant land, intended to encourage construction. The tax is expected to yield NIS 8 billion annually. The revision of the tax brackets has come in for criticism, because of the tax hikes carried out as part of the special measures to finance the war, changes in National Insurance payments and income tax that partly nullify the benefit now being proposed.
There has also been criticism that for all the structural reforms proposed in the Economic Arrangements Bill, it lacks reforms to deal with bottlenecks in the economy and promote growth. Since the draft Economic Arrangements Bill was distributed, several reforms have already been subtracted from it, among them a substantial reform to set employment targets for the Arab section of the population.
The Ministry of Finance aims to bring the budget before the Knesset for first reading next month, and to conclude preparations for second and third readings by the end of March, as required by law. But in the light of the fragile state of the coalition and the upcoming election, it is very doubtful whether the legislative process will be completed on time.
Published by Globes, Israel business news – en.globes.co.il – on December 4, 2025.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2025.
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