The public discourse surrounding the 2026 budget, which is expected to pass today (Monday) its first reading in the Knesset, focuses on two things: the allocation of the budget among ministries with an emphasis on coalition funds, and the size of the public debt. But neither of these reflects the truly important figure that determines how much money the government can spend: the debt burden.
According to an analysis by Davar, despite the war and the heavy expenditures it entails, and notwithstanding the rise in interest rates to a peak, the debt burden— that is, the cost of paying interest on the debt —has increased only marginally and remains at a historic low. This indicates that the government still has significant fiscal room for additional spending, to boost growth or address existing problems, even without creating financial risk or a repayment burden that would be difficult to sustain.
More important than the debt-to-GDP ratio
The economic figure given priority by the Finance Ministry in setting the budget is the debt-to-GDP ratio—that is, the total state debt divided by the size of the economy. While this is indeed a standard figure for international comparisons, by itself it says very little. A country can have large debts that are very manageable, or smaller debts that are more restrictive. This all depends on how the debt is structured, who is owed, and the interest rate on the debt.
The annual deficit as a percentage of GDP spiked at the start of the war and totaled 4.7% by the end of 2025. The forecast for 2026 is a reduction to 3.9%. The debt-to-GDP ratio rose at the start of the war from 60% of GDP to nearly 70% – and the Finance Ministry’s plan is a moderate decline of 1% per year over the next decade, at minimum.
Government debt is a financing tool that is not repaid but continuously rolled over. This does not pose an immediate danger, unlike a business or family loan, which comes with a repayment date. The important question is the cost the government pays on the debt — that is, the interest on government debt, or the debt burden.
According to estimates, interest payments are expected to rise from 57.9 billion shekels in 2025 to 64.6 billion shekels in 2026. Calculated as the debt burden (interest payments relative to GDP), this represents an increase of 0.54%— from 2.37% in 2023 to 2.91% in 2026. This rise reverses the trend of declining debt burden observed since 2005, when it stood at 5% of GDP.
Even if the trend change continues in the coming years (repayment of debt and its interest occurs several years after it is raised), it is hard to see it as an economic drama. Israel is still in an environment of historically low interest repayments, and their burden on the budget and the economy in general remains small. Israel’s debt structure is also such that most of the debt repayments the state makes go, in fact, into Israeli hands, so they are also growth-supportive.
Beyond that: a country with a vision for sustainable growth can also handle the other side of the equation—the size of the economy. The essential question is not the level of the debt-to-GDP ratio, but what Israel needs to do in 2026 and in the coming decades: Israel can choose to advance national projects in computing, infrastructure, and education. It can compare public, and particularly civilian, investment to the average in OECD
Reducing public spending without good reason
The Finance Ministry sees itself as the protector of the Israeli economy. Ahead of the 2026 budget, Finance Minister Bezalel Smotrich told reporters that he echoes the phrase he heard from senior ministry officials: “the tragedy of the one who prevented a disaster,” referring to the ministry’s assumption of this often-unpopular responsibility.
But as long as the Finance Ministry manages to implement a restraining policy on government spending, the real tragedy is for all those for whom the “theoretical disaster” is averted at their expense: the children in crowded classrooms whose achievements are on average lower than those of their parents, the elderly standing in long lines outside soup kitchens, patients in hospitals, and commuters stuck in traffic, whether in private cars or on buses, all of this without any real good reason.
Budget cuts reduce public spending, but also the growth and income that derive from it. Proper government spending, such as investments in infrastructure, industry, and vocational training, or investment in public services like education, welfare, and healthcare, contributes to economic growth. In such a case, interest on the debt would indeed increase, but so would GDP and the state’s tax revenues. The upcoming budget is not expected to take this path— and in doing so, avoiding an increase in public debt will effectively increase the debt the state owes to its citizens.
