The Finance Committee approved the state budget for 2026 on Monday. The total budget will amount to 699 billion shekels, with the defense budget set at approximately 144 billion shekels. The annual deficit relative to GDP will be 4.9%—lower than the deficit ceiling approved for 2025 (5.2%), but higher than the actual rate at the end of last year (4.7%). The government and the Knesset now have until March 31 to give final approval of the budget.
The total size of the budget, including debt repayments and the National Insurance Fund, is 850.6 billion shekels. However, these amounts are not included in the budget calculation for the purpose of the expenditure limit, since the debt is rolled over each year and is therefore not considered a real expenditure.
In contrast, interest payments on the debt are included within the 699 billion shekels and serve as a measure of the “cost of debt,” which changes from year to year. Interest payments for 2026 are set at 64.5 billion shekels, amounting to 2.91% of GDP, slightly above the OECD average, but lower compared to previous decades in Israel prior to the war.
Following “Operation Roaring Lion”: the defense budget will increase by an additional 30 billion shekels
The largest ministry, and the one with the greatest impact on the overall size of the budget, is the Ministry of Defense. The ministry’s budget approved in its first Knesset reading was 112 billion shekels, but Operation Roaring Lion led to an increase of about 30 billion shekels, bringing it to 142 billion shekels, with an additional 7 billion shekels allocated as a reserve depending on security developments.
The defense budget had been tens of percent lower before October 7, 2023, standing at 63 billion shekels that year prior to the war. At the beginning of the discussions, the Ministry of Finance had hoped the budget would be around 90 billion shekels, while the Ministry of Defense demanded approximately 140 billion shekels.
Most major ministries saw real increases in their budgets, even after accounting for inflation and population growth. The education budget rose from 89.8 billion shekels in 2025 to 98.9 billion shekels, a real increase of 4%. The health budget increased from 59 billion to 63 billion shekels. The welfare budget grew from 12.2 billion to approximately 14 billion shekels (a real increase of 10.3%). Meanwhile, the budget of the Ministry of National Security rose from 26 billion to 30.3 billion shekels, including about 1.1 billion shekels added following the outbreak of Operation Roaring Lion.
Notable changes can be seen in the Ministry of Foreign Affairs, whose budget grew by 24.1% in real terms to 3.3 billion shekels, and in the elections and party financing budget, which, ahead of elections, increased from 234 million shekels to 976 million shekels.
Budgets for the ministries of Aliyah and Integration, Agriculture, Finance, Economy and Industry, Communications, Housing, and the Water Authority will see real-term cuts.
The total amount of coalition funds, which are not included in the base budget and are approved separately each year for specific purposes designated by coalition parties, stands at 5.8 billion shekels. About 75% of these funds are allocated to the Haredi and religious-Zionist sectors, and 25% to general purposes. This amount is slightly lower than last year, but continues an upward trend in such allocations under the current government, compared to about 700 million shekels in 2022.
Arrangements Law: dairy reform and land tax left out
The 2026 Arrangements Law was initially planned to be particularly extensive, but several major reforms and policy measures were removed and shifted to separate legislation, including the dairy reform and the introduction of a property tax of 1.5% annually on the value of undeveloped land.
A tax benefit of up to 400 shekels per month for workers in income deciles 8–10 was approved, as was an income tax exemption for new immigrants for five years. In the first year, a full exemption will apply to annual income of up to 1 million shekels. Additional tax benefits to encourage the high-tech sector were also approved.
The taxation of excess profits of large banks, a measure that was expected to generate about 7.5 billion shekels over five years, was scaled back. Instead, a one-time levy of 3 billion shekels will be imposed for the state budget, along with an additional 125 million shekels next year. Together with an added 50 million shekels from the banks, these revenues will be allocated to a fund for businesses in northern Israel affected by the war.
During discussions in the Finance Committee, officials from the Ministry of Finance explained that they preferred a lower amount agreed upon with the banks that could meet the budgetary needs of 2026, while reducing the projected deficit from 5.1% to 4.9% of GDP. “It was important for us to see the deficit below 5% and to signal responsibility to the markets,” said Tamar Levi-Bona, Deputy Director for Macro in the Budget Department at the Ministry of Finance.
Voting on part of the Arrangements Law will be combined with the vote on the budget, though it includes many provisions that are effectively separate “laws” unrelated to one another.
Although, in theory, the budget could be passed without this part of the Arrangements Law, its provisions are an integral part of the agreement between the coalition parties on the budget. Time pressure, intensified by the war, and the difficulty of holding thorough discussions on the law’s provisions led to a reduction in its scope, as well as to an agreement by the Haredi parties to support the budget even without the passage of the conscription law.
Expenditures of the Citizens of Israel Fund: promoting employment in the Negev and Galilee, mental health, and blue-tech
The Citizens of Israel Fund, also known as the Sovereign Wealth Fund or Gas Fund, will allocate 235.6 million shekels this year, primarily for promoting employment, energy, and mental health. This fund manages the state’s revenues from natural gas production, and by law, the Knesset committee overseeing it must allocate part of these funds each year for the benefit of future generations.
After last year, when the coalition made last-minute decisions to allocate funds to purposes different from those discussed by the committee, this year the allocations were directed toward different goals than in previous years and toward non-sectoral objectives.
40 million shekels from the fund’s budget were allocated to promote employment in the Negev and Galilee, 40 million for trauma-focused treatments for reservists, and about 40 million shekels to expand additional emotional care and rehabilitation services.
15 million shekels were allocated to promote blue-tech (marine-related technologies), and 25 million shekels were designated for installing solar roofing in sports facilities and public spaces.
Final week to pass the budget
The government has, as noted, has until the 31st of March to pass the state budget for 2026, which began nearly three months ago. If the budget law is not passed within the required timeframe, the government will be dissolved and the Knesset will be dispersed, leading to elections within three months.
Last year as well, the state budget was passed in the final week in which it was still possible to do so. Currently, government ministries are operating under a provisional (continuity) budget, in which each month is allocated one-twelfth of the previous year’s budget, a lower amount than the proposed budget (699 billion shekels).
If a budget for this year is not passed, the total provisional budget will amount to approximately 605 billion shekels, and any additions that are not defined as essential and for which prior commitments were made will be canceled.
