Israel’s ruling coalition wants next year’s budget to take the country “from conflict to growth,” and estimates that the deficit will be reduced now that a ceasefire with Hamas has been achieved, Finance Minister Bezalel Smotrich said.
The government intends to roll back some of the fiscal measures imposed to help finance the two-year war in Gaza, thereby easing the burden on Israeli workers, Smotrich said at a briefing Tuesday on Israel’s 2026 budget framework. He plans to introduce a permanent tax on the windfall profits of banks whose profit margins are “unprecedented,” he said, without giving a time frame for the change.
Next year’s target deficit is expected to be reduced to 3.2% of GDPfrom 5.2% predicted for 2025, although Smotrich says the actual figure could be lower.
Much will depend on whether the Ministry of Defense stays within the limits of the budget supplement agreed upon earlier this year, Smotrich declared. It referred to an additional $12.9 billion for all security needs this year and next, with the exception of current spending.
Defense will continue to be the most important item in the budget, after spending last year increased to 8.8% of GDPaccording to the Stockholm International Peace Research Institute.
Smotrich said his new bank tax would focus on interest profits, and added that it would be “a permanent tax on a component of earnings that is not the product of hard work.”
The chief economist of the Ministry of Finance reduced the economic growth projection for this year from 3.1% to 2.8% and stated that next year’s growth is estimated at 5.2%. This measure follows a similar one adopted by the central bank in September.
In the course of the conflict between Israel and Hamas—currently in a state of fragile ceasefire following a U.S.-brokered deal last month— The Israeli economy has grown below its pre-war trajectory, and in 2024 it recorded the slowest year in more than two decades, excluding the Covid-19 pandemic.
The debt is expected to decline after a surge caused by loans taken out to finance the multi-front war in Gaza, Iran and Lebanon, triggered by the Hamas attacks in October 2023. Israel’s debt ratio rose to 69% of gross domestic product last year, up from 60% before the war. The budget department of the Ministry of Finance estimated that it would take between five and fifteen years to return to pre-war levels, depending on the extent of growth and spending.
Smotrich said he hopes the budget will be approved by cabinet in early December and receive full parliamentary approval by March 26, without which the government would automatically fall. “The Israeli economy should not be held hostage by anyone,” he said.
Tensions within Prime Minister Benjamin Netanyahu’s ruling coalition pose the biggest risk, after two Orthodox Jewish parties left the government in July over a proposal related to conscription. This left the government without the majority needed to approve the budget. Since his departure, the two parties—Shas and Torah Judaism—have sabotaged most of the government’s legislative efforts in parliament. The parties have conditioned their return to government on the approval of a bill that would further exempt Orthodox men from military service.
