Knesset approves first reading of 2026 state budget

If the NIS 662 billion budget does not pass the committee stage and second and third readings by March 31 then the Knesset will be dissolved and new elections held.

The Knesset has approved the first reading of the 2026 budget by 62 votes to 55. Now, the various clauses in the budget and reforms in the Economic Arrangements bill will be discussed in committee in preparation for the second and third readings in the Knesset.

The budget must complete the entire complex legislative process by March 31. If it does not pass approvals in the Knesset committees and three readings in the plenum by then, the Knesset will be dissolved by law, and Israel will go to elections.

The budget framework approved by the cabinet for the state budget is NIS 662 billion, up from NIS 650 billion in the revised 2025 budget, which was updated following major budgetary additions for the Ministry of Defense due to the war.

The Ministry of Finance and the Bank of Israel expressed concern about a provisional budget if the state budget is not approved by the Knesset by the end of March. This is due to the significant gaps between the 2025 budget before the massive transfers to the Ministry of Defense and the needs in 2026. The provisional budget is by law 1/12 more for each month than the previous year’s budget.

The defense budget for 2026 is NIS 112 billion, and there is concern in the Ministry of Finance that the Ministry of Defense will find this sufficient. The Ministry of Defense director general has also expressed reservations about the budget in various public forums.

The budget deficit target for 2026 is 3.9% of GDP, and it was increased from the original proposed target of 3.2%. This means that the government will not succeed in cutting the debt-to-GDP ratio from 68.6%, a much higher rate than the situation before the war, when it was about 60%.

The Bank of Israel and the Ministry of Finance expressed concern about budgetary divergence during the Knesset discussions, and about the approval of significant and unusual additions to the Ministry of Defense budget. The concern stems from the fact that the high fiscal deficit target (3.9%) does not lower the debt-to-GDP ratio, but it does not increase it either. An increase in the debt-to-GDP ratio would be in complete contradiction to the promises made by the country's senior economic figures to investors and rating companies.

The stage that will determine what reforms will pass

Now, the Knesset committees will be required to discuss the Economic Arrangements bill. That is where the major struggles are expected to decide what will remain of it. For example, the Ministry of Finance is preparing for a reform of the dairy sector, with Minister of Finance Bezalel Smotrich declaring that without it he will not agree to pass a state budget. This is against the position of some farmers and large dairies. His intention to increase tax on the banks is also expected to encounter significant opposition. These are just two examples among many.

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Among other things, within the framework of the state budget, it is proposed to partially increase the tax brackets, so that some workers in the economy will benefit from the increase in net income and pay less income tax. It is proposed to cover the loss of state revenues due to this measure through a property tax on land - a controversial reform that is expected to arouse great opposition from entrepreneurs.

Even smaller reforms are expected to encounter major opposition, such as the one concerning the change in depreciation taxation on airplanes that El Al is fighting against, or the intention to grant a private concession to build a new airport in Israel in the face of opposition from the Israel Airports Authority and workers' committees, which have already succeeded in vetoing laws and reforms in the past.

Estimates are that, as with the budget, some of the reforms will be shelved along the way, as usually happens with the Economic Arrangements bill. This time, the hourglass for completing the legislation is particularly short, and that's without even mentioning the law intended to regulate haredi military mobilization, which the haredi parties are demanding be completed before the state budget is passed.

Published by Globes, Israel business news - en.globes.co.il - on January 29, 2026.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2026. .