Israel's Cabinet Approves 2026 State Budget with Significant Defense Spending Increase

Cabinet Greenlights 2026 State Budget

The Israeli government's cabinet officially approved the 2026 state budget on Friday, December 5, 2025, following extensive negotiations over its allocations. The comprehensive budget is set to total approximately NIS 662 billion (around $205 billion USD). A central feature of the approved plan is a substantial increase in defense spending, which has been set at NIS 112 billion (approximately $34.6 billion USD).

The approval came after hours of intense discussions, particularly concerning the defense allocation, which saw Finance Minister Bezalel Smotrich and Defense Minister Israel Katz reach a compromise. The budget will now advance to the Knesset for its initial plenary reading and subsequent committee discussions, with a critical deadline of March 2026 for final parliamentary approval to avoid triggering early elections.

Defense Spending Sees Major Boost

The NIS 112 billion defense budget marks a significant increase from an earlier draft that proposed NIS 90 billion. It also represents a rise of 47 billion shekels compared to the 2023 pre-war budget, making it the highest defense allocation since the establishment of the state. The agreement between Minister Smotrich and Minister Katz was crucial, as Smotrich had initially advocated for a smaller defense budget, while the military had sought a higher figure of NIS 140 billion.

The increased funding is intended to reinforce the Israel Defense Forces (IDF), address the needs of soldiers, and reduce the burden on reservists. The defense budget is based on an operational assumption that an average of 40,000 reservists will be called for duty throughout 2026, a reduction from the 300,000 mobilized at the peak of recent conflicts. Additionally, the budget includes a NIS 725 million package, spread over three years, dedicated to enhancing security measures in the West Bank (Judea and Samaria) and along the Jordanian border.

Broader Economic Measures and Reforms

Beyond defense, the 2026 state budget introduces several economic measures and reforms. The approved deficit ceiling for 2026 has been set at 3.9% of GDP, a revision from earlier, lower targets. The Finance Ministry indicated that the budget aims to return the Israeli economy to a path of growth and fiscal responsibility after two years of expanded wartime spending.

Key initiatives include:

• Measures aimed at reducing the cost of living.
• A proposed loosening of tariffs on dairy imports.
• The introduction of a NIS 30 tax on e-cigarettes.
• An increase in National Insurance payments, while income tax brackets remain frozen.
• An education budget increase to NIS 94 billion, with new funding for special education, STEM programs, and postwar support services.
• Allocations for public transportation and support for flights between Ben-Gurion Airport and Ramon Airport.
• Over 3 billion shekels earmarked for advancing artificial intelligence.

Political Reactions and Path to Final Approval

Prime Minister Benjamin Netanyahu praised the budget, describing it as 'responsible and balanced' and asserting that it meets Israel's security needs. He expressed confidence in its passage through the Knesset and stated that the government intends to complete its full term. However, the budget has drawn criticism from opposition figures. Opposition Leader Yair Lapid denounced it as a 'budget of corruption and draft-dodging,' alleging that it raises taxes on ordinary Israelis to cover the costs associated with Haredi draft evasion.

The budget's journey through the Knesset is expected to involve further debate and scrutiny. Failure to secure parliamentary approval by the end of March 2026 would automatically lead to the dissolution of the Knesset and trigger new elections, a scenario the government aims to avoid.