The 2026 state budget was approved by Israel’s cabinet late Thursday night, with many issues remaining open. The biggest question is whether this budget will even be passed by the Knesset within three months as required, or whether the Knesset will dissolve due to the lack of a majority for the budget, if the haredi parties oppose it as part of the struggle against the Conscription Law.
In previous budgets, the MKs from United Torah Judaism (UTJ) and Shas fought against conscription but supported coalition funds for private educational institutions affiliated with their parties and ensured that the opposition was unable to bring down the entire budget and the government along with it. Shas and UTJ leaders know that the direct consequence of not passing the budget will be a sharp and immediate cut in government support funds, on which the budgets of haredi institutions rely.
But even if the budget ultimately passes the second and third readings in the Knesset, it is unclear how many of the already meager reforms that appear in the Finance Ministry's budget proposal for 2026 will survive the discussions in the Finance Committee.
The belligerent line towards the Finance Ministry
One of the chapters in the Economic Arrangements Law approved by the government along with the budget deals with "completing legislative processes for measures from the economic plans for 2023-2025 whose legislation has not yet been completed." These are measures that Knesset Finance Committee former chairman Moshe Gafni Has forced on the Ministry of Finance in previous years.
One of the steps that the Ministry of Finance is trying to implement is reporting obligations to the Tax Authority for apartment renters, including those who do not reach the threshold for paying taxes. This is part of the state's attempt to identify tax evaders, and in addition, fixing the exemption ceiling so that it will not be updated again each year according to inflation. The Ministry of Finance also wants to include appreciation that arises from the sale of an apartment in the calculation of income as subject to surtax.
These proposals have already been approved in the past by the government and have stalled in the Finance Committee. Gafni is no longer serving as chairman of the committee, following his formal resignation from the coalition, but remains dominant in the committee. His successor, MK Hanoch Milwidsky (Likud), is also continuing his predecessor's belligerent line towards the Ministry of Finance.
Still in doubt
Traditionally, Ministry of Finance real estate tax proposals unite the coalition and the opposition in the Finance Committee with resolute objections. The same may be true of the Ministry of Finance's plan, as part of the 2026 budget, to reinstate the property tax that was abolished decades ago on the possession of private land that is not used for construction. The Ministry of Finance is seeking to impose an annual tax of 1.5%, in a preliminary attempt to prevent objections in the Knesset, and has linked approval of the property tax to the implementation of the biggest incentive in the budget for the working public - a reduction in income tax for those who earn over NIS 16,000 gross per month.
The Ministry of Finance is likely to warn that the opposition of MKs to the vacant land tax will leave no budgetary sources for cutting income tax. On the other hand, the Finance Committee will respond that the Ministry of Finance's incentive is not at all sufficient, because it does not help low-income earners. The Finance Committee voiced similar objections last month to the Ministry of Finance’s reservists aid plan, which forced it to add relief for low-income earners as well.
In any case, other Ministry of Finance plans for the new year are still in doubt. Despite the statements by Minister of Finance Bezalel Smotrich, the imposition of the new tax on banks is still far from being agreed upon with the Bank of Israel, and the approved budget leaves the issue open. Smotrich's flagship milk reform is also expected to face stubborn battles in the Knesset by MKs who will be joined by representatives of dairies and dairy farmers who oppose the opening of the market's business model. Agriculture Minister Avi Dichter was the only one to vote against the budget in the government, in his opposition to the reform. But the real power of the agricultural lobby is set to be expressed mainly in the upcoming Knesset debates.
Published by Globes, Israel business news - en.globes.co.il - on December 7, 2025.
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