Knesset about to pass budget already seen as irrelevant

The 2026 state budget has still not been passed by the Knesset, and is already liable to breach the budget framework for the second time. Only last week, the government approved the revised budget proposal, with an additional NIS 32 billion for defense because of Operation Roaring Lion in Iran, bringing the defense budget to NIS 144 billion, almost 30% more than in the original budget that the government approved in December. The escalation in fighting against Hezbollah on the northern border, however, and the emerging scenario of a prolonged ground operation in Lebanon, put the revised budget in question as well.

A situation has thus arisen in which a budget that has not yet passed second and third readings in the Knesset is already seen as inadequate by some of those who will have to live with it. The demand by the Ministry of Defense for NIS 177 billion, exposed by “Globes”, was raised in the discussion held with Prime Minister Benjamin Netanyahu, in which it was decided that the defense budget would be NIS 144 billion. The Ministry of Finance says that since then it has received no new demand from the Ministry of Defense for a larger budget.

The NIS 33 billion gap between what the Ministry of Defense wanted and what it received still hovers in the background, however, and the army has still not given up on the additional amount, especially given the developing situation in the north, together with the extended campaign in Iran.

The Ministry of Finance Budgets Division insists that the increased reserve of NIS 13 billion in the revised budget should be sufficient for a wide range of security scenarios. According to Ministry of Finance estimates, the direct budgetary cost of the operation in Lebanon will be considerably lower than that of the “Northern Arrows” operation in September-November 2024, in which Hezbollah leader Hassan Nasrallah was killed. The campaign in Iran itself, despite its length, has not at this stage exceeded the budget allocated to it by the Ministry of Finance.

That estimate, however, is correct for scenarios “in the middle of the bell curve” as the Ministry of Finance puts it, i.e., for the range of probable plans currently known to the ministry. A scenario in which Israel digs in in South Lebanon for months is apparently not priced into the NIS 13 billion reserve. If such a decision is made, the fiscal deficit forecast and the economic growth forecast will have to be substantially revised, as will the budget framework itself.

In such a scenario, in which the government announces an extended operation in Lebanon, the Knesset will pass the state budget in its current format by the end of the month, when it is irrelevant from day one. The Ministry of Finance will then immediately start to put together a new budget for 2026, with a higher deficit and an enlarged spending framework, which will require a full legislative process in the government and the Knesset, like the original budget.

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Already, however, even before a clear decision on an expanded IDF operation in Lebanon, the financial markets don’t believe the Ministry of Finance. The markets perceive the ministry’s forecasts from last week of a deficit of 5.1% of GDP and economic growth of 4.7% in 2026 as optimistic, as does the Bank of Israel, given the developments in the north since the forecasts were formulated. Market analysts are already talking about a deficit of 5.5% of GDP or more.

Other departments at the Ministry of Finance are also more pessimistic than the Budgets Division, and already estimate that a budget blow-out is probably only a matter of time. No-one at the Ministry of Finance thinks that the army’s demands will be met in full, but the Budgets Division is almost alone in its stance that it will be possible to preserve the existing budget framework.

The Budgets Division even points out that the NIS 13 billion reserve is included in the 5.1% of GDP deficit, so that if it is not utilized in full, the actual deficit will be lower. It is more likely that the reserve will be used for security needs within the next few months, whether or not the budget itself is exceeded.

A growing excess

Beyond the specific military scenarios, the Ministry of Finance has a deeper fear relating to the dynamic itself: the defense establishment, which in the course of three and a half years has become accustomed to working with a budget that is reopened time and again, is behaving, according to the Ministry of Finance, like someone with a blank check. In the past, before October 7 2023, when the defense budget was around NIS 60 billion, the Ministry of Finance was able to cope with a small excess. But when the defense budget reaches NIS 144 billion, an excess of just 3% amounts to over NIS 4 billion, an amount equivalent to the annual budget of a medium-size government ministry.

The reserve itself is causing tension. On the one hand, it’s a necessity in the circumstances of a war and a budget being passed in mid-year. On the other hand, history shows that as soon as there’s money available, people start eyeing it. The Ministry of Finance is well aware of this dynamic. When the 2025 budget was reopened to take into account Operation Rising Lion, there were calls for a similar reserve, but the Ministry of Finance objected, fearing that the money would be used for other purposes, and in retrospect there was no need to open the budget again. This time, circumstances necessitate a different approach.

The mechanism for releasing the reserve has not yet been finalized. It will probably be formulated along the lines of the conditions set in 2025: intensive warfare necessitating the release of funds from the reserve. The question of how far these conditions will be binding, or will be regarded as more of a recommendation, is one of the things that will determine whether the reserve will indeed serve its intended purpose, or whether it will be swallowed up by other needs.

Published by Globes, Israel business news – en.globes.co.il – on March 18, 2026.

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