Finance Minister Bezalel Smotrich after a press conference at the ministry, December 4, 2025; illustrative. (photo credit: YONATAN SINDEL/FLASH90)

The 2026 budget passed its first test, yet the battles over defense, taxes, and reforms expose a government more focused on managing crises than shaping policy.

Israel’s state budget for 2026 passed its first hurdle on Friday, receiving approval from the government in the annual high-stakes process, which could potentially trigger early elections.

Israel’s various ministries battled from Thursday morning until mid-Friday over the funds that they would receive.

The approved budget will still need to pass three votes in the Knesset’s plenum to come into effect. If it is not approved by the end of March, marking the end of the fiscal year, the Knesset is dissolved, and elections are declared.

Overall, the total approved budget came out to be approximately NIS 662 billion ($204 b.), and the deficit ceiling for 2026 will be 3.9% of GDP.

Here are some of the agreements reached that affect the entire spectrum of Israeli society.

Finance Minister Bezalel Smotrich at a Religious Zionist Party meeting in the Knesset, December 1, 2025; illustrative. (credit: CHAIM GOLDBERG/FLASH90)

Defense Minister Israel Katz and Finance Minister Bezalel Smotrich had previously clashed over defense funding, yet they ultimately came to an agreement.

The defense budget framework for 2026 was agreed to be set at NIS 112 billion ($34.6 b.).

According to the agreement, there will be a reduction of the annual number of reservists from 60,000 to 40,000. In addition, a budget package totaling approximately NIS 725 million ($224 m.), spread over three years, was agreed upon.

The package was created to strengthen security in the West Bank. Within the initiative are investments in armored transport, paving roads and routes, establishing IDF bases there, as well as advancing projects along Israel’s eastern border.

Smotrich announced various financial initiatives for the country that were also agreed upon. Among them were plans related to taxation.

The finance minister outlined an initiative that calls for reducing the tax burden on the middle class by widening the brackets taxed at 20% and 31%.

This will primarily reduce tax liability for middle-income earners and moderately benefit higher-income earners, the Finance Ministry said.

Smotrich’s controversial dairy reform was also approved by the government.

The reform calls to make various changes to Israel’s dairy production, claiming to lower the cost of living by addressing monopolies dominating the dairy market. It also calls for reducing the price of milk and cheese for Israeli citizens.

Agriculture and Raw Food Security Minister Avi Dichter reportedly voted against the dairy reform, being an outspoken critic of it and expressing concerns that it could cause harm to Israel’s local dairy farms.

Since the haredi (ultra-Orthodox) parties left the government in July following the fallout in negotiations on the controversial bill to enforce conscription to the IDF, Tourism Minister Haim Katz (Likud) has taken over the missing haredi ministerial portfolios as construction and housing minister, health minister, and welfare and social affairs minister.

He reached various budget agreements with his ministries as well.

For Israel’s housing sector, it was announced that approximately NIS 700 million ($216 m.) would go to promoting land tenders, accelerating construction processes, and subsidizing infrastructure development in the periphery. Approximately NIS 250 million was allocated for renovation, maintenance, and rehabilitation of public-housing units.

The Welfare Ministry received an additional NIS 1 billion ($309 m.), which was said to be directed toward strengthening social-service departments, services for people with disabilities, senior citizens, and at-risk youth and young adults, as well as to expand support for victims of domestic violence, including the addition of necessary therapeutic positions, particularly in the aftermath of the war.

Smotrich, Sa’ar agree on budget for Israel advocacy campaigns

Smotrich and Foreign Minister Gideon Sa’ar agreed on a budget of NIS 2.35 b. ($726 m.) for Israel advocacy campaigns.

It was agreed that the National Security Ministry will receive an increase of NIS 4.5 b. ($1.4 b.).

The ministry said the funds would enable the continuation of reforms, strengthening operational units, and investing in infrastructure and equipment.

It will also receive 3,000 new positions for the police, Israel Prison Service, and internal security bodies. Additional salary expenses are estimated at NIS 1.5 billion ($463 m.), which were also approved.

The state budget approval received backlash from politicians in Israel’s opposition. Opposition leader Yair Lapid (Yesh Atid) slammed the government for approving "a budget of corruption and draft-dodging."