Israel's 2026 Budget Relies Heavily on Borrowing, Not Taxes
Israel's state budget for 2026 projects NIS 850.59 billion in revenue, with a significant portion, NIS 265 billion, sourced from borrowing rather than taxes. This borrowing includes NIS 229.58 billion from domestic loans, NIS 26.22 billion from foreign loans, and NIS 9.2 billion from the National Insurance Institute. This means 31% of the year's projected income is borrowed money that will need to be repaid with interest.
The budget structure, which records all incoming funds on the revenue side regardless of source, can be misleading. While loans are liabilities for businesses, in the state budget they are treated as revenue. The actual cost of these loans, including principal repayment and interest, appears on the expenditure side of the budget.
Domestic borrowing is largely comprised of tradable bonds listed on the Tel Aviv Stock Exchange, with a small portion from designated bonds for insurance companies and pension funds, and the "Independence and Development Loans" (Bonds) raised from Diaspora Jews. Foreign borrowing includes other loans with self-guarantees, banks, and governments. The designated bonds for pension funds are now zero due to a reform that guarantees returns instead of bond issuance, though this still incurs a NIS 4.8 billion expenditure for the state.
The government manages its borrowing through weekly tenders overseen by the Ministry of Finance's Debt Management Unit. These tenders are open to authorized financial institutions, known as market makers, who then distribute the bonds to institutional investors managing public savings, such as pension funds and provident funds, as well as foreign investors and banks. In 2025, gross borrowing was approximately NIS 207 billion, with the total public debt reaching about NIS 1.408 trillion, or 68.6% of GDP.
Expenditures in the 2026 budget include NIS 171.41 billion for debt repayment and NIS 64.58 billion for interest and fees. The net increase in debt for the year is projected to be around NIS 93.6 billion. Notably, the annual interest payment of NIS 64.58 billion exceeds the entire budget for the Ministry of Health (NIS 63.34 billion). The loan from the National Insurance Institute is also changing; while historically the Institute lent to the government, in 2026 the government will lend NIS 9.2 billion to the Institute while repaying NIS 19.6 billion in principal and NIS 9.1 billion in interest, resulting in a net flow of funds from the Treasury to the Institute.
The difference between planned and actual borrowing highlights the budget's reliance on loans to cover shortfalls. For instance, in 2022, actual borrowing was less than 40% of the plan due to higher-than-expected tax revenues. However, in 2024, borrowing surged to NIS 278.4 billion, more than four times the 2022 amount, particularly in foreign borrowing, indicating a potential concern about overwhelming the domestic market.
The cost of borrowing is influenced by the base interest rate, Israel's credit rating (currently Baa1 stable from Moody's and A stable from S&P), and a risk premium reflecting security situations and fiscal confidence. Even small increases in borrowing costs can amount to hundreds of millions of shekels annually, directly impacting funds available for public services and future tax burdens.
