Israel's Defense Budget Soars, Demanding Billions Amid Political Uncertainty

Israel's defense budget is reaching historic highs, presenting a significant challenge to the nation's economy. The annual defense budget, which stood at approximately 70 to 80 billion shekels before the war, is projected to reach 158 billion shekels by 2026, a substantial increase from the initial target of 111 billion shekels. This figure has already been raised twice since March 2026. Now, even the professional echelon at the Ministry of Finance, initially hesitant about further increases, acknowledges that this is not the final sum. Prime Minister Benjamin Netanyahu met with Defense Minister Israel Katz and Finance Minister Bezalel Smotrich shortly before the elections to discuss an urgent request for an additional 25 billion shekels for the defense establishment immediately after the vote.

The immediate hurdle is securing parliamentary approval for this additional funding. Given the political timeline and the expected length of coalition negotiations following the election results, passing this measure before the new Knesset convenes in about two weeks presents a considerable difficulty. Prime Minister Netanyahu will likely have to make a decision on the matter, potentially even before a new government is formed, especially if a caretaker government serves for an extended period.

The dramatic rise in defense spending is directly attributed to the complex operational reality. The Israel Defense Forces (IDF) are currently engaged on three simultaneous fronts, maintaining security zones in Lebanon, Syria, and the Gaza Strip, at a weekly cost exceeding two billion shekels. Beyond ongoing operations, the defense system is preparing for a potential conflict with Iran and is ensuring high readiness for intensified combat scenarios, including renewed missile fire from Hezbollah towards Israeli civilians.

This expansion occurs against a backdrop of a severe manpower shortage, with an estimated deficit of 15,000 to 20,000 soldiers. The ongoing protests by Haredi groups against conscription further necessitate heavy reliance on tens of thousands of reservists. The extensive and prolonged use of reservists incurs substantial economic costs, including direct payments and lost productivity, as repeatedly warned by Governor of the Bank of Israel, Professor Amir Yaron.

Projections suggest the defense budget could reach 200 billion shekels next year, a level unimaginable even a year or two ago, and remain at this level through 2027 and 2028. This would bring defense expenditures to approximately 8.3% of GDP, a global high and significantly above Western and even non-democratic country averages. Such an increase will necessitate painful cuts to other government budgets and potentially new taxes in early 2027 to close the financial gap. Proposed measures include a potential VAT increase to 19%, a tax on vacant land, and the cancellation of existing tax exemptions, though the latter faces lower chances of approval.

The Bank of Israel Governor has issued stark warnings about uncontrolled defense budget growth, emphasizing that it will inevitably come at the expense of civilian services like education, health, and welfare. Diverting resources to defense could also delay critical national infrastructure and transportation projects, potentially harming Israel's long-term economic growth potential. Israel faces a critical decision between immediate security needs and the economic and social resilience of its citizens amidst political uncertainty.