Israeli Finance Ministry Threatens VAT Hike to Fund Defense Budget Increase

The Israeli Finance Ministry has warned it may raise the value-added tax (VAT) by 4.5 percentage points, pushing it to 22.5%, if Prime Minister Benjamin Netanyahu approves the Defense Ministry's request for an additional 30 billion shekels in the 2026 budget. This threat followed a high-level Finance Ministry meeting after the Defense Ministry demanded a defense budget of 188 billion shekels, significantly higher than the 144 billion shekels approved in the state budget. While the Finance Ministry has agreed to increase the defense budget by 15 billion shekels, the Defense Ministry insists on at least double that amount due to ongoing large-scale deployments of IDF forces in Gaza, Lebanon, and Syria.

Finance officials argue that fully meeting the Defense Ministry's demands would require sharp tax hikes or severe spending cuts, directly impacting the public. They warn that raising VAT by 4.5% would immediately increase prices of goods and services, worsening the cost of living and reducing citizens' purchasing power. The Finance Ministry also criticized the Defense Ministry for insufficient efficiency measures despite the already significant budget increases since the war began. They emphasized that while they support funding security needs, exceeding budget limits could damage Israel's economy for years, stating, "If the economy suffers, security will also be harmed."

Conversely, the Defense Ministry maintains that the budget increase is necessary due to political directives and expanded IDF missions across multiple fronts. They argue that maintaining current troop levels and fulfilling all security tasks is impossible within the approved budget from March. The dispute between the Finance and Defense Ministries is expected to be resolved by the political leadership amid concerns about further tax increases and additional burdens on Israeli citizens.