Israel Faces High Risk of Tax Hikes and Social Benefit Cuts After October Elections

Israel is likely to see significant tax increases and social benefit adjustments following the Knesset elections scheduled for October 27, 2026. The incoming government will have nearly four years to implement difficult fiscal measures amid a high budget deficit, ongoing security expenses, and a rapidly depleting National Insurance Fund. Political dynamics typically delay tax hikes during election years, but post-election periods provide a more favorable environment for such decisions.

The Bank of Israel projects a deficit of approximately 4.9% of GDP in 2026 and 4.2% in 2027, assuming current defense spending levels. The debt-to-GDP ratio is expected to hover around 69%, with potential increases if defense budgets expand. Although recent strong tax revenues offer some fiscal breathing room, much of this improvement stems from timing and exceptional transactions. Meanwhile, the government faces rising costs including interest payments, infrastructure rehabilitation, coalition commitments, and services for a growing population.

A critical concern is the National Insurance Fund, which is forecasted to exhaust its reserves by 2029, much earlier than previously expected. Payments for pensions, disability, and eldercare already exceed current contributions in some years, with the gap covered by fund reserves and government transfers. The aging population and shrinking ratio of workers to beneficiaries exacerbate this issue, forcing the state to increase budget allocations for social payments, potentially at the expense of defense, education, health, and transportation.

To address these challenges, the next government may introduce a combination of measures, including broad or targeted increases in National Insurance contributions, possibly making temporary hikes permanent or expanding taxable income brackets. On the expenditure side, adjustments could involve freezing or reducing certain benefits, modifying indexation, tightening eligibility criteria, raising retirement age, or cutting benefits for economically stronger groups.

Value-added tax (VAT) remains a quick revenue tool, with a 1% increase potentially generating billions of shekels annually and immediately impacting household expenses. Corporate tax rates might also rise, alongside extensions of income tax bracket freezes, higher taxes on banks, vehicle taxation changes, and enhanced enforcement on rental and capital income. Social taxes on investment funds and rental income are also under consideration.

The new government is expected to frame these fiscal steps as a comprehensive responsibility package combining revenue increases, spending efficiencies, and social insurance reforms. For the public, this likely means lower net wages, higher living costs, and slower growth in social benefits, with the first half of 2027 seen as a critical window for implementing these policies.