Israel Faces High Likelihood of Tax Increases After October Elections Amid Budget Pressures

Israel is expected to see significant tax hikes following the Knesset elections scheduled for October 27, 2026, as the incoming government will have nearly four years to implement difficult fiscal measures. The country faces a high budget deficit, ongoing defense expenditures, and a rapidly depleting National Insurance Fund, which is projected to run out of reserves by 2029. These financial pressures are likely to prompt a combination of tax increases, higher insurance contributions, and cuts or freezes in certain social benefits.

During election years, politicians typically avoid raising taxes due to their immediate impact on net wages and household expenses. However, after elections, governments have more political leeway to introduce painful economic reforms. The Bank of Israel forecasts a deficit of approximately 4.9% of GDP in 2026 and 4.2% in 2027, assuming defense spending remains within current limits. The debt-to-GDP ratio is expected to hover around 69%, with any increase in defense budgets potentially worsening the fiscal gap.

The National Insurance Fund's depletion poses an additional challenge, as payouts for pensions and long-term care already exceed current revenues in some years, requiring government transfers to cover the shortfall. The aging population and shrinking ratio of workers to beneficiaries exacerbate this issue. The next government may address this by raising National Insurance contributions, possibly targeting higher earners, self-employed individuals, or employers, or by extending recent temporary increases made in 2025.

On the revenue side, a likely quick measure is raising the value-added tax (VAT) from 18% to 19%, which could generate billions of shekels annually but would increase consumer costs significantly. Other potential tax hikes include raising corporate tax from 23% to 24%, extending freezes on income tax brackets and credits, increasing taxes on banks, adjusting vehicle taxes, and tightening enforcement on rental and capital income. Social taxes on investment funds and rental income may also be expanded.

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