Israel’s 2026 state budget, which faces its first vote in the Knesset plenum next week, has become a high-stakes test of governance, coalition discipline, and political survival, as the finance minister seeks to showcase immediate consumer relief while opposition leaders warn that the fiscal framework is being bent by political leverage tied to military service exemptions. With a statutory deadline looming, the budget vote now carries consequences that extend far beyond spreadsheets. If it fails, the Israeli Parliament dissolves automatically.
The budget submitted to the Knesset places total government spending for 2026 at 660 billion shekels. The largest allocation remains defense, at 112 billion shekels, a figure that was tightened from earlier projections but remains historically high. Even so, officials within the defense establishment have already pointed out that the allocation may prove insufficient, particularly if Israel faces another round of fighting on one of its fronts.
At the center of the government’s message stands Bezalel Smotrich, who has anchored the debate in a concrete cost-of-living move. With cameras rolling, Smotrich used the weekly faction meeting to implement the decision. After his remarks, with reporters in the room, he signed the order expanding tariff-free import quotas for hard and premium cheeses. Under the order, the annual duty-free quota rises from 11,500 to 19,500 tons. The change applies immediately and lasts for 2 years. An extension would depend on how the market responds.
Smotrich cast the measure as a direct challenge to market concentration. Speaking at the signing, he said, “I have taken another significant step in the fight against the cost of living and dramatically expanded the opening of the hard-cheese market to imports.” He illustrated the price gap he is targeting by adding, “A tariff-free yellow cheese costs 32 shekels per kilo, while the same cheese sold by the monopolies costs three times as much.” The disparity, he argued, is not inevitable. “Why do they sell it for three times the price? Because they can. And why can they? Because until now the quantity of imports was restricted and we were all forced to pay more.”
Declaring a turning point, Smotrich said, “Now this is over. It can be cheap here.” He framed the outcome in practical terms, telling consumers, “You will pay less for basic products,” and pledged to continue what he described as a determined effort to lower prices. He also pressed for rapid implementation, publicly urging Economy Minister Nir Barkat to move immediately and release the quotas for tender so the reform would not stall inside the bureaucracy.
Yet as Smotrich emphasizes execution and delivery, the broader budget is advancing through parliament under a shadow that has little to do with dairy markets. Ultra-Orthodox coalition partners have openly warned that their support for the budget is conditional on the passage of legislation preserving exemptions from military service. The message has been delivered bluntly: without final approval of the draft-exemption law, there will be no budget.
The pressure comes as the education budget, the second-largest in the plan at 97 billion shekels, reflects sharply uneven growth. Funding for ultra-Orthodox education networks is set to rise significantly, with the Independent Education network increasing by roughly 27 percent and the Shas-affiliated network growing by more than 40 percent compared to the original 2025 budget. By contrast, funding for the state secular education system is slated to rise by about 8 percent.
The threat has transformed the budget from a fiscal plan into a pressure point capable of collapsing the political system. Unlike routine coalition bargaining, this is not a dispute that can be postponed or softened. Under Israeli law, failure to pass the budget by the deadline triggers automatic dissolution of the Israeli Parliament, sending the country to elections without a confidence vote or formal crisis declaration. That mechanism has turned the ultra-Orthodox warning into a direct challenge to the government’s survival.
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Opposition leaders argue that this dynamic reveals the budget’s true logic. Yair Lapid dismissed the framework outright, portraying it as a political instrument rather than an economic plan. “What has been presented is not a budget,” Lapid said during his faction meeting. He then sharpened the accusation, arguing that the government is exploiting working Israelis. “They are stealing from Israel’s middle class, from the productive public, from the people who work.”
Lapid’s critique goes beyond spending levels. He focused on what he described as ministries that either do not function or lack active leadership, yet continue to receive budgets, staff, and authority. In his telling, the state is funding structures that exist politically but not operationally, while core needs are neglected. “This is a systematic transfer,” Lapid said, “from those who serve, work, and pay taxes to those who do not.” He warned that the budget offers no real answers to the cost of living, childcare shortages, or long-term investment in health, research, and innovation, concluding that “this is a budget designed to survive politically, not to fix the country.”
This is a systematic transfer from those who serve, work, and pay taxes to those who do not
Lapid’s emphasis on ministries and governance is deliberate. By highlighting portfolios that lack ministers or real activity, he frames the budget as misallocating not only money but responsibility, hollowing out the state’s capacity while preserving coalition arrangements. In that reading, even visible consumer reforms cannot offset what he sees as structural decay.
Avigdor Lieberman echoed the claim that the budget lacks substance, extending the critique directly to defense spending. “This is not a real budget,” Lieberman said, adding, “and the defense budget is not real either.” His argument is not about the overall size of the defense allocation, but about its orientation and assumptions. He warned that headline figures can mask strategic blindness in an era dominated by missiles, drones, and precision strikes on civilian and strategic infrastructure.
The real issue is not the budget itself. The real issue is the law that enables evasion of military service.
Lieberman argued that Israel continues to budget for past wars while underinvesting in civil defense, shelters, and protection of national assets. “We are still talking about yesterday’s wars,” he said, warning that preparedness gaps exposed in recent conflicts remain unresolved. He tied the budget debate directly to the draft-exemption crisis, arguing that the government’s true priority is not fiscal stability but advancing legislation that allows continued avoidance of military service. “The real issue is not the budget itself,” Lieberman said. “The real issue is the law that enables evasion of military service.”
That connection has reshaped the political calendar. Coalition leaders must now decide whether to push the budget forward while risking defections, accelerate draft-exemption legislation to secure ultra-Orthodox votes, or accept the possibility of dissolution. Each option carries a cost. Advancing exemptions risks public backlash and legal challenges. Failing to advance them risks losing coalition support. Missing the deadline risks ending the parliament altogether.
Beyond defense and education, other major spending lines reflect continuity rather than a shift in priorities. The Health Ministry’s budget for 2026 stands at 63 billion shekels, an increase of roughly four billion shekels from the original 2025 allocation. At the same time, funds that were previously labeled as coalition agreements have, in part, been absorbed into the budget base. The Prime Minister’s Office budget is set to rise to approximately six billion shekels in 2026, up from around three and a half billion in the original 2025 budget, with associated increases for ministries operating under its umbrella.
Smotrich’s strategy reflects a different governing instinct. By spotlighting a reform he can sign and implement immediately, he presents himself as a minister who delivers results even as the coalition shakes. His language emphasizes resolve and control. “I am determined to continue lowering prices,” he said, vowing not to allow any factor to block measures intended to make economic strength felt by ordinary citizens.
The opposition argues that the sequence itself is the problem. In their view, isolated cost-of-living steps cannot compensate for a budget framework shaped by exemptions, leverage, and unequal burdens. Lapid frames it as a moral failure of redistribution and governance. Lieberman frames it as a strategic failure of preparedness. Both argue that the budget’s credibility is undermined by the open threat of coalition blackmail.
As the deadline approaches, the 2026 budget has become a referendum on the government’s ability to reconcile delivery with legitimacy. Passage would keep the coalition alive, but at a political and social price. Failure would dissolve the Israeli Parliament and force a reckoning at the ballot box. Either outcome would shape Israel’s trajectory well beyond the fiscal year.
While Smotrich highlights executable reforms, Lapid and Lieberman challenge the budget’s underlying logic. With coalition threats on the table and no procedural margin for delay, the budget vote once again carries consequences that extend to the government’s survival.