Unveiling 2026 budget, Smotrich fumes at excessive defense spending, mulls tax cuts

Finance Minister Bezalel Smotrich on Tuesday harshly criticized the defense establishment for inefficiently managing its spending chest, while vowing to lower income taxes and impose a new tax on banks, as he unveiled the principles of Israel’s 2026 state budget following two years of ballooning war costs.

“The defense establishment cannot continue to hold the stick at both ends,” said Smotrich. “On the one hand, it is a system with great appetite and need for funds, and on the other hand, it will have to do the hard work to manage this resource.”

Smotrich called for efficiency measures to counter excessive military spending as he presented an initial state budget framework based on a deficit target of 3.2 percent of gross domestic product, to enable the economy to transition from war to growth.

The budget deficit in 2024 reached 6.9% of GDP due to higher defense and civilian spending as a result of the war with the Hamas terror group in Gaza that erupted in October 2023 and subsequent conflicts in Lebanon and Iran. It has since eased to 4.7% in September.

To date, the two-year war has cost the economy NIS 250 billion ($76 billion), out of which NIS 180 billion were direct costs for defense and security needs, according to Smotrich.

“It is of great importance to maintain Israel’s security alongside supporting the civilian economy,” said Smotrich. “We gave the security forces the budget they needed without limit.”

“The defense budget will be significantly larger than before the war, but it cannot continue to be at current levels… We have reached agreements on this and I expect that they will not be violated,” he cautioned.

Also speaking at the press conference, Finance Ministry director-general Ilan Rom, attacked the defense establishment as being “wasteful,” calling for structural changes in the management of military spending and greater efficiency. Rom accused the defense establishment of mismanagement, citing funds being “wasted” on unnecessary callups for reserve duty, as one example.

“We get stories about kitchen duty in reserves, guard duty in reserves, week on week off – these are not combat fighters,” said Rom. “Every shekel that is not wasted is a shekel that is invested in welfare and education,” Rom remarked.

“The defense budget is the cornerstone of the budget, and it will determine what the budget will look like,” he cautioned.

In response, Defense Ministry director-general Amir Baram said that the Treasury chief is “once again cynically exploiting the reserve force, to which we are all indebted, only to create a smokescreen and incite discussion on core issues: the urgent security need to invest in restoring capabilities and ramping up the IDF and the defense establishment’s forces, in the face of emerging threats, primarily Iran’s accelerated rebuilding attempts.”

This year’s defense budget has already reached NIS 163 billion, and in 2026, it is projected to be around NIS 90 billion or 4.5% of GDP, according to Smotrich.

Speaking at the press conference, Finance Ministry chief economist Shmuel Abramzon revised the country’s growth forecast for 2025 down to 2.8%, from 3.1% previously, which is still higher than the Bank of Israel’s projection of 2.5%. In 2026, the Finance Ministry expects the economy to grow at a faster pace of 5.1%.

Meanwhile, Smotrich expressed confidence in the nation’s economic resilience during the war period, emphasizing that it has the “tools and potential to transition quickly from war to growth.”

Smotrich announced that the government is working on a plan to reduce income taxes, which he said will encourage people to join the labor market and increase households’ disposable income.

“In addition, we will increase competition in banking, along with lowering the cost of credit for small businesses by opening the financial market to new players in the field of deposits,” said Smotrich.

Smotrich bashed the country’s banks for reaping huge profits while paying low interest on deposit accounts, and raising rates on overdrafts.

“This is intolerable behavior,” said Smotich. “We are working on a fixed model to impose a new tax on banks that will be a function of the interest rate.”

According to the timetable presented by the Finance Ministry, the 2026 budget will be submitted for government approval on December 4. The budget will then be submitted to the Knesset for approval in its first reading in early January, and in second and third readings in March. By law, the budget needs to be passed by the end of March, or new elections will be triggered.