Israel's Finance Ministry has prepared a package of tough economic measures for the incoming government, finished before the exit polls from the 2026-10-27 elections were even known. The plan is meant in part to pay for a bigger defense budget and to keep the deficit and the debt-to-GDP ratio from rising. Some elements were drawn up together with the Bank of Israel, and the next government will be responsible for carrying them out.
One immediate change involves fuel. Finance Minister Bezalel Smotrich subsidized gasoline by NIS 1 per liter over the past two months to head off price increases, at a cost of more than half a billion shekels. That subsidy ends Saturday night, so pump prices will jump by at least NIS 1 per liter at midnight and could climb further if global fuel prices keep rising. A liter of self-service 95-octane gasoline is expected to reach NIS 8.90, although the dollar's roughly 1% drop against the shekel yesterday should soften the rise somewhat.
Higher fuel costs are expected to push up prices of other goods and services that the government has so far kept frozen, among them electricity, water and public transportation. That in turn is likely to lift the Consumer Price Index.
Several tax measures will stay in place through 2027 under existing automatic budget provisions. These are the freeze on adjustments to income tax brackets, tax credit points and National Insurance contributions, as well as the current VAT rate. Together they are estimated to raise NIS 10 billion. Further tax steps will be proposed on top of ending the gasoline subsidy.
Among them is mandatory reporting of income from residential property rentals, with tax applied from the first shekel earned. At present, rental income of up to NIS 5,654 per month is exempt. Some of these legislative efforts have been held up in the Knesset Finance Committee. Another proposal would tax international content providers operating in Israel, the so-called "Netflix tax." The ministry also expects to cut tax benefits on pension contributions and recommends ending VAT exemptions for sectors that now enjoy them.
The broader goal is to find funding for the required rise in the defense budget, which is expected to reach NIS 187 billion. One nearly certain source will be sharp cuts to coalition funds, together with sweeping efficiency measures across ministry budgets.
The new coalition's main challenge will be passing a 2027 budget, or possibly a two-year budget covering 2027 and 2028, including comprehensive reforms under the Economic Arrangements Law. Because the Finance Ministry is unlikely to win approval for that budget by the end of 2027, it will need to prepare a continuing budget. The timetable is tight, and the parties forming the coalition will have to begin acting even before the government is established.
Meanwhile, the Tel Aviv Stock Exchange seemed unfazed yesterday by Prime Minister Benjamin Netanyahu's stark weekend warnings about the crypto economy. Trading opened lower on the last session before the elections, after Netanyahu spoke of possible sanctions, cuts to US aid and a shift toward a shadow economy. The trend soon reversed and the market moved into positive territory, except for banking stocks.
The exchange has fallen since the start of the month amid election uncertainty. Traders now appear cautiously optimistic about the possibility of change.
