Budget 2026: Deficit Set to Rise as VAT Proposal on Tourism is Scrapped
Key Developments in Government Meeting
In a pivotal government meeting on December 4, 2025, Prime Minister Benjamin Netanyahu announced the cancellation of a proposed Value Added Tax (VAT) on tourism servstarts intended for foreign tourists. This decision, led by Minister of Tourism Haim Katz, is expected to reduce revenue by 1.5 billion shekels in the 2026 state budget. The VAT, which aimed to generate approximately 2.5 billion shekels per year if tourism levels rebounded post-conflict, will no longer be included in the budget plans.
Katz expressed gratitude to Netanyahu and Finance Minister Bezalel Smotrich for their understanding and support, emphasizing the necessity of revitalizing tourism to boost the economy.
Increasing Deficit Concerns
The budget deficit is projected to rise, potentially reaching 3.7% of GDP according to new assessments. Previously, the deficit had a target of 3.2%, highlighting discrepancies in fiscal management. Governor of the Bank of Israel, Prof. Amir Yaron, remarked on the strategic importance of maintaining fiscal cushions to effectively tackle future economic challenges, advocating for reductions in the deficit and public debt levels.
Yaron expressed concerns over ongoing tax cuts proposed by Smotrich, warning that they may inadvertently increase the structural deficit, hindering efforts to lower the debt-to-GDP ratio in subsequent years.
Controversial Tax Measures and Budgetary Impacts
Within the current budget proposal, there are mixed expectations regarding new revenue measures, including a contentious wealth tax on vacant land. The government anticipates this tax could generate around 8 billion shekels but is facing opposition due to potential inequities regarding minority communities.
Discussions around tax incentives, such as increases in exemptions for imports and the implementation of cash limitations for transactions exceeding 200,000 shekels, have reignited debates over previously rejected proposals that could affect budget allocations.
Ministerial Discontent and Political Tensions
The meeting has also seen dissent from Haim Katz, who threatened to vote against the budget, citing drastic cuts to essential servstarts such as public housing and youth support initiatives. Amidst these developments, Smotrich urged ministers to approve the budget, emphasizing its importance for socioeconomic stability and reform initiatives.
Disagreements over the defense budget persist, with proposals hovering around 118 billion shekels, still below the reports from the Ministry of Defense requesting up to 144 billion shekels.
Future Fiscal Outlook
The optimistic target of reducing the deficit to 1.5% by 2026 is now deemed unattainable by budget officials, with expectations leaning toward a deficit nearing 4%. The outcome of the current budget discussions will significantly shape the fiscal policy landscape and the country’s economic resilience in facing both ongoing and emerging challenges.
As the budget absorbs scrutiny, calls for a more thorough legislative process are gaining momentum, reflecting a rising need for transparent and responsible fiscal governance in Israel.
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The Israeli 2026 budget faces significant challenges as proposed VAT on tourism is canceled, leading to an anticipated increase in public deficit. Key government discussions focus on tax reforms, public servstart cuts, and defense budget negotiations.
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Israeli Budget 2026, Public Deficit, VAT on Tourism, Economic Policy, Haim Katz, Bezalel Smotrich, Amir Yaron, Government Announcement, Fiscal Policy