Ministries told to cut budgets to fund higher defense spending

The Ministry of Finance contacted the director generals of government ministries this morning demanding they present streamlining measures to be approved by the cabinet together with the 2026 budget proposal in two days, due to the budgetary demands of the Ministry of Defense. Prime Minister Benjamin Netanyahu has made it clear that he plans to increase the defense budget by NIS 250-350 billion over the next decade.

A letter signed by “Budget Division Management” says, “Discussions are currently taking place on the Defense Ministry’s budget for 2026 and the following years. The discussions show that defense needs will be particularly high. In order to prioritize the Defense Ministry’s budget, maintaining a sustainable fiscal policy will require pushing back the rest of spending in the state budget.”

The letter continues, “After three years in which the state budget deficits have widened dramatically due to the war, it is of crucial importance to gradually reduce the debt-to-GDP ratio, which has soared by almost 10% since the outbreak of the war. This is in order not to damage investor confidence and the state’s credit profile, which could lead to an economic volatility.”

The letter added, “Compared with the pre-war years, the composition of spending in the state budget has changed beyond recognition, with defense and interest spending soaring to an especially high level on a permanent basis, so that no relief is expected in these areas of spending in the foreseeable future. Thus, the erosion of the share of defense and interest spending from the budget, which characterized the two decades preceding the war and thus ‘made room’ for civilian spending, is no longer a part of the state budget, but rather the opposite. Defense and interest spending significantly limit the government’s ability to increase other spending.”

The Budget Division says the streamlining proposals will “hopefully” help determine balanced and responsible budget frameworks.

Differences of tens of billions of shekels

During the budget discussions between the Ministry of Finance and Ministry of Defense, the differences ranged from NIS 40-50 billion just for 2026. The amount agreed upon between the parties stands at NIS 93 billion shekels, but does not include additional Defense Ministry demands, including reinforcing current defense at a cost of NIS 37 billion.

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In discussions held with Netanyahu, the parties were told to continue negotiations on the 2026 budget, but a significant gap was reached here on the defense budget for the coming years, and Netanyahu announced that he plans to increase the defense budget between 2027 and 2037 by NIS 350 billion, compared with the NIS 133 billion recommended by the Nagel Committee, which examined the defense budget and submitted its conclusions in November 2024. The Ministry of Defense itself is asking for NIS 450 billion over the next 10 years.

After Netanyahu’s decision, sources in the Ministry of Finance Ministry said, “The direction the Prime Minister is taking without coordination is creating budgetary gaps that it is not clear how he intends to bridge. Imposing taxes on the scale that this policy will require will lead to stymying the Israeli economy and an impossible tax burden on Israeli citizens. The Minister of Finance has no intention of accepting the move. Things are expected to get complicated between the Prime Minister and the Finance Minister, who is demanding answers from the Prime Minister.”

The Finance Ministry’s strategy for the next decade is aimed at reducing the debt-to-GDP ratio by 0.8% each year to return it to its pre-war level in a decade. To that end, the deficit needs to be around 3.2%, and it is doubtful that this will happen given the demands of the Ministry of Defense.

Now it appears that the Finance Ministry is pulling out another card before the election budget, and instead of negotiating budget increases in line with the election year budget, it is seeking streamlining measures from government ministries, after years in which their needs were pushed aside in favor of the country’s defense needs.

Published by Globes, Israel business news – en.globes.co.il – on December 2, 2025.

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