Israel’s 2026 Budget Reveals The Stresses Of The War And Internal Politics

At the  eleventh hour,  the Israeli parliament, the Knesset, passed the national budget for 2026. Failure to do so by March 31st  would have triggered a snap election. As with any national budget, there is a sense of relief, but at the same time there is considerable  debate over specific allocations and the longer term fiscal well-being of the nation. The government secured a budget of NIS 699 billion ( $ 221 billion), a historic high.

As expected, the defense sector is the primary beneficiary of this  budget. Overall, the defense budget was set  at $45.8 billion, recognizing that expenditures could go as high as $57 billion, not knowing how long the war will last. Note that this  figure  is twice the allocation in place prior to  the Oct 7th 2023, start of the Gazan war. The defense industry is turning out to be a major source of economic growth, of exports and of new technologies. In 2025, the defense stocks were outstanding performers on the Tel Aviv stock exchange. Elbit Systems (ESLT) reached a market cap of $ 34 billion, and reports an order book of $28 billion, mostly from international sales . The government is considering selling shares in other defense companies to capitalize on the strength of the industry. In sum, the defense industry is very bullish, as its backlog of orders from home and abroad are setting record levels. 

The high-tech sector continues to be the primary driver of the Israeli economy, accounting for around 10-15% of employment and approximately 50% of all exports. In 2025, the industry attracted $15.6 billion from  private sources  for start-ups. M&A deals and  exits had a banner year, estimated to be around $75 billion.  In conjunction with the defense budget, the government set aside an additional  $ 1 billion to expand the artificial intelligence program as well as investment in  “ deep tech” scientific research. Overall, the tech sector remains buoyant as it shifts into high value segments of AI and deep tech.

Financial market reaction has been relatively positive. The shekel remains at an historic high, 0.32 USD supported by  current account surpluses  and high levels of capital inflows from abroad.. Overall, the deficit -to- GDP is expected to reach 5% and debt-to- GDP to hit 70%. While these are substantial increases from 2022,  these ratios are well within acceptable levels. Hence the rating agencies  have not made any changes to Israel’s credit standing. The markets recognize that the cost of the war is manageable and do not expect any difficulty in the government’s ability to finance the deficit.

The budget set out the issues for the forthcoming elections, slated for October. A  sizable opposition decried at the last minute an increase for the ultra -  Orthodox  community from $1.3 billion to $1.65 billion, in a dramatic late-night vote on amendments. 

Separately, the Bank of Israel decided to keep its benchmark interest unchanged at 4%. The Bank argued that the current  inflation rate of 2% will likely continue, although it did acknowledge the  potential risks of a spike originating in the world energy markets. The Bank officials maintain their relative optimistic forecast, featuring a significant recovery once the Iranian war is concluded. GDP is forecasted to grow by 5.2% for the year as whole.