Finance Ministry Finalizes NIS 10 Billion Austerity Package for Incoming Government

Israel’s Finance Ministry has completed a comprehensive economic plan for the incoming government, a package designed to generate NIS 10 billion in new revenue. The strategy focuses on closing the deficit and funding a projected defense budget of NIS 187 billion. Officials coordinated with the Bank of Israel to draft these measures, ensuring the next administration has a clear framework for fiscal management from the outset.

The most immediate impact on consumers will be the end of a gasoline price subsidy implemented by Finance Minister Bezalel Smotrich two months ago. The subsidy, which cost the state more than half a billion shekels, expires Saturday night. Consequently, the price of self-service 95-octane gasoline is expected to jump by at least NIS 1 per liter to reach NIS 8.90. While a 1% drop in the dollar against the shekel may slightly soften the blow, higher fuel costs are likely to trigger price increases in electricity, water, and public transportation, which have been frozen until now.

To meet the revenue targets, the ministry proposes several new taxes and reporting requirements. Residential property rental income will be subject to taxation from the first shekel, eliminating the current monthly exemption of NIS 5,654. The plan also includes a levy on international content providers, often called the Netflix tax, and a reduction in tax benefits for pension contributions. Additionally, the ministry recommends removing VAT exemptions for specific sectors that currently benefit from them.

These legislative changes have faced delays in the Knesset Finance Committee, but the incoming government will be tasked with enacting them. The broader macroeconomic strategy involves sharp cuts to coalition funds and efficiency measures across all government ministry budgets. This approach aims to free up resources for the expanded defense budget without raising the debt-to-GDP ratio further.

The primary challenge for the new coalition will be passing the 2027 budget, or potentially a two-year budget spanning 2027 and 2028. This budget must incorporate reforms under the Economic Arrangements Law. Because approval by the end of 2027 is unlikely, the Finance Ministry will likely need to prepare a continuing budget. The tight timetable means coalition parties must begin coordinating on these policies before the new government is formally constituted.

Market reactions to the political shifts remain mixed. The Tel Aviv Stock Exchange opened lower yesterday, the final trading day before the elections, reflecting concerns raised by Prime Minister Benjamin Netanyahu regarding the crypto economy. However, trading reversed course, and the index moved into positive territory, excluding banking stocks. Traders appear cautiously optimistic about the potential for political change, despite the exchange’s decline earlier in the month.

The existing automatic budgetary provisions will keep income tax brackets, tax credit points, and National Insurance contributions frozen for 2027. The current VAT rate will also remain unchanged during this period. These temporary measures provide a baseline for the incoming government’s more extensive reforms, which are intended to stabilize the fiscal framework for the next several years.