The Finance Ministry has warned that meeting the Defense Ministry's demands for tens of billions of shekels in additional military spending would require an immediate 4.5 percentage-point increase in the country's value-added tax, according to officials familiar with internal discussions.
The warning came after senior Treasury officials held a high-level meeting to discuss the Defense Ministry's request to raise the 2026 defense budget to 188 billion shekels (about $62 billion), up from the 144 billion shekels approved by parliament in the state budget earlier this year.
The Finance Ministry in Jerusalem
(Photo: Amit Shabi)
According to officials, the Defense Ministry is seeking at least 30 billion shekels (about $10 billion) more than the additional 15 billion shekels (about $5 billion) the Treasury has already agreed to provide.
The Defense Ministry argues that the extra funding is needed to sustain the prolonged deployment of large IDF forces in the Gaza Strip, southern Lebanon and parts of Syria, as military operations continue beyond earlier expectations.
Finance Ministry officials urged the Defense Ministry to accept the proposed 15 billion-shekel increase, warning that additional spending would come at the expense of the broader economy.
Senior Treasury officials said Israelis could not absorb another round of spending cuts and tax increases without significant economic consequences. They insisted the 2026 budget ceiling should remain intact to avoid imposing steep new taxes.
According to the Finance Ministry, accommodating the Defense Ministry's full request while maintaining fiscal discipline would require raising the VAT rate by 4.5 percentage points.
Such an increase would immediately raise the cost of most goods and services, further increase the cost of living and reduce consumers' purchasing power, officials said.
Treasury officials noted that the additional funding sought by the Defense Ministry amounts to roughly half of Israel's annual health budget.
"When we explain this to the Defense Ministry, we encounter indifference," a senior Treasury official said. "For them, money has no price."
The official accused the Defense Ministry of poor budget management, saying it had failed to implement efficiency measures despite repeated requests.
"They keep demanding more money, violate commitments and even exceed legal spending limits by making budget commitments beyond what has been approved," the official said. "The Finance Ministry has funded the war effort with billions of shekels and fully supported Israel's security needs. But if the economy is damaged as they propose, ultimately there will be no security either."
Defense Ministry officials rejected the criticism, saying they recognize the importance of funding civilian government services but argue that Israel's expanded military commitments require substantially higher spending.
Officials said maintaining larger military deployments in Lebanon, Gaza and Syria over the long term makes the requested budget increase unavoidable and that the armed forces cannot meet the government's operational requirements under the budget approved in March.