A huge budget hole, starved public systems demanding money simply to keep functioning and an urgent need for painful measures that will reach into the pocket of every Israeli: This is the inheritance awaiting the next government after the October election, regardless of who forms it.
The Netanyahu government is leaving behind that legacy after years of war, repeated breaches of the state budget framework and billions of shekels diverted to coalition spending.
At the heart of the current economic crisis is the enormous increase in defense spending. Prime Minister Benjamin Netanyahu’s decision to add tens of billions of shekels to the current defense budget before the election, while also setting aside plans for as much as 400 billion shekels in additional defense spending over the next decade, has placed a crushing burden on already depleted state finances.
The security needs are clear. The financing is not.
No sustainable source of funding
The long-term commitments were made without sustainable revenue sources, creating a structural deficit that threatens to consume much of Israel’s future economic growth.
Senior Finance Ministry officials have already made the message clear internally and in official discussions: There are no miracles. Financing the new commitments will require measures on a scale Israel has not seen for decades.
Tax Authority Director Shay Aharonovich has acknowledged as much. “2027 is expected to be a very difficult year that will require urgent and exceptional measures,” he said.
The next government will therefore have to reach deep into the public’s pockets. Treasury officials are already considering a series of politically painful steps, many of which have been proposed repeatedly in the past but successfully blocked.
This time, there may be far less room to avoid them.
One option is eliminating longstanding VAT exemptions. The exemption enjoyed by the southern resort city of Eilat is again under consideration, as is the VAT exemption on fresh fruit and vegetables, a measure dating back decades that, if removed, would immediately raise the price of basic foods and hit lower- and middle-income households particularly hard.
Tourism could lose tax benefits as well. Foreign visitors currently do not pay VAT on hotel stays, an exemption the Treasury sought to eliminate last year before Tourism Minister Haim Katz blocked the move. That victory may prove temporary.
Another major battle could center on tax exemptions for advanced-training funds, known in Israel as keren hishtalmut, one of the last widely used medium-term savings vehicles whose investment gains remain tax-free for employees.
Israel’s Histadrut labor federation has fought fiercely against previous attempts to remove the benefit. But a weakened labor movement may find it much harder to stop the measure next time.
VAT, income tax and National Insurance could all rise
The plans being examined go beyond canceling exemptions.
A direct increase of one or two percentage points in VAT is also under discussion, a move that would raise the price of virtually every product and service. Higher income-tax rates are another possibility, reducing workers’ take-home pay, alongside increased National Insurance contributions.
Those additional National Insurance payments would not only help close the immediate fiscal gap. They may also be needed to address the institution’s growing actuarial deficit, which raises serious questions about its long-term ability to finance old-age, disability and long-term care benefits.
And this is only one part of the inheritance.
(Photo: Elad Gershgon)
While billions flowed toward defense and politically favored constituencies through expansive coalition allocations, major national infrastructure and public services were left with enormous unmet needs.
The Tel Aviv metropolitan area’s long-planned metro system, arguably Israel’s most important transportation project, continues to crawl forward. The next government will have to accelerate it while finding tens of billions of additional shekels before road congestion becomes even more damaging to productivity.
Former National Economic Council chairman Prof. Manuel Trajtenberg once described the danger simply: “One day all the cars in Israel will be standing side by side on the roads and the entire country will be one giant traffic jam.”
Education, health and welfare need money too
The social systems are in little better shape.
Public education continues to suffer declining achievement levels and deteriorating teaching quality, while more students are being educated without a full core curriculum. Reversing those trends will require both structural reform and substantial investment.
The health system is stretched close to its limits, burdened by structural deficits, shortages of hospital beds and medical staff, and increasingly long waiting times.
Welfare services also remain far behind standards in many other developed countries, leaving vulnerable populations without adequate support.
The result is a fiscal trap. Israel has committed enormous sums to defense at precisely the moment when its transportation, education, health and welfare systems also require major investment.
That combination of defense obligations, neglected infrastructure and delayed reforms has created a ticking economic time bomb.
The government taking office at the beginning of next year will not be able to solve it with cosmetic changes. Whether Benjamin Netanyahu returns to power or an opposition leader such as Gadi Eisenkot replaces him, the next prime minister will be forced to act as the responsible adult.
That means raising taxes, canceling exemptions, changing spending priorities and taking measures almost guaranteed to anger voters.
Israelis are likely to pay a very heavy price for years of fiscal indiscipline and economic populism. Repairing the damage will be long, painful and politically difficult.
That, more than any campaign promise, may be the real inheritance awaiting whoever wins in October.