These days, the state budget was supposed to enter the home stretch ahead of votes in the Knesset. In the meantime, however, there is no government in sight, no one knows when one will be formed, and a new budget seems very far off. Despite the political uncertainty, the Finance Ministry is already working on the next budget, which will likely be a two-year budget for 2027-2028. The task is not simple: Dealing with massive defense expenditures, the heavy deficit, and the possibility of a reduction in US defense aid. To finance all of this, the ministry will need to find a great deal of money.
Leading the work is the "Committee of Three," which was established on the initiative of senior officials in the Finance Ministry and the Israel Tax Authority, without a cabinet decision and without a minister's directive. Its members are Budgets Commissioner Maharan Froznfar, Chief Economist Dr. Shmuel Abramson, and Tax Authority Director Shay Aharonovich. Operating under them are eight teams examining changes to the tax system, the cancellation of exemptions and tax benefits, alongside reliefs for workers and businesses.
Some of the proposals are supposed to reach the finance minister for review in the coming days, and the full recommendations are expected to be published in the coming weeks. However, there is a big difference between what the officials want to do and what the next government will be willing to approve. Finance Ministry officials told Walla that some of the measures can certainly be implemented, while others are mostly fantasies that are unlikely to pass the political test.
Immediate VAT payment
One of the proposals being examined is a transition to immediate value-added tax (VAT) payment via an online system, instead of the monthly accounting customary for businesses. According to the sources, the move is intended to ease the burden on business owners, who will not have to wait for the monthly report to settle VAT payments. To carry it out, the Finance Ministry wants to expand the "Israel Invoices" system so that it applies to invoices from the first shekel.
The system is designed to combat fictitious invoices, which enable tax evasion on a massive scale. Finance Ministry officials claim that expanding it could eliminate the phenomenon entirely, while simultaneously simplifying reporting and payment. However, in this case too, it is a proposal that still requires examination, not a decision that has been made.
Another proposal considered more practical is canceling the tax exemption on rental income from apartments. Apartment owners enjoy an exemption on monthly rental income up to a ceiling of about NIS 5,600, and the Finance Ministry is examining the possibility of canceling it and collecting tax from the first shekel. According to the sources' estimates, the move could bring about NIS 1 billion a year into the state coffers.
Changing the existing exemption would require legislation in the Knesset, and opposition is expected here as well. It represents a direct hit to the income of many apartment owners, and it is uncertain whether politicians will want to confront them.
Regarding the cancellation of VAT exemptions, the Finance Ministry already understands that not everything is possible. According to the sources, the proposal to impose a tax on outbound flights from Israel is in the realm of fantasy, and a sweeping cancellation of VAT exemptions is also not expected to pass. By contrast, canceling the exemption on fruits and vegetables is definitely worth discussing, even though it is a move that could raise prices for consumers and primarily hurt families struggling to make ends meet.
Tax credit points for parents at risk of cuts
Another proposal that could spark an uproar is reducing tax credit points for working parents. The Finance Ministry claims that the benefits granted to parents in recent years have grown far beyond measure, and they already cost the state about NIS 14.5b. a year.
At the same time, the Finance Ministry wants to reduce income tax for those earning between NIS 25,000 and NIS 53,000 a month. The ministry intends to finance the relief for high earners, at least in part, by reducing tax credit points for parents and tax benefits granted to residents of certain communities.
A Finance Ministry source claims that reducing child tax credit points is an unavoidable step, but the chance of carrying it out depends on the composition of the next government. According to him, if the haredim (ultra-Orthodox) are partners in the coalition, they might not specifically oppose reducing tax credit points for fathers. The reason, he claims, is that a large portion of haredi fathers do not work, or do not pay enough tax to enjoy the full benefit, so cutting it would not necessarily affect them.
Property tax on vacant land is also back on the table. This is a tax that was customary in Israel in the past and was canceled in 2000. The Finance Ministry wants to reinstate it in an updated version and require owners of vacant land to pay an annual fee. The idea is that anyone who holds land without building on it, and does not pay municipal property tax (arnona) on it, will begin paying tax.
Professionally speaking, Finance Ministry officials say, the move has high feasibility. It could bring money into the state coffers and encourage landowners to build on their land instead of holding onto it for years. Politically, however, the chance of approving it is much lower. In the past, both Arab representatives and the haredim opposed the tax, and the Finance Ministry estimates that if either of them is part of the next coalition, it will be very difficult to pass it. Thus, a tax considered justified and practical by professionals could be shelved due to political opposition.
Continuing education funds (keren hishtalmut) are also on the list. The Finance Ministry is examining the possibility of reducing tax benefits, not only on new deposits into the funds, but also on money already accumulated in funds that have matured and become liquid. This is a significant change that could hurt the savings of many workers, and it is expected to provoke fierce opposition from the Histadrut labor federation and workers' unions.
The biggest danger to the budget: Another round of elections
All of these proposals are at various stages of formulation, and none of them has yet been approved. Finance Ministry officials make clear that even if they succeed in preparing an orderly and detailed plan, everything will depend on the composition of the coalition and the identity of the next finance minister. What looks logical to one government could be rejected immediately by another.
Therefore, the Finance Ministry is trying to prepare as many plans in advance as possible. The assessment is that the moment a new government is sworn in, a race will begin to pass a two-year budget, without much time for discussions and deliberations.
Another source in the Finance Ministry expresses deep concern over the possibility that Israel will be dragged into another round of elections, and perhaps even more than one. According to him, passing a new budget is an urgent need, mainly because of the massive defense expenditures. Every month that passes without a government and without a budget deepens the budgetary hole and harms the country.