Israel’s Finance Ministry has started preparing the country’s next state budget despite uncertainty over when a new government will be formed.
The upcoming budget is expected to cover 2027 and 2028, with officials facing pressure to address rising defence expenditure, a substantial budget deficit and the possibility of reduced US military assistance.
Although the political situation has delayed progress towards the next budget, the ministry is developing proposals to raise additional revenue and adjust the tax system.
The work is being led by a group known as the Committee of Three, established by senior officials from the Finance Ministry and Israel Tax Authority without a cabinet decision or instruction from a minister.
The committee comprises Budgets Commissioner Maharan Froznfar, Chief Economist Dr Shmuel Abramson and Tax Authority Director Shay Aharonovich. Eight teams are working under their supervision, examining possible tax changes, the removal of exemptions and benefits, and measures to provide relief to workers and businesses.
Some proposals are expected to be submitted to the finance minister for consideration, while the committee’s full recommendations are anticipated in the coming weeks.
However, Finance Ministry officials told Walla that the proposals differ considerably in their chances of approval. Some are considered achievable, while others are unlikely to survive political opposition.
Immediate VAT Payments and Expansion of Israel Invoices
One proposal under consideration would introduce an online system allowing businesses to pay value-added tax immediately rather than following the current monthly reporting and payment process.
The Finance Ministry believes the change could reduce administrative pressure on business owners by allowing VAT payments to be settled without waiting for monthly reports.
To implement the system, officials are considering expanding the Israel Invoices programme so that it covers invoices from the first shekel.
The programme was introduced to tackle fictitious invoices used in large-scale tax evasion. Ministry officials believe expanding its coverage could eliminate the practice while making tax reporting and payments simpler.
The proposal remains under examination and has not been approved.
Rental Income Tax Exemption Could Be Scrapped
The ministry is also considering removing the tax exemption currently available to apartment owners earning rental income below a specified monthly threshold.
Under the existing arrangement, rental income of approximately NIS 5,600 per month is exempt from tax. The proposal would require landlords to pay tax from the first shekel received.
Finance Ministry sources estimate that ending the exemption could generate approximately NIS 1 billion annually for the state.
The change would require legislation in the Knesset and could face opposition from property owners whose rental income would be affected.
Other VAT-related proposals have different prospects. Ministry sources described a proposed tax on outbound flights from Israel as unlikely to be implemented and said a broad cancellation of VAT exemptions was also not expected to pass.
However, removing the VAT exemption on fruits and vegetables remains under consideration. Such a move could increase food prices and affect households already facing financial pressure.
Working Parents Could Lose Tax Credit Benefits
Another proposal involves reducing tax credit points available to working parents.
The Finance Ministry argues that the benefits have expanded significantly in recent years and now cost the state approximately NIS 14.5 billion annually.
At the same time, officials want to reduce income tax for people earning between NIS 25,000 and NIS 53,000 per month.
The ministry is considering using reductions in parental tax credits and benefits granted to residents of selected communities to help finance the proposed income tax relief.
A Finance Ministry source described reducing child-related tax credit points as necessary but acknowledged that approval would depend on the political composition of the next government.
The source also suggested that the position of ultra-Orthodox parties could influence the proposal, arguing that some ultra-Orthodox fathers do not earn taxable income or do not pay enough tax to benefit fully from the existing credits.
Property Tax on Vacant Land Could Return
The Finance Ministry is considering reintroducing an annual tax on vacant land, a measure that previously existed in Israel before being abolished in 2000.
Under the proposed arrangement, owners of undeveloped land would be required to pay an annual charge, particularly where the property is not subject to municipal property tax, known as arnona.
Officials believe the measure could increase government revenue while encouraging landowners to develop properties rather than hold them unused for extended periods.
From a professional standpoint, ministry officials consider the proposal highly feasible. However, they expect political resistance to make its approval more difficult.
Arab representatives and ultra-Orthodox parties opposed the tax in the past. The ministry believes the measure could face significant obstacles if either group becomes part of the next governing coalition.
Tax Benefits on Continuing Education Funds Under Review
Continuing education funds, known in Israel as keren hishtalmut, are also being examined as part of the proposed tax changes.
The Finance Ministry is considering reducing the tax advantages associated with these savings funds.
The review could affect tax benefits on new contributions as well as money already accumulated in funds that have matured and become accessible to their owners.
The proposal could affect savings held by many workers and is expected to face resistance from the Histadrut labour federation and other workers’ unions.
Defence Spending and Political Instability Threaten Budget Plans
None of the proposed measures has been approved, and their future will depend on the next government’s coalition arrangements and the identity of the incoming finance minister.
Finance Ministry officials are preparing several possible plans ahead of the formation of a new government, anticipating that there could be limited time to negotiate and approve a two-year budget covering 2027 and 2028.
Officials expect the process to move quickly once a new government takes office, particularly because of the pressure created by defence spending.
A further round of elections remains a major concern within the ministry. One official warned that prolonged political uncertainty could delay the budget process and worsen the country’s financial position.
The source said approving a new budget was urgent because of Israel’s substantial defence commitments, adding that every month without a functioning government and an approved budget increases the financial gap and creates further difficulties for the country.
