# Israel's next government inherits a 25 billion shekel defense budget gap and military plans worth hundreds of billions

The Bank of Israel has warned that higher defense spending without offsetting measures will stop the debt-to-GDP ratio from falling, and police rejected Likud's claim that Arab parties rigged the vote.

- Published: 2026-10-29T05:12:07.061Z
- Canonical: https://polylog.news/2026-10-29/israel-s-next-government-inherits-a-25-billion-shekel-defens
- Publisher: Polylog (Global desk)
- Section: macro
- Sources: [Globes](https://www.globes.co.il/news/article.aspx?did=1001560991#utm_source=RSS), [RT](https://rt-english.com/news/647981-likud-arab-fraud-claim-rejected/?utm_source=rss&utm_medium=rss&utm_campaign=RSS), [Africanews](http://www.africanews.com/2026/10/28/palestinian-citizens-of-israel-hope-election-results-bring-change/)

The defense budget will be the main economic decision facing Israel's next government, the Hebrew-language business daily [Globes reported](https://www.globes.co.il/news/article.aspx?did=1001560991#utm_source=RSS) under the headline "400 billion shekels is only the beginning." Globes wrote that an immediate gap of 25 billion shekels has put the Finance Ministry and the defense establishment in direct conflict. The larger problem, it said, will be funding the Israel Defense Forces' buildup plans, which run to hundreds of billions of shekels, without a multi-year plan for the military. The newspaper cited warnings from the governor of the Bank of Israel that a jump in spending without adjustments would prevent a fall in the ratio of debt to gross domestic product (GDP) and would hurt citizens.

Israeli financial reporting puts numbers on that warning. In a July scenario, the Bank of Israel estimated that up to 25 billion shekels in additional defense spending would raise the defense budget to about 183 billion shekels and lift the deficit to about 5.5% of GDP, compared with 4.9% in its base case, [Calcalist reported](https://www.calcalist.co.il/local_news/article/syu9zujb11e). The central bank estimated the extra spending could add about 0.3 percentage points to inflation.

The budget fight will take place during disputed coalition talks. Israeli police said they found no evidence to support Likud's claim that Arab parties rigged the parliamentary election, [RT reported](https://rt-english.com/news/647981-likud-arab-fraud-claim-rejected/?utm_source=rss&utm_medium=rss&utm_campaign=RSS). Palestinian citizens of Israel expressed optimism after Arab parties performed strongly, [Africanews reported](http://www.africanews.com/2026/10/28/palestinian-citizens-of-israel-hope-election-results-bring-change/). That result makes the parliamentary arithmetic for any coalition more difficult. Globes also noted, in a separate consumer report, that the shekel has weakened.

## What this means

Israel's sovereign risk depends on whether the next coalition finances a multi-year military buildup with taxes and spending cuts or with debt. A deficit near 5.5% of GDP and a debt ratio that stops falling would push the Finance Ministry to borrow more. That puts upward pressure on long-term shekel yields and on the risk premium foreign investors demand for Israeli bonds, and it would leave the central bank less room to cut rates if defense spending adds to inflation. A fragmented parliament makes tax increases harder to pass, so debt becomes the most politically convenient option. The consensus expects a war-related risk premium on Israel to fade after the election. The budget numbers suggest it will persist for structural reasons. After 1973, Israel ran large defense-driven deficits that ended in the inflation of the early 1980s and the 1985 stabilization plan. The desk's read is that the 2027 budget will exceed the Bank of Israel's base-case deficit and that ratings agencies will keep a negative outlook through next year. A coalition agreement that includes specific tax measures to fund defense would prove this wrong.

## What to watch

- The coalition agreement's fiscal terms. Specific tax or spending offsets would show the next government taking the central bank's warning seriously.
- Ratings agency statements on Israel after a government forms. A downgrade or a change of outlook would raise borrowing costs across Israeli issuers.
- The shekel against the dollar during coalition talks. Further weakness would add imported inflation on top of the defense spending.