Strong tax revenues keep the fiscal deficit low in August, but defense spending could push it higher by year-end

ISRAEL - In Brief 09 Sep 2026 by Sani Ziv

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Israel’s fiscal data for August continued to tell a positive story. Tax revenues continued to show strong and surprisingly positive growth, while the fiscal deficit remained well below earlier expectations. The numbers show a 12-month rolling fiscal deficit of 3.2% of GDP in September 2025-August 2026, compared with 3.3% in July. Tax collections increased by 13.9% in January-August 2026 and, on a constant tax-rate basis, by 9.3% in real terms compared with the same period last year. Direct-tax revenues increased by a strong 12.1%, a clearly positive development, while indirect-tax revenues also continued to improve, rising by 5.5% over the same period. On the expenditure side, spending growth remains moderate relative to the strong increase in revenues. Defense spending increased by 10.9% YTD, while non-defense spending declined by 0.1%. Overall, total expenditure rose by around 3.2% y/y in nominal terms, well below the 13.9% increase in revenues. The chart below shows the cumulative government budget balance during 2024-2026. Fiscal performance has improved in 2026, reflecting strong tax revenues and restraint in civilian expenditure.  Cumulative government budget deficit, NIS bnSource: Ministry of Finance, Accountant General Department; Macro Analytics calculations and forecastsThat said, we continue to see defense spending as the main medium-term fiscal risk. The government is still considering an additional increase of up to NIS 25bn in the 2026 defense budget, beyond the NIS 15bn already approved. If fully approved, the additional spending would bring the defense budget to around NIS 183bn and could push the 2026 budget deficit toward 5.0% of GDP.Additionally, the...