Ministry of Finance warns 4.5% VAT rise to 22.5% may be needed to meet defence spending
Israel’s Ministry of Finance has warned that the country’s standard VAT rate could need to rise by an unprecedented 4.5% to 22.5% if the government agrees to the military’s full request for additional defence funding.
A possible 2026 Israeli defence VAT rise at the original 2026 budget talks had been avoided in December 2025.
2026 Defence Budget row
The warning follows a dispute between Israel’s Finance Ministry and Defence Ministry over the 2026 defence budget. The military is seeking up to NIS 188 billion, significantly above the NIS 144 billion already approved by parliament, citing the continued costs of operations in Gaza, Lebanon, Syria, Iran and Yemen.
According to Treasury officials, funding the request while maintaining fiscal discipline would require a dramatic increase in VAT. Such a move would immediately increase the cost of most goods and services, adding further pressure to Israel’s already elevated cost of living. Officials argued that households would struggle to absorb another round of tax rises following previous wartime measures.
The proposal is currently only a fiscal warning rather than a formal tax measure.
Israel has repeatedly considered VAT increases since the outbreak of the current conflict as defence expenditure has risen sharply. The latest debate highlights the growing tension many governments face between financing higher security spending while limiting the impact on consumers and businesses.
