Israel could go through all of 2027 without an approved budget. The cost could be steep
With elections delaying preparations, the government may be forced to operate under a restrictive continuing budget. While this could curb spending and help reduce the deficit, it could also leave an NIS 80 billion gap between available funds and the government's actual commitments.
This past Sunday was the deadline for the government to submit its 2027 state budget proposal to the Knesset. The final two months of 2026 were supposed to be devoted to determining an appropriate budgetary framework for a country emerging from war, one that requires reforms to return to a path of growth and adapt to rapid technological change. But with elections approaching, the Ministry of Finance has not even begun preparing the budget. The formulation of the 2027 state budget appears increasingly remote, and the possibility that the year will end without an approved budget, as happened in 2020, no longer seems far-fetched.
The consequences could be significant. Structural reforms needed by the economy would be put on hold, government efficiency measures deferred, and many social and civilian programs left facing cuts. Yet there is a potential silver lining: a "continuing budget," under which the government operates on the basis of the previous year's allocations, acts as a constraint on spending and could therefore reduce both the deficit and the national debt.
Let's start with the timetable. In principle, the absolute deadline for passing a budget is March 31, 2027. However, a newly formed government is granted a special provision allowing it to pass a budget within 145 days of its formation. In practice, the period can be even longer, as the 145-day count excludes holidays and the eves of holidays. Thus, if a government were formed today, it would have until roughly the end of March to pass the budget. In reality, however, governments often take their time and are formed only at the last possible moment.
In the current situation, this last-minute scenario could unfold in two ways. In the first, the initial candidate tasked by the President with forming a government manages, at the last moment, to establish some kind of administration, whether a unity or minority government. That deadline would fall around December 20. The President has one week after the announcement of the election results to receive recommendations from the political parties and assign the mandate to a candidate. That candidate is given 28 days to form a government, with the option of an extension of up to 14 days, bringing the total to 42 days. Under this scenario, the 2027 budget could be approved as late as the end of May.
If the first candidate fails and President Isaac Herzog assigns the mandate to another member of Knesset, the second candidate receives an additional 28 days to try to form a government. If successful, that government could be established around January 20, potentially pushing budget approval to the end of June.
But these are far from the only possibilities. Many believe the most likely outcome is a return to the polls. In that case, members of Knesset are given another 21 days to try to form a government themselves. If they fail, another election must be held within 90 days. This would put a repeat election around mid-May 2027. If that happens, the likelihood that 2027 will end without an approved budget increases considerably.
Even in the more optimistic scenario, in which the first candidate succeeds in forming a government without using the available extensions, the process of establishing a government after an election typically takes around 40 days. Once formed, the government would have another 145 days to pass the budget, with holidays extending the deadline. In this scenario, approval could be pushed to early December 2027. If repeat elections take place, however, forming a government afterward could take around 60 days, making it highly likely that the entire year will pass without an approved budget.
In practical terms, all government ministries, as well as the Accountant General's Division at the Ministry of Finance, must prepare for a continuing, or provisional, budget lasting six months or longer. What does that mean? Under the State Economy Law, if a budget is not approved, a continuing-budget mechanism is triggered. The previous year's budget, in this case the 2026 budget, is adjusted for factors such as population growth and divided into 12 monthly allocations. The government is then authorized to spend one-twelfth of the resulting amount each month.
But that calculation does not tell the whole story. The 2026 budget was unusual because the Knesset designated certain expenditures as one-time allocations. These cannot serve as the basis for a continuing budget if the 2027 budget is not approved on time.
Consider the numbers. The 2026 budget was ultimately set at approximately NIS 699 billion. However, the Deficit Reduction Law stipulates, in rather convoluted language, that for the purpose of calculating the permitted level of government expenditure, the relevant 2026 budget base is effectively only around NIS 633 billion. That creates an initial gap of approximately NIS 66 billion compared with the full 2026 budget.
After adjusting for population growth, assumed to be around 1.3% in 2027, the amount available under the continuing-budget mechanism rises to approximately NIS 642 billion. Even then, it remains NIS 57 billion below the full 2026 budget.
One of the main reasons for classifying certain 2026 expenditures as one-time costs, including spending on "Operation Roaring Lion" and other defense-related outlays, was the assumption that they would not recur. But Operation Roaring Lion alone cost approximately NIS 35 billion, and it is highly likely that 2027 will also require substantial defense spending, even if it is formally classified as one-time expenditure. In other words, the continuing-budget framework is exceptionally restrictive. It would leave the government with approximately NIS 642 billion to spend throughout the year, or an average of about NIS 53 billion a month.
To understand just how difficult that would be, consider another Ministry of Finance document, known as the "Numerator." It sets out the government's firm spending commitments for the coming years. The latest version, published in July, puts the government's rigid commitments for 2027, those anchored in legislation and cabinet decisions, at approximately NIS 673.5 billion. That is NIS 31.5 billion more than the NIS 642 billion available under the continuing-budget framework.
Even that figure, however, falls short of the government's actual obligations. According to a Calcalist calculation published in June, those obligations amount to approximately NIS 720 billion, nearly NIS 80 billion more than the amount available under a continuing budget. The government is therefore heading toward a severe financial squeeze.
One could, in theory, argue for a different approach: why not simply spend 4% of GDP less? Why not manage 2027 with a budget NIS 80 billion smaller than the amount that would have been available had a regular budget been approved? What is wrong with saving money?
The problem is that the cuts would not necessarily fall where they are most needed. They could instead hit areas in which Israel is already under-investing. The main reason the continuing-budget framework is lower than the budgets of recent years is the assumption that defense spending, which surged during the war, would now decline. That assumption has proved increasingly difficult to sustain. The Ministry of Defense is demanding, and may genuinely need, substantial additional funding. When the defense establishment makes such demands, they tend to take priority, leaving civilian needs increasingly sidelined.
The problem goes beyond the cancellation of discretionary spending. Any continuing budget makes it difficult for ministries to fund additional initiatives, such as calls for proposals and pilot programs. In this case, however, the constraints could also affect substantive government commitments that are already in place. Many programs could be left in limbo, with ministries uncertain about whether they can proceed.
In a typical year, the Accountant General might exercise some flexibility, operating on the assumption that a regular budget would soon be approved. This time, however, Accountant General Michal Abadi-Boiangiu faces a much more complicated task, as the 2027 budget may not be approved until well into the year, or even retroactively.
It is important to distinguish between two different consequences of a continuing budget. The first is the government's inability to fund expenditures mandated by law or practical necessity. This is primarily an operational problem. Ultimately, the government and the Knesset will find a way to meet their obligations. If necessary, a majority could be assembled to approve a special budget package for defense needs.
The second consequence is harder to avoid. Nonprofit organizations could lose funding, government programs could remain in limbo, and 2027 could become a year in which few new initiatives are launched or evaluated. This is the real damage that repeat elections could inflict on the country, far beyond the direct cost of holding another election.
