Knesset approves first reading of 2026 budget, averting snap election risk

The Knesset approved the first reading of the 2026 state budget by 62 votes to 55, delivering Prime Minister Benjamin Netanyahu’s coalition a temporary political reprieve and reducing the immediate prospect of snap elections. The vote follows a two-day delay that had threatened a boycott by ultra-Orthodox coalition partners over exemptions for yeshiva students.

Two headline numbers describe the plan. Cabinet sources frame the package as a NIS 662 billion framework; Knesset reporting presents a full spending total of NIS 811.74 billion (about $262 billion), which the Knesset breaks down into a regular/current budget of NIS 580.75 billion (about $187 billion) and NIS 230.99 billion (about $74.5 billion) in development and capital expenditure. The differing figures reflect how the plan is being presented: a cabinet-approved framework versus the Knesset’s total spending aggregation.

The vote hinged on last-minute resolution of a Haredi dispute over military-service legislation. Shas and Degel HaTorah voted for the first reading, while Agudat Israel opposed it; Agudat Israel dissenters included Yitzhak Goldknopf, Yaakov Tessler and Meir Porush. The split within the ultra-Orthodox bloc produced the two-day delay that prompted an emergency meeting called by Mr. Netanyahu on Jan. 26 to head off a boycott during the annual budget session.

Legislative procedure now moves the bill to committee for clause-by-clause examination, including the Economic Arrangements bill and any amendments to the Haredi exemption legislation. The finance committee, which will consider final amendments, is led by Haredi MK Moshe Gafni (Degel HaTorah). By law the budget requires three parliamentary approvals by March 31, with at least 60 days required between the first and final readings. If the Knesset does not complete the timetable, the law mandates dissolution and early elections within three months.

Economic policymakers have warned of real costs if the final budget is not passed. The Ministry of Finance and the Bank of Israel caution that a failure to approve a full budget would trigger a provisional mechanism that allocates 1/12 of the previous year’s budget per month. Officials say that would likely be inadequate given substantial 2025 transfers to the Ministry of Defense and evolving 2026 needs, creating risks for planned capital projects and defense financing.

Market and fiscal implications could be material if the process falters. Uncertainty around final spending totals and the timing of revenue measures in the Economic Arrangements bill could put upward pressure on borrowing costs and complicate cash management for ministries. The proposed NIS 230.99 billion in development and capital spending is a key variable: delays or cuts to that envelope would slow public investment plans and could weigh on growth expectations.

Politically, the first-reading passage buys the coalition time but not stability. Opponents have intensified criticism of Mr. Netanyahu’s leadership, and his legal and international standing remains a factor shaping political calculations; some observers note that his wanted status at the International Criminal Court has complicated electoral risk assessments. What follows is intensive committee work, two further floor votes spaced by at least 60 days and a high-stakes race to meet the March 31 deadline. Failure to do so would automatically trigger elections and a fresh round of fiscal uncertainty.