Weekly report, August 10, 2026: Israel's election campaign heats up; the budget "miracle" continues
Key points:
Israel's election campaign is advancing ahead of the October 27 election. The latest polls continue to show a highly divided political map. The current coalition, led by Likud together with the ultra-Orthodox and right-wing parties, has around 50 seats. The opposition has around 59-60 seats, but is divided among several parties. Gadi Eisenkot currently leads the bloc in the polls, alongside former Prime Minister Naftali Bennett, Avigdor Lieberman and the more left-leaning Democrats. The Arab parties have around 10 seats.
We think this structure creates a significant risk of political deadlock, similar to the repeated elections of 2019-2020. The main center-right opposition parties are reluctant to form a government that depends on the Arab parties. Unless the opposition wins more than 60 seats without them, Likud, together with the ultra-Orthodox and far-right parties, could effectively block the formation of an alternative government.
Turning to the economy, we received several interesting data points over the past week. The first was high-tech services exports, which continue to provide an important source of resilience, with strong exports and capital inflows. In contrast, the employment picture in the sector remains weak.
Economic activity is currently focused on the GDP data, which are expected to be published at the beginning of next week. However, the ongoing indicators point to continued growth in the domestic market in the second quarter.
On the fiscal front, the 12-month rolling fiscal deficit stood at 3.3% of GDP in July, unchanged from June. Tax revenues increased by 14.3% y/y in July and by 14.5% y/y in the first seven months of the year. Part of the strong increase reflects tax payments from Nvidia and other high-tech companies. At the same time, expenditure remains surprisingly contained. Defense spending increased by only 2.9% y/y YTD, while non-defense spending declined by 1.3%. Overall, total expenditure is up only around 2% y/y in nominal terms, compared with an 11% increase in revenues. We believe these numbers significantly strengthen the likelihood that the fiscal deficit will come in below the government’s 4.9% of GDP target. However, the main medium-term risk to Israel's fiscal outlook remains defense spending: the government approved an additional NIS 15bn for the defense budget beyond the amount allocated in the 2026 budget, while a further increase of around NIS 25bn appears likely before year-end.
We expect the Bank of Israel to keep the policy rate unchanged at 3.50% at its September meeting. While an easing in geopolitical tensions and oil prices could create room for another rate cut later this year, we continue to expect no more than one additional 25bp cut by year-end. The case for caution remains strong: the labor market is tight, wage growth remains elevated and the policy rate is already approaching its neutral level.
Now read on...
Register to sample a report