Israeli banks to pay state $1 billion, lowering 2026 budget deficit target to 4.9% of GDP

By Steven Scheer

JERUSALEM, March 19 (Reuters) - Israel's commercial banks will pay the state a one-time tax of 3.25 billion shekels ($1.0 billion), which will lower the planned budget deficit target to 4.9% of gross domestic product from 5.1% in 2026, the Finance Ministry said on Thursday.

Under a compromise agreement with Israel's Banks Association, banks will pay 3 billion shekels in 2026 and the rest in 2027.

Finance Minister Bezalel Smotrich had threatened banks with a 15% tax on "excess" profits, accusing lenders of exploiting customers in the wake of a spike in interest rates over the past few years.

Israel's cabinet last week approved a revised budget for 2026 that includes boosting ⁠defence spending by 32 billion shekels ​this year to help finance the Iran air war, while raising the budget deficit ​target to 5.1% of GDP from 3.9%.

The 2026 budget must be approved by parliament in its two final votes by the end of March or new elections will be triggered. Government officials have said they expect the budget to be approved in time.

OPENING BANKING SYSTEM TO COMPETITION

Also on Thursday, a parliamentary committee approved a plan to open the banking system to competition and enable the establishment of small banks. It still needs final approval by the full plenum.

The ministry-led reform aims to increase competition in the banking system, lower interest rates for small and medium-sized businesses and households, and improve credit conditions and financial services for the public, it said.

The ministry estimates the reform would save the public billions of shekels and "represents a significant step in tackling the cost of living."

Bank of Israel Governor Amir Yaron welcomed it, saying "the promotion of competition in the banking system" was a central strategic goal.

($1 = 3.1239 shekels)