Israel’s political crisis and its fiscal implications for 2025–2026

ISRAEL - In Brief 18 Jul 2025 by Sani Ziv

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Prime Minister Netanyahu’s government lost its parliamentary majority this week, after the two ultra-Orthodox parties—Shas and United Torah Judaism—announced their resignation from the government. The move came after the coalition failed to submit a draft law that would exempt most ultra-Orthodox men from mandatory military service. Although both ultra-Orthodox parties stated that they would continue supporting the coalition in Knesset votes, their resignation from the government does not signal its immediate collapse. However, their departure is a serious blow to the government’s stability. Netanyahu is now left with only 50 seats, far from the 64-seat majority he formed after the last election. The crisis stems from an ongoing dispute over the future of military exemptions for Haredi yeshiva students, which has drawn sharp public criticism, especially since the Gaza war began. The exemption policy dates back to the early years of the state and has long been a source of social and political tension. Over the past two decades, multiple attempts to legislate a permanent draft law have failed, with Israel’s High Court repeatedly striking down laws that allowed mass exemptions as unconstitutional. The most recent version of the draft law expired in 2023, and efforts to pass a new law have stalled due to deep divisions within the coalition. The Gaza war has reignited public pressure for a more equitable distribution of the military services, placing the ultra-Orthodox parties and Prime Minister Netanyahu under growing scrutiny. Our assessment: The Knesset is scheduled to begin its annual three-month summer recess at the end of July, during which the government’s ability to...