Yesh Atid, Likud's largest coalition partner, may leave the government if Prime Minister Benjamin Netanyahu does not ensure that Finance Minister Yair Lapid's plan to cancel VAT on first homes passes into law.
Coalition chairman Yariv Levin, who is also the Likud Knesset whip, announced on Tuesday that he was freezing the passage of the "Zero VAT" law, even though it had been rubber-stamped by the Finance Committee on Monday.
Mr Levin would not say whether he was acting on instructions from the prime minister, but said: "It's not clear how we can add money to the defence budget without raising taxes as Lapid is demanding and at the same time allocate large funds to the 'No VAT' plan."
Mr Lapid responded saying that he preferred to "dismantle the government and not raise taxes" and that new taxes would be punishing the middle and working classes.
If the prime minister blocks his VAT law, he said the government would "break up anyway". Others in his party were more blunt, saying that if Mr Netanyahu dictates a new state budget, they will leave the coalition.
I prefer to dismantle the government and not raise taxes Yair Lapid
Behind the scenes, there has been a three-way struggle between the Defence Ministry, which is demanding more cash to cover the cost of the Gaza operation and confront new threats; the Finance Ministry, which is opposed to these demands; and the Bank of Israel, which favours higher taxes instead of sourcing the funds for the military and the "No VAT" plan in the reserve budget. Mr Netanyahu has yet to come out publicly on any side.
Another source of tension in the cabinet is the ongoing feud between Defence Minister Moshe Yaalon and Economic Minister Naftali Bennett over the Gaza operation.
Mr Bennett is claiming to have averted a tragedy by "demanding over and over to embark on an operation to destroy the tunnels. There were politicians and security officials who stopped the operations and belittled the threat, leaving the people in the south vulnerable to strategic terror."
Mr Yaalon counter-attacked saying that "some ministers" had caused Israel damage during the war by making statements that gave Hamas leaders reason to think that Israel was desperate, thereby prolonging the conflict.