Israeli Prime Minister Benjamin Netanyahu is still without a coalition more than a month after winning parliamentary elections, but amid the political horsetrading the next government's agenda is coming into view.

While the Israeli leader initially called for a super-sized coalition to grapple with foreign foes like Iran and regional instability, it increasingly appears that a divisive domestic issue – entitlements for the ultra-Orthodox – will be a top priority. That will push the peace process further onto the back burner as President Obama prepares to make his first visit to the country as president, which many hope will spur a renewed push for Israeli-Palestinian peace.

Mr. Netanyahu’s coalition-building effort has been rattled by an unexpected alliance between two ascendant political parties which, despite their contradictory views on the Palestinians, have doggedly pursued a joint demand to end draft exemptions for the ultra-Orthodox, or Haredim.

With the deadline for coalition negotiations two weeks away, it looks like he won’t be able to form a majority government without them.

The axis between Yesh Atid, a centrist party that supports a Palestinian state, and the pro-settler Jewish Home party, which believes in annexing most of the West Bank, brushes aside a longstanding divide between hawks and doves. It also shows starkly that the Israeli public is more focused on socioeconomic issues than Arab-Israeli peace.

"This is a strange and wondrous moment in Israeli history…. For the first time we have a coalition of parties driven by a domestic agenda," says Yossi Klein Halevi, a senior fellow at the Shalom Hartman Institute in Jerusalem.

"The political system has always deferred dealing with long-festering domestic problems because of external threats and emergencies. Those threats certainly exist today, but what has changed is that the Israeli public is demanding of its leadership that it learn how to walk and chew gum at the same time: 'Deal with our external threats, but don’t defer dealing with our internal problems.' "

The shift reflects both exhaustion and pessimism about Israel’s ability to solve the decades-old conflict with the Palestinians, even amid rising fears that a new intifada, or uprising, might erupt and that the two-state solution could be rendered unworkable. That change coincided with a rising concern about bread-and-butter issues, which first came to dominate the public agenda in summer 2011, when hundreds of thousands of Israelis staged street demonstrations over cost-of-living issues.

'Sharing the burden'

During the election campaign, Yesh Atid championed the middle class and the value of "sharing the burden," a code for ending government entitlements to the ultra-Orthodox that allows the burgeoning Israeli group to stay out of the army and the workforce in favor of religious study. Jewish Home, a party of Israeli religious nationalists, promised to block surging housing prices, and also supports integration of the ultra-Orthodox into the mainstream.

In coalition negotiations, both parties focused on reforming the draft, an issue that bridges much of the right and left, secular and religious.

Political commentators yesterday speculated that Netanyahu would partner with Yesh Atid and Jewish Home, while leaving the ultra-Orthodox out of the coalition.

"Some people believe that real peace isn’t expected, and because of that we can deal with domestic issues like the draft, and entitlements for the ultra-Orthodox," says Avraham Diskin, a professor of political science at Hebrew University in Jerusalem.

When Yesh Atid and its charismatic leader Yair Lapid surprised pollsters with a second-place finish last month, it stoked hope that he would help moderate government policy toward the Palestinians and restart peace negotiations after being stalled for five years.

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But cooperation with the Jewish Home seems to indicate that is not Mr. Lapid's priority. In a gesture to his ally, Lapid recently asked parliament members from his party not to participate in a tour sponsored by a pro-peace activist group. It was a reminder that the peace process was barely discussed during the election, and that parties that championed it fared poorly.

"The Israeli public didn’t vote on the two-state solution. It wasn’t a topic in the election," says Tal Shalev, a political reporter for the Walla news website. "The two big issues are the economy and the Haredim."