Israel's Economy Faces Dichotomy Amid War and Growth

Israel's economy is currently experiencing a "split-screen" reality, where optimistic indicators like a booming stock market, high tax revenues, and numerous tech exits coexist with pessimistic concerns such as soaring cost of living, a massive deficit, and demographic challenges. Both perspectives hold truth, reflecting a complex economic landscape.

Positive signs include robust growth despite an ongoing war, surprisingly high tax revenues, near-zero unemployment, record-breaking stock market performance, a strong shekel, continuous tech funding and exits, a thriving arms industry, a halt in housing price increases, and declining interest rates. High airport traffic and credit card spending data further suggest a rising standard of living.

Conversely, negative aspects are significant. Israel faces a national debt exceeding 1.4 trillion shekels, with a debt-to-GDP ratio nearing 70%, necessitating future tax hikes. Labor participation rates for Haredi men and Arab women remain low. Extensive reserve duty, estimated to cost tens of billions, disrupts the workforce. Concerns are rising about the future of the "Startup Nation" due to declining student performance in core subjects, while a strong shekel harms exporters and the tech sector. "Brain drain" is evident, with hundreds of doctors and engineers leaving in recent years. Rental prices are sharply increasing, and Israel ranks second globally in the "Big Mac index" for cost of living, with fuel prices at record highs and the highest child poverty rate among OECD countries.

Historically, Prime Minister Benjamin Netanyahu described Israel's economic challenge as the "fat man" (public sector) burdening the "thin man" (private sector). However, the public sector has undergone significant cuts, now under-resourced compared to OECD averages, with stagnant public sector wages since 2019. This underinvestment, coupled with political appointments over professional ones, contributes to shortages in education, infrastructure delays, and other service deficiencies.

The private sector, meanwhile, has become robust, largely driven by the tech industry, which accounts for a third of state tax revenues and over half of exports. However, this sector now also shoulders the immense costs of the ongoing war, estimated at over 420 billion shekels since October 7th. This expenditure has led to a significant shift in government priorities, with defense spending increasing from 12.6% to 19.8% of the government's total expenses between 2022 and the previous year, while spending on education and health has decreased. The government has also planned an additional 400 billion shekels for defense over the next decade, nearly doubling the defense budget compared to pre-war levels.

The primary challenge for the next government is to re-establish national priorities, focusing on citizens' needs. This involves potentially reducing the defense budget, transforming government ministries into citizen-focused entities rather than catering to political groups, cutting coalition funds and redundant ministries, and addressing pressing issues like the cost of living, traffic congestion, and the collapsing education system.