Israel's Economy Faces Dual Reality of Growth and Crisis

Israel's economy is currently experiencing a "split-screen" phenomenon, presenting a contradictory picture of robust growth alongside significant challenges. Optimists point to a booming stock market, high tax revenues, and a steady stream of tech company exits. Conversely, pessimists highlight soaring living costs, a substantial national deficit, and demographic hurdles. Both perspectives hold validity, reflecting the complex economic landscape.

The positive indicators include a resilient economy growing despite an ongoing war, tax revenues exceeding forecasts, near-zero unemployment, record-high stock market performance, a strong shekel, continuous tech funding and exits, a thriving arms industry, a halt in rising housing prices, and declining interest rates. High airport traffic and credit card spending data further suggest a rising standard of living.

However, the negative aspects are equally stark. Israel faces a national debt exceeding 1.4 trillion shekels, with a debt-to-GDP ratio nearing 70%, necessitating future tax increases. Labor participation rates for Haredi men and Arab women remain low. The economic toll of mandatory military reserves, estimated in the tens of billions, is significant. Concerns are also rising over 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 having left the country in recent years. Rental prices are sharply increasing, and Israel ranks second globally in the "Big Mac index," indicating high living costs, and first among OECD countries for child poverty.

Historically, Prime Minister Benjamin Netanyahu described Israel's economic challenge as the "fat man and the skinny man," where the private sector (skinny) supported the public sector (fat). Today, the public sector is described as "starving," with civilian spending significantly lower than the OECD average and public sector wages stagnating. This underinvestment, coupled with political appointments replacing professional leadership, contributes to shortages in education, infrastructure delays, and other service deficiencies.

The war's cost since October 7th is estimated at over 420 billion shekels, with an additional 400 billion planned for defense over the next decade. This massive defense spending is shifting government priorities, as evidenced by a decrease in the percentage of the budget allocated to education and health, while defense spending has increased significantly. The primary challenge for the next government is to re-establish national priorities, focusing on citizens' needs by potentially reducing defense spending, reforming government ministries, and addressing critical issues like the cost of living and the collapsing education system.