Israel's Economy Defies War Woes Amidst Deepening Fiscal Challenges

As Israel approaches the 2026 elections, its economy presents a surprising picture: low unemployment and a booming high-tech sector mask a significant deficit and a vastly expanded defense budget. While political parties focus on viral campaign videos and promises, the underlying economic decisions are stark. The famous 1992 mantra, "It's the economy, stupid," coined by James Carville for Bill Clinton's campaign, emphasized focusing on voters' financial well-being. In Israel, Prime Minister Benjamin Netanyahu's counter-narrative, "Life itself," prioritized national security over economic issues, a stance that has persisted through three years of continuous conflict.

Despite the prolonged war, Israel's macroeconomic indicators are unexpectedly strong. Unemployment is below 3%, tax revenues are exceeding expectations, and the shekel remains relatively stable. Economic commentator Keren Marziano described the situation as "largely great," attributing it to a robust foundation, particularly the thriving high-tech industry. The sector continues to attract massive investments and generate billions in cyber exports, exemplified by Google's $32 billion acquisition of Israeli cybersecurity firm Wiz. Defense industries have also seen a meteoric rise, with proven weapon systems driving record exports. Global stock market gains have further bolstered the economy.

However, beneath this surface of success lies a severe budgetary crisis, primarily driven by the defense budget, which has ballooned from approximately 65-70 billion shekels annually before the war to about 160 billion shekels today. The ongoing dispute between the defense establishment and the Treasury over further increases has led to the cancellation of significant procurement deals. The war has cost the economy an estimated 405 billion shekels, nearly half of the annual state budget. This massive defense expenditure necessitates either substantial tax hikes or deep cuts in education, welfare, and health. The national deficit, which surged to nearly 7% of GDP in late 2024, now stands at around 3%, but the cost of servicing this debt amounts to 50-60 billion shekels annually, equivalent to the entire health ministry budget.

The ruling Likud party, led by Netanyahu, highlights positive economic data like low inflation and record foreign currency reserves, calling it an "economic miracle." However, the government also implemented unpopular measures such as raising VAT and freezing income tax brackets and national insurance benefits. A major criticism is the unprecedented allocation of coalition funds, reaching an estimated five billion shekels in 2026 alone, a sevenfold increase in four years. Finance Minister Bezalel Smotrich dismisses this criticism as "cheap populism," while experts argue these funds were not directed towards growth engines. Instead, agreements were made with labor unions for industrial peace, and budgets were allocated to Judea and Samaria, with some of Netanyahu's initiatives for the Haredi sector facing legal challenges.

Opposition parties are presenting alternative economic platforms. The Yishar party, fronted by former Budget Division head Saul Maridor, proposes reducing the deficit by closing unnecessary government offices and combating the black market, while remaining vague on tax increases. Naftali Bennett's Tikva Hadasha party, led by former Finance Ministry Director General Keren Turner, focuses on integrating the Haredi population into the workforce and improving public sector efficiency with AI. The Democratic party advocates for investment in welfare infrastructure and taxation on banks and large corporations, funded by reduced military spending. Avigdor Lieberman's Yisrael Beiteinu party continues to push for privatization, while Itamar Ben-Gvir's Otzma Yehudit party supports taxing the top income deciles and streamlining the IDF.

Beyond the macroeconomic figures, the high cost of living remains a primary concern for Israelis. Food prices have risen five times faster in the last four years compared to the preceding period, making an average grocery basket 21% more expensive than in other wealthy nations. Efforts like the "State's Basket" initiative by Economy Minister Nir Barkat have failed to significantly impact market concentration. Netanyahu continues to promise to "break the monopolies," blaming historical structural blockages. Arab parties like Ra'am and the Joint List highlight the exacerbated cost of living in the Arab sector due to infrastructure deficits and propose measures such as lowering VAT, raising the minimum wage, and interest-free mortgages, funded by halting investments in settlements and the war.

With the election two weeks away, cynicism surrounds economic promises, many of which are unrealistic or unfulfilled. True solutions to the economy's structural problems require courageous leadership and persistent, unglamorous work: increasing competition, simplifying regulation, and strengthening oversight. Marziano concludes that successful reforms need a government with a significant majority capable of enacting painful, far-reaching changes. In a reality where military operations are still being considered, the economy may continue to wait its turn, while citizens bear the brunt of the costs.