Israel's Economy Suffers Amid War, Rising Costs, and Government Spending

Israel's economy has weathered its longest war, showing resilience with a return to growth in the short term. However, households have paid a heavy price, experiencing a decline in living standards, increased prices, and higher taxes. The state budget has plunged into a significant deficit, leading to a historic downgrade of Israel's credit rating for the first time. The average household has lost thousands of shekels annually due to indirect tax hikes and service cuts.

Despite promises to lower the cost of living, the food basket has quadrupled in price compared to the four years preceding the current government's formation. The government also allocated billions in coalition funds, disproportionately benefiting Haredi yeshivas, Haredi education, religious services, and West Bank outposts, with the Haredi sector receiving preferential treatment. Meanwhile, the government increased indirect taxes, such as raising VAT from 17% to 18% in January 2025, freezing child benefits, and increasing national insurance and health taxes. These measures are estimated to have cost the average household between 8,000 and 12,000 shekels annually.

While indirect taxes rose for the general public, direct taxes were lowered, primarily benefiting high earners. The expansion of income tax brackets provided relief only to those earning over 16,150 shekels per month, leaving approximately 77% of the population without this benefit. This means that while the government did offer tax breaks, they did not assist the most affected families.

Coalition funds continued to flow despite household austerity, with over 21 billion shekels distributed during the current government's term. These funds were largely directed to Haredi yeshivas, some of which reportedly enroll draft dodgers, as well as Haredi and religious education, religious services, and West Bank settlements, including illegal outposts. This occurred during a severe war and a period of escalating deficit and taxes.

Settlements, representing about 5% of the population, received disproportionately large funding. In 2023, the Ministry of Interior alone allocated 795 million shekels to settlements, constituting 10.5% of all local authority grants. Government development investments per capita in settlements are 74% higher than within the Green Line, and Ministry of Education funding is about 30% higher. Future plans aim to further increase these allocations, with a proposed 2.7 billion shekels over five years for infrastructure in Judea and Samaria, including new settlements.

Economically, while the overall GDP has grown, GDP per capita has contracted, indicating a decline in living standards. The cost of living remains high, with food prices significantly above OECD and EU averages. Efforts to reduce prices through import reforms have yielded limited results, and the government's attempts to break up monopolies have been largely unsuccessful, with major food companies continuing to raise prices. The Director General of the Competition Authority, Michal Cohen, retained her position after a Supreme Court ruling that set a high evidentiary bar for dismissing senior officials.