Israel Faces Tax Hikes and Service Cuts After Elections Due to Defense Spending

Israel's next government will face a significant challenge in managing the massive increase in defense spending, which experts warn will soon impact citizens' wallets. While economic data shows a stable and growing economy, many Israelis do not feel this prosperity in their daily lives. Experts agree the current situation is unsustainable but differ on the solutions and who should bear the cost.

Before the current government took office in 2022, Israel's economic starting point was strong, with low debt and revenues exceeding expenditures, thanks to accumulated 'cushions' used during the COVID-19 pandemic and the recent war. However, this masked an existing issue: a gap in living standards compared to developed nations, which Israel has struggled to close for 30 years despite its high-tech boom. The purchasing power of the average Israeli worker has lagged behind that of their counterparts in developed countries.

This disparity is evident in public services. Before the war, civilian spending on education, health, welfare, and infrastructure was already below the average for developed nations. This means citizens often have to pay out-of-pocket to supplement services, such as shortening wait times for specialists or paying for private tutoring. This effectively leads to Israelis paying twice: once through taxes and again from their personal finances.

The October 2023 war drastically altered the landscape. Defense budget expenditures have surged from approximately 60 billion shekels in 2022 to nearly 160 billion shekels by 2026. The Netanyahu government's approach to funding this increase, through broad budget cuts to other ministries, tax hikes, and increased national debt, has drawn criticism. Despite these pressures, Israel's economic indicators remain stable, attributed to the pre-war 'cushions.' However, the growing share of the national budget allocated to defense and interest payments (from 29% in 2022 to an expected 37% in 2026) leaves less for essential services like education, health, and transportation.

Experts identify four key challenges: the erosion of social services, leading to longer waits and increased private spending; the fact that economic growth isn't reaching all citizens, creating a feeling of financial strain; the need to adapt education and training to the modern job market, particularly for Haredi and Arab populations, to avoid future unemployment; and a crisis of public trust in the government, fueled by perceptions of unfair budget allocation and a lack of perceived value for taxes paid.

Disagreements persist on how to address these issues. Some advocate for canceling tax exemptions and improving tax collection and budget efficiency, including in defense. Others argue for expanding the tax base and increasing tax rates, particularly on non-wage income, to fund public services. The consensus among experts is that Israel is heading into challenging years, and the government's ability to manage the situation effectively will determine the extent of damage and the maximization of benefits for its citizens.