IMF Cuts Israel Growth Forecast and Urges Measures to Reduce Public Debt

The International Monetary Fund (IMF) released its annual report on Israel's economy, highlighting the country's exceptional resilience during three years of conflict but noting that its GDP remains about 9% below the expected trajectory had the war not occurred. The IMF downgraded Israel's growth forecast for 2026 to 3.5%, down from a pre-war projection of 4.8%, and anticipates a moderate recovery to 4.4% growth in 2027.

The report warns that low employment rates among Haredi men and Arab women have shifted from a social issue to a macroeconomic risk. Inflation is expected to rise from 1.9% in the first quarter of 2026 to 2.5% by the fourth quarter, mainly due to energy prices, before easing toward 2% in 2027. Core inflation and inflation expectations are projected to remain near the midpoint target of 2%, with the strong shekel helping to offset price increases.

The IMF projects the government deficit will widen to 6.2% of GDP in 2026, up from 5.2% in 2025, and public debt will increase to 70.1% of GDP, potentially reaching about 74% by 2031. The IMF team recommends reducing the government deficit to around 2.5% of GDP within three years, primarily through revenue measures rather than further cuts to already low civilian spending. Suggested options include merging the two lowest income tax brackets, raising VAT by an additional 2%, and reducing exemptions such as those on training funds and tourism-related VAT.

The IMF also advocates expanding core education studies to improve labor market participation and economic inclusion. These recommendations aim to strengthen Israel's fiscal sustainability and support long-term economic growth amid ongoing regional challenges.