Israel's next government faces heavy debt, high defense costs
With estimated war costs of NIS 350b and public debt near 70% of GDP, Israel’s next government must balance surging defense spending with urgent education and labor market reforms.
Israel's next government will inherit a challenging economic landscape marked by high public debt, defense costs, and a tight labor market. The estimated fiscal costs of the war from 2023 to 2026 are projected to reach NIS 350 billion ($114 billion), with public debt nearing 70% of the country's GDP. Despite the economic shocks, the economy has managed to remain stable, though the government's fiscal room for maneuver is diminishing.
Structural issues such as weak productivity, educational gaps, and low labor-force participation persist. The Bank of Israel estimates that the economy produced about NIS 177 billion less than it would have in the absence of the war. Some experts argue that while the rise in debt is concerning, it is not an immediate crisis compared to other OECD countries.
However, the government faces significant challenges in rebuilding fiscal space amid rising defense spending, which could consume a larger share of the economy than before the October 7 conflict. The Bank of Israel projects that defense spending will reach around 8% of GDP in 2025 and may remain near 6% in 2026, leaving limited room for civilian and social spending.
Potential solutions include increasing government revenue through higher taxes or reducing sectoral spending, but these measures could have implications for economic growth and consumption.
Written by urgent.news from Jerusalem Post's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
