Full Breakdown
Israel Faces Tight Fiscal Space as New Government Takes Office
By Drooid · · How we work
Fiscal Landscape for the Incoming Administration
Israel’s next finance minister will inherit an economy still coping with a tight labor market, a resilient shekel and a technology sector that has operated through nearly three years of war. At the same time, the government must manage roughly NIS 350 billion (about $114 billion) in estimated war-related fiscal costs, with about half financed through borrowing. Public-debt ratios have risen from 60.5 % of GDP at the start of 2023 to 68.5 % by the end of 2025, and the deficit stood at 4.7 % of GDP. The Bank of Israel projects a 2026 deficit of 4.9 % and public debt near 69 %.
Key Economic Indicators
- War-related fiscal gap: NIS 350 billion (2023-2026).
- Debt-to-GDP: 68.5 % (end-2025) -> ~70 % (2026 projection).
- Deficit: 4.7 % (2025) -> 4.9 % (2026 forecast).
- Defense spending: rose from about 4.5 % of GDP before the war to roughly 8 % in 2025; IMF estimates it could stay near 6 % in 2026.
- Labor market: remains tight, with a low unemployment rate and a risk premium at pre-October 7 2023 levels, according to the central bank.
Policy Options and Structural Challenges
Economists stress that Israel’s long-term resilience depends on upgrading human capital. Prof. Elise S. Brezis argues that the core issue is skill gaps—many workers lack English and math proficiency—and calls for uniform core curricula in publicly funded schools, ending budget allocations based on family size or sectoral affiliation, and redirecting roughly NIS 20 billion toward education reform and public-transport improvements.
Adrian Filut emphasizes the need for fiscal buffers given Israel’s high geopolitical risk. He warns that limited fiscal space constrains civilian and social spending once defense budgets are protected, and suggests a medium-term plan to lower the debt ratio before tackling education and labor-market reforms. Potential revenue measures include higher value-added or income taxes and taxes on negative externalities such as pollution.
Official Perspectives
The Bank of Israel notes that the risk premium remains comparable to pre-war levels and that the economy’s rebound in early 2026 partly reflects recovery from earlier disruptions. The International Monetary Fund’s estimate of defense spending at 8 % of GDP in 2025 underscores the fiscal pressure of sustained security needs.
Verbatim Quotes
- “When you look at that compared to many OECD countries, our situation is not so bad,” — Prof. Elise S. Brezis
- “If you can’t touch defense, you don’t have that much room left in civilian and social spending,” — Iran. Adrian Filut
- “They don’t know English, they don’t know math,” — Prof. Elise S. Brezis