By Galit Altstein
Israel’s election campaign has been consumed by Iran, national security and the impact of three years of war, with Israeli Prime Minister Benjamin Netanyahu and his main challenger, Gadi Eisenkot, rarely straying from the theme.
Those fixations belie a sobering reality for Israeli households: overshadowing Tuesday’s ballot is is an economic schism that the next government will have to address.
The vote will pit Netanyahu’s military hawkishness and religious nationalism against Eisenkot’s plans to fund Israel’s defense buildup through structural reforms that help bring down the government’s debt, which has soared in the past three years.
Eisenkot, a retired general, wants to prioritize integrating the rapidly growing ultra-orthodox population, which is largely exempt from military service and heavily subsidized by the government, into the defense forces and the labor market.
In Netanyahu’s vision, Israel should become a “Super Sparta” and spend hundreds of billions of shekels to achieve greater military self-reliance.
“For years, we kept defense spending under control to encourage economic growth,” he said on Friday. “Now the economy must support defense, because without security, there will be no economy.”
He drew criticism, including from the central bank, by saying — in a nod to Israel’s growing isolation — that it should prepare to circumvent possible international sanctions by using cryptocurrencies as part of “an alternative economic system.”
“The upcoming elections represent a crossroads for the economy, with the outcome likely to have significant implications,” said Rafael Gozlan, chief economist at the Tel Aviv-based IBI Investment House.
More than a guns-versus-butter debate, the divide is over how far Israel will go to pay for its guns.
On the surface, Israel’s economy is thriving against the backdrop of war. Foreign direct investment hit a record $26 billion last year, while growth — fueled by the tech industry — is expected to outperform peers this year and the shekel is among the world’s top-performing currencies.
Economists, however, warn the incoming government will inherit severe structural vulnerabilities.
Whoever the next leader is, they must navigate a skyrocketing defense budget, the international isolation, a brain drain and demographic imbalances that threaten to paralyze the economy long after the ballots are counted.
The cost of living, a long-running source of social unease, especially when it comes to housing, remains one of the highest in the OECD, alongside Iceland and Switzerland.
“Resilience is not equivalent to prosperity,” a group of researchers from the Tel-Aviv-based Institute for National Security Studies said in a report this month. Israel is channeling a bigger portion of its national resources to defense, “unavoidably at the expense of long-term investment in growth engines and in civilian services.”
Gross domestic product per capita has barely changed since Hamas’s attack in October 2023 triggered the start of multiple wars.
On Wednesday, the central bank raised its growth projections to 5.6% for this year and 7.5% for 2027. Still, Governor Amir Yaron said that “rapid growth may create a distorted picture of the pace of real domestic economic activity.”
The numbers are heightened by the so-called “Nvidia effect,” he said. That refers to the huge revenues earned by the US chip designer’s Israeli arm, which help boost tax revenue but do little to support local investment and jobs. Excluding Nvidia, the economy would grow just 3.4% this year.
The mobilization of tens of thousands of Israelis during the war, keeping them away from their businesses, is one of the headwinds awaiting the next government. That will complicate keeping the budget deficit under control.
Paying for Guns
While ceasefires have reduced the intensity of the various conflicts, Israel’s forces are still occupying parts of Gaza, Lebanon and Syria. They’re conducting daily operations in the West Bank, pushing up expenditure on salaries and munitions. The war with Iran, meanwhile, may be about to escalate.
The opposition largely accepts Israel’s new preemptive military approach, so it’s likely the defense bill will remain elevated regardless of the voting on Tuesday.
Israel’s defense budget stands at almost 8% of GDP this year — the highest share among its Western peers — and Netanyahu has proposed a 450-billion-shekel ($145 billion) buildup over 12 years. If the plan goes ahead, the central bank sees debt increasing to as high as 85% of output through 2035. While still fairly low by today’s rich-world standards, it was only around 60% before Hamas’s attack.
Retaining Talent
While Netanyahu’s government boasts of Israel’s military and economic achievements, the opposition argues that finances are stretched and the country risks a mass departure of the country’s most productive citizens.
“When I ask audiences at parlor meetings what their greatest fear is if Netanyahu stays in power, the most common answer is: ‘That my kids pack up and leave the country,’” said Shaul Meridor, a former Finance Ministry official now running with Eisenkot.
Some 100,000 Israelis left the country in 2023 and 2024, far more than in previous years, according to a Tel Aviv University study. Academics, engineers, physicians and other high-earners featured prominently among them and preliminary data suggest the trend continued into 2025.
The exodus began to take shape after Netanyahu’s government embarked on a push to curb judicial powers and continued through the war, as many Israelis sought respite from repeated missile attacks and relentless reserve duty.
Finance Ministry Chief Economist Shmuel Abramzon said emigration hasn’t reached macroeconomic-relevant levels, but acknowledges the trend is concerning.
Ultra-Orthodox Exemptions
Netanyahu has resisted drafting ultra-Orthodox men into military service, in defiance of a Supreme Court ruling fiercely opposed by religious parties that have long been kingmakers in his coalitions.
That’s meant tens of thousands of reservists were called to serve, including some of the nation’s most skilled tech workers. The opposition and economists argue this can be resolved by drafting thousands of eligible ultra-Orthodox men to the military.
Authorities say mobilizing civilians who have already done mandatory service is far more expensive than integrating Israelis yet to do so.
An opposition-led government would be more likely to pursue those goals while “potentially winding down some active military fronts,” said Gozlan of IBI Investment House. The current coalition, he believes, “would be reluctant to end existing military campaigns and has failed to pursue a more equitable distribution of the military service burden.”
The challenge has loomed for years, but the war has pushed it to the forefront of politics. Many secular and observant Jews alike resent seeing loved ones risk their lives in combat, leaving families, businesses and studies for months while others remain exempt.
The economic implications of Israel’s growing religious population extend well beyond the military. One in four first-graders attends an independent ultra-Orthodox school, where core subjects like math and English are often neglected. That risks leaving the country with an increasing share of the workforce sidelined from high-income jobs and overly reliant on subsidies.
“We must integrate the Ultra-Orthodox and Arab communities,” Meridor said. “It starts by terminating all budgets for schools who don’t teach a core curriculum.”
The Bank of Israel has voiced similar concerns. It’s also called for measures to address a chronic under-investment in public services, which in 2025 lagged the OECD’s 43% share of economic output by ten percentage points.
That’s translated into long wait times to see medical specialists and record-low scores by Israeli students in the PISA comparative assessment.
