Israel's next government faces heavy debt, high defense costs

Israel's next finance minister will inherit a tight labor market and resilient shekel but faces an estimated NIS 350 billion war bill and public debt approaching 70% of GDP. The Bank of Israel projects a 2026 deficit of 4.9% and debt of 69%. Economists differ on priorities: some urge immediate fiscal consolidation, while others emphasize education reform and human capital investment as the more urgent long-term challenge.

Israel's next finance minister will inherit an economy with a tight labor market, a resilient shekel, and a technology sector that operated through nearly three years of war. However, the government faces roughly NIS 350 billion in estimated war-related fiscal costs and a public-debt ratio approaching 70% of GDP, up from 60.5% before October 7, 2023. The Bank of Israel projects a 2026 deficit of 4.9% and public debt of about 69%. Defense spending rose from 4.5% of GDP before the war to roughly 8% in 2025 and could remain near 6% in 2026. Economists interviewed by The Media Line disagree on priorities. Prof. Elise S. Brezis of Bar-Ilan University argues Israel has enough underlying strength to focus first on education reform and ending sector-based budget allocations, which she estimates could save 20 billion shekels. Adrian Filut of Calcalist warns that Israel has "very little fiscal room" and needs a medium-term fiscal plan to reduce the debt ratio, noting that Israel's high geopolitical risk requires larger buffers than other countries. Both agree that integrating Haredi and Arab Israelis into productive, skilled employment is an immediate economic necessity, not a deferred issue.