The Netanyahu government has just tied the hands of the next finance minister, even if that minister comes from the ranks of today's opposition. More broadly, the economic path it has created sharply restricts the political options available to the next government, even if that government wishes to change course.
This hamstringing is reflected in three measures adopted in recent weeks:
- The various laws enabling draft evasion for the ultra-Orthodox do not permit a genuine expansion of the Israel Defense Forces and continue to impose a heavy burden on the IDF system of reserve service. This has many consequences, including economic ones. When a significant share of the civilian labour force spends a quarter or even a third of the year on military duties, both the composition and the level of output change. This will inflict short- and long-term damage on the economy.
- The legislation concerning the ultra-Orthodox also implies the continued subsidisation of that community from the government budget. This is one major millstone around the neck of the state budget.
- The defense budget has been increased enormously. Allow me to offer a few figures for illustration. It rose from NIS 70 billion in 2022 to more than NIS 140 billion in the current budget. Discussions are now under way over a further increase, to over NIS 180 billion. For those to whom these vast sums do not make their huge scale sufficiently clear, consider them as shares of the national economic pie: an increase from about 4 per cent of GDP to roughly 7 per cent today, and to approximately 8.7 per cent once the additional increase is approved. In addition, a further NIS 350 billion over the course of a decade has for some time been under serious consideration, and Netanyahu is pushing for it aggressively. If this trajectory materialises, Israel will reach defence spending of more than 10 per cent of GDP. This is another enormous millstone around the neck of the budget.
Which prime minister, and which finance minister, will cut the defence budget amid the grave geopolitical reality that now prevails? It should be recalled that a large part of this reality was created by the present government itself. What new policies could such a government pursue for the benefit of its citizens? Urgent problems such as road congestion, the shortage of doctors and long waitlists for appointments, as well as long-term challenges such as high housing prices and employment in the age of AI , will receive no significant treatment because of the immense pressure on the budget.
This policy has placed Israel on a path towards large future tax increases, including in the near term; a substantial decline in living standards; and growing difficulty in financing the security burden. It is far from clear that any new government will be able to change direction. A sharp turn will require considerable time and effort.
More than that, realistically, I am not convinced that all the constituents of the next government will rush to reverse the Netanyahu government's damaging legislation. The security situation, the desire to win the support of the ultra-Orthodox parties and sheer political convenience may outweigh long-term considerations. For some members of the new government, it may even be convenient to preserve the de facto expansion of the executive branch's political power, alongside the shrinking space for policies that benefit the country's citizens. The constraints will become an excuse for inaction and a very serious obstacle on the country's path.
Eran Yashiv is Professor of Economics at Tel Aviv University and former Head of the Economics and National Security Program at the Institute for National Security Studies (INSS).
