In the Shadow of War: Aggregate Budget, Spending Priorities, and the Implications of an Increased Security Burden | Executive Summary
This study was released ahead of the Eli Hurvitz Conference on Economy and Society 2025.
Photo by Canva
In this study, we analyze the 2025 budget in comparison with historical trends and examine possible implications of the planned defense expenditure on civilian spending and public services.
Since the outbreak of the war in October 2023, there has been a dramatic shift in budgetary priorities. Contrary to the trend of the past 20 years, defense expenditures and interest payments have risen significantly—the net defense budgetNet budget – not including expenditure conditional on receiving income designated for specific expenditure – such as American aid. increased from 3.9% of GDP in 2019 to 5.2% of GDP in 2025, and interest payments also rose markedly. Although the share of net civilian expenditure in GDP remained unchanged relative to 2019 (20.4%), its composition has shifted—the share of social services has declined and has been replaced by war reserves, emergency infrastructure, and the budget of the Tkuma (reconstruction) Directorate. These expenditures place a heavy burden on public systems, which must continue their regular responsibilities while also responding to wartime needs.
Simultaneously, the 2025 budget projects a deficit of 4.9%, which is expected to raise the debt-to-GDP ratio to over 68%, its level in 2024. Moreover, various budget components increasingly serve specific sectors of society, with funding for services that do not benefit the general public—for example, increases to the budget for ultra-Orthodox education (including planned wage increases, which are difficult to cancel), geographic subsidies for public transportation, and the skewed (and harmful) policy of land discounts allocated for housing lotteries targeted disproportionally at the ultra-Orthodox population.
Looking ahead to the coming decade, we analyze two scenarios assuming the government adheres to the fiscal rules it has committed to and implements the recommendations of the Nagel Commission on Evaluating the Security Budget and Force Building: compliance with the expenditure ceiling alone, or compliance with both the expenditure and deficit ceilings.Expenditure ceiling – Fiscal requirement that limit the amount the budget can increase year to year using a population growth and debt target-based equation. Deficit ceilings – Fiscal requirements that limit the government deficit to a target percent of GDP. In both scenarios, civilian expenditure declines. Civilian expenditure under these scenarios is projected to decrease by 4–5.5 percentage points of GDP by 2034, and in real per capita terms, would erode by up to 14%. Although these scenarios are unlikely, they illustrate the implications of the existing fiscal constraints, the threat posed by continued routine fiscal conduct and the significant increase in the defense budget to public services and growth potential, and consequently, the critical importance of the government’s budgetary priorities.
In light of these risks, we propose an alternative path: a gradual increase in the tax burden to reach the median tax-to-GDP ratio of OECD countries, alongside the elimination of inefficient land discounts and exemptions, and cuts to budgets that serve specific sectors of society, which hinder growth. This approach would enable financing the additional defense and interest expenditures, stabilize the deficit at 2.5% of GDP in the medium term—thereby gradually reducing the debt ratio to 65.5% of GDP by 2034—and moderately raise civilian expenditure to 36.7% of GDP. While this level of civilian expenditure is low by international standards, it would, in our view, allow for necessary investments in infrastructure, reduction of educational disparities, strengthening of higher education and Israeli research, and the attraction of higher-quality personnel to the public sector, assuming the right reforms would be implemented in alongside the expenditure increase. These changes would help preserve social security, economic growth, and the standard of living in Israel.
We assess that in the absence of a tax increase, primarily by broadening the tax base, relaxation of the overall expenditure ceiling, a change in government expenditure priorities to increase budgets that support productivity growth and reduce those that undermine economic participation incentives, and a stabilization—followed by a slower reduction—of government debt relative to the current deficit ceiling constraint, the quality of public services will further deteriorate and growth engines will be harmed. The choice between revising budgetary priorities and fiscal paths—starting now—or continuing fiscal conduct that postpones addressing critical challenges until they are unavoidable, will determine the well-being of Israeli citizens, the country’s growth potential, and the economic stability of the State of Israel in the near future.