Israel's Economic Edge Erodes as Defense Needs Mount

Israel spent NIS 37.5 billion ($12.2 billion) in 2024 on subsidies, benefits and discounts for the ultra-Orthodox community, many of whose members neither work nor serve in the IDF. Prof. Dan Ben-David, president and founder of the independent Shoresh Institution for Socioeconomic Research, calculated that the total exceeded state investment in hospitals and higher education combined by NIS 10.83 billion ($3.5 billion).

That figure anchors a warning with direct security implications. Israel must field a first-world military against Iran-backed enemies, and paying for it requires a first-world economy. Ben-David argues that the economy is being hollowed out from within.

The Economic Base Under the Military

Israel's long-term viability as an advanced economy is at risk, Ben-David says. The country depends on a shrinking technology sector as education standards fall and demographic shifts favor groups that lack skills for a 21st-century economy. Labor productivity in 2024 ranked below every G7 country except Japan. Israel trailed Germany by 34 percent, the US by 30%, France by 28% and Italy by 20%.

The war in Gaza put huge numbers of reservists into uniform in 2024. Yet productivity didn't significantly change from its 2022 figure, according to Ben-David.

The technology sector represents 10% of the workforce and is 22% more productive than the OECD average. The other 90% averages 24% less. Twenty percent of workers fund 93% of income-tax revenue, while half earn too little to pay income tax at all. Arab and Haredi citizens, particularly Haredim, receive more than they contribute, Ben-David said.

He rejected the claim that unusually high defense spending explains weak civilian investment. "The problem was never a lack of resources, but a diversion of public funds from national priorities to sectoral and personal ones by the nation's leaders," he said. Until the Great Recession, from late 2007 to mid-2009, Israel's civilian expenditures exceeded or equaled the OECD average, he added.

Classrooms and the Demographic Math

In the 2025 PISA exam, Israel's average scores in math, science and reading were near the bottom of the OECD, as they had been for two decades. Ben-David said the 2025 results were the country's worst. The average would have fallen still lower if Haredi boys, who tend not to study those core subjects, had taken part.

Around half of Israeli children receive a subpar education, he said. That group includes Arab Israelis, Haredim and pupils in geographic and social peripheries, some of the fastest-growing population groups.

Jerusalem shows the change. From 1988 to 2025, the share of primary-school pupils in the city's secular Jewish education stream dropped from 33% to 9%. In 2025, Arabs accounted for 37% of the city's primary-school pupils and Haredim 41%.

The Haredi fertility rate is three times that of nearly all other groups in Israel. It stands more than 80% above the national religious Jewish rate and more than double the Muslim rate, which has fallen rapidly over two decades. Haredim made up 6% of the population aged 50 to 54 in 2023. Their grandchildren accounted for 26% of toddlers.

Haredi men's employment rate fell from more than 80% in 1979 to about 60% in recent years, a trend Ben-David blamed on government incentives not to work. More Haredim are pursuing higher education, but few can make up for the core education they missed as children.

Ben-David stated the stakes bluntly. When these groups become half of the adults, and eventually a majority, "they will only be able to maintain a third-world economy, which will not be able to support first-world healthcare or welfare, or the first-world defense necessary for Israel's physical survival."

Leaving the Country

The government's judicial overhaul effort began in January 2023. Multifront wars followed, sparked by the Hamas invasion and massacre on October 7 that year. In 2026, native-born emigrants, many highly educated professionals, outnumbered returnees by 160%, Ben-David said. From 2009 to 2022, annual emigrants exceeded returnees by 43%, except in the COVID year of 2020.

Ben-David recommended combining the four education streams—public secular, religious, Arab and independent Haredi—into one system, with a largely uniform curriculum and room for parental preferences. The streams now receive different levels of public support. He also called for moving government funding from sectoral to national priorities and enforcing full public transparency.

Why This Matters: Israel faces enemies who openly seek its destruction, and it has fought multifront wars since the Hamas massacre of October 7, 2023. Deterrence costs money, and a narrow tax base supplies it. If 20% of workers keep funding 93% of income-tax revenue while productivity lags and skilled professionals leave, the defense budget loses its foundation. Ben-David's argument is that economic strength and physical survival are linked. His warning is that these are domestic choices within Israeli politics, not outside pressures, and leaders are making them while the country's adversaries wait for any sign of weakness.