Israel’s Economic Strains Raise Defense Capacity Concerns

Prof. Dan Ben-David warned that Israel’s long-term viability as an advanced economy faces risks from a shrinking technology sector, falling education standards and demographic shifts. He said those changes could weaken the future workforce and the country’s capacity to support defense. The president and founder of the independent Shoresh Institution for Socioeconomic Research said political priorities have moved from national interests to sectoral ones.

Spending and productivity

In 2024, the government spent NIS 37.5 billion ($12.2 billion) on subsidies, benefits and discounts for the ultra-Orthodox community, Ben-David said. He said many members of the community neither work nor serve in the IDF. That spending exceeded the state’s combined investment in hospitals and higher education that year by NIS 10.83 billion ($3.5 billion).

Israel’s labor productivity in 2024 ranked below every G7 country except Japan, according to Ben-David. It lagged Germany by 34 percent, the US by 30%, France by 28% and Italy by 20%. Even with mass reserve-duty call-ups during the war in Gaza in 2024, productivity barely moved from its 2022 figure.

Ben-David said public investment in national infrastructure once helped Israel close its productivity gap and overtake G7 countries by the mid-1970s. That pattern has since reversed. He cited underinvestment in physical infrastructure, healthcare, higher education and human capital. He rejected claims that unusually high defense spending explains the shortfalls in 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,” Ben-David said. “For decades, until recent years, when the developed world entered the Great Recession (from late 2007 to mid-2009), Israel's civilian expenditures exceeded or equaled the OECD average.”

Education and the future workforce

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

Around half of children—including Arab Israelis, Haredim and pupils in geographic and social peripheries—receive a subpar education, Ben-David said. He called these groups some of the fastest-growing population groups. “When they 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,” he said.

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

Ben-David said the Haredi fertility rate is three times that of nearly all other population groups in Israel, more than 80% higher than that of national religious Jews, more than double the Muslim rate, and three times the rate among Jews in traditional and secular streams. The Muslim rate, he said, has dropped rapidly over two decades. Haredim made up 6% of the population aged 50 to 54 in 2023, while their grandchildren accounted for 26% of toddlers.

Workforce, emigration and policy proposals

Employment among Haredi men fell from more than 80% in 1979, the earliest year for which data exists, to about 60% in recent years. Ben-David blamed government incentives not to work. More Haredim are pursuing higher education, he said, but few can overcome the lack of core education in childhood. The sector’s rapid growth means future workforce skills “are being shaped – and constrained – decades before these children enter the labor market,” he said.

The technology sector makes up 10% of the workforce and is 22% more productive than the OECD average, Ben-David found. The remaining 90% of Israel’s workforce averages 24% less productivity. He said 20% of workers fund 93% of income-tax revenue, while half earn too little to pay income tax. Arab and Haredi citizens, particularly Haredim, receive more than they contribute, he said.

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

Ben-David recommended merging the four current education streams—public secular, religious, Arab and independent Haredi schools—into one system with a largely uniform curriculum and room for parental preferences. He also called for shifting government funding from sectoral to national priorities and enforcing full public transparency. The findings were published with permission from Ben-David.