What the campaign is about
Tuesday's vote is framed by security and the price tag that comes with it. Benjamin Netanyahu is pitching a "Super Sparta" vision, arguing Israel should pour hundreds of billions of shekels into military self-reliance. "For years, we kept defense spending under control to encourage economic growth," he said on Friday. "Now the economy must support defense, because without security, there will be no economy."
He also faced criticism - the central bank among the critics - after proposing that Israel get ready for potential international sanctions by deploying cryptocurrencies within what he termed "an alternative economic system." Gadi Eisenkot, a retired general, counters that Israel can fund a defense buildup through structural reforms that restrain debt and by bringing the rapidly growing ultra-Orthodox community into both the armed forces and the workforce.
At IBI Investment House in Tel Aviv, chief economist Rafael Gozlan said, "The upcoming elections represent a crossroads for the economy, with the outcome likely to have significant implications,"
The state of the economy and the war's bill
Against a wartime backdrop, headline indicators look solid. Last year, foreign direct investment reached an unprecedented $26 billion, and projections for this year have Israel growing faster than comparable economies, with the shekel ranking among the strongest globally. Yet economists warn the next government inherits deep-seated strains.
On Wednesday, the central bank lifted its growth forecast to 5.6% for this year and to 7.5% for 2027. Governor Amir Yaron cautioned that "rapid growth may create a distorted picture of the pace of real domestic economic activity," pointing to the "Nvidia effect" - large profits from the US chip designer's Israeli arm that swell tax receipts without adding much local investment or jobs. Strip that out, and growth would be 3.4% this year. Meanwhile, GDP per person has barely budged since Hamas's October 2023 attack set off multiple conflicts.
The war's costs are still climbing. Israel's forces remain in parts of Gaza, Lebanon and Syria, and carry out daily operations in the West Bank, raising spending on salaries and munitions. The confrontation with Iran could intensify. The opposition largely accepts a more preemptive military posture, implying defense spending stays elevated regardless of who wins.
Israel's defense budget is near 8% of GDP this year, the largest share among Western economies. Finance Ministry data show defense outlays rose 69% from 2023 to 2025. Netanyahu has proposed a 450-billion-shekel buildup over 12 years.
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If implemented, the central bank projects government debt could climb toward 85% of GDP by 2035, up from roughly 60% before the war. The mobilization of many tens of thousands of Israelis has pulled people from their businesses and will make deficit control tougher. And despite the recovery, the cost of living - notably housing - remains among the priciest in the OECD, with Iceland and Switzerland also in that top tier.
Demographics, education and emigration as economic risks
The political fight over drafting the ultra-Orthodox has become an economic question. Netanyahu has resisted conscripting ultra-Orthodox men, defying a Supreme Court ruling opposed by religious parties that anchor his coalitions. That choice has meant calling up large numbers of reservists, including highly skilled tech workers.
Officials say recalling civilians who already completed mandatory service is far pricier than bringing in Israelis who have yet to serve. The opposition and many economists argue that drafting thousands of eligible ultra-Orthodox men would ease the burden.
The education pipeline is part of the worry. About a quarter of first graders are in independent ultra-Orthodox schools in which foundational courses such as math and English are frequently omitted, raising the risk of a larger share of future workers ill-prepared for high-paying jobs and more reliant on subsidies. "We must integrate the Ultra-Orthodox and Arab communities," said Shaul Meridor - formerly a Finance Ministry official and now running with Eisenkot. "It starts by terminating all budgets for schools who don't teach a core curriculum."
Another concern is talent leaving. A Tel Aviv University study estimates roughly 100,000 Israelis departed in 2023 and 2024, well above earlier years, with many academics, engineers, physicians and other high earners among them, and early data indicate the trend continued into 2025. "When I ask audiences at parlor meetings what their greatest fear is if Netanyahu stays in power, the most common answer is: 'That my kids pack up and leave the country,'" Meridor said. Finance Ministry Chief Economist Shmuel Abramzon said the outflow has not yet reached a level that moves the macro data, though he called the trend troubling.
What the choices mean for your portfolio
Gozlan expects an opposition-led coalition to push harder on integrating the ultra-Orthodox and to be more open to "potentially winding down some active military fronts." By contrast, he said the current coalition "would be reluctant to end existing military campaigns and has failed to pursue a more equitable distribution of the military service burden."
Why does that matter? Growth headlines are flattered by overseas services income, while the war's demands are crowding out future-growth spending. The Bank of Israel's numbers highlight three key watch items for investors: a defense budget parked near 8% of GDP, a debt path that could head toward 85% of GDP by 2035 if the 450-billion-shekel plan proceeds, and structural frictions from schooling gaps and low ultra-Orthodox participation in work and service. How the next government balances those will feed directly into taxes, borrowing needs and Israel's capacity to keep its high-value tech engine humming - and into how exposed your portfolio is to Israel's growth, currency and credit.
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