What Netanyahu win or loss could mean for Israel’s economy

Gas prices, inflation and debt woes are leading voter concerns in the United States, France and elsewhere in 2026. Much less so in Israel.

Ahead of a pivotal Oct. 27 election, safety and security issues are topping the list of national concerns as voters weigh Prime Minister Benjamin Netanyahu’s political future and the US-Israel-Iran conflict continues to simmer.

A recent Gallup poll found 56% of Israelis considered issues such as public safety, war and conflict the most important problem facing the country, while the economy was a distant second at 10%. Meanwhile, forecasts indicate the economy has proven resilient despite wartime pressures. The International Monetary Fund projects Israel’s gross domestic product will expand 4.5% in 2026, outperforming many advanced economies.

Yet the economy will be a challenge for whoever prevails amid questions about the resiliency of war-fueled growth. Beneath the positive headline GDP figure lie mounting fiscal pressures, persistent frustration over high living costs, labor shortages and brain drain, among other issues. Economists point to a need for a major course correction on spending, reforms and other structural issues, which could cause a growth hit in coming decades.  

This election could determine whether Israel maintains its current course or shifts priorities and seeks to rebuild institutional and international confidence. Rising defense spending will remain a burden regardless of the vote’s outcome, but the next government’s decisions on war and peace will directly impact Israel’s economic outlook.

Smoke and mirrors?

Amid turmoil since the Hamas attacks on Oct. 7, 2023, Israel’s economy has posted steady growth, with real GDP expanding 3.5% last year, up from 1.7% in 2024. Meanwhile, the local stock market has surged, with Tel Aviv’s main index rising nearly 140% since 2023.

Netanyahu and Finance Minister Bezalel Smotrich have used that resilience to defend their record while promising continuity. Others take a dimmer view of the performance. Omer Moav, an economics professor at the University of Warwick, argues that the headline figures obscure deteriorating fundamentals.

“The claims of robust economic growth in Israel are largely smoke and mirrors,” Moav told Al-Monitor, noting that GDP per capita is virtually unchanged from four years ago. “In other words, while most developed economies enjoyed post-pandemic economic growth, Israel stood still. In fact, the situation has actively deteriorated.”

The government’s wartime spending has inflated growth, noted the economist, while higher taxes have squeezed household incomes and rising debt has increased future burdens. Israel’s government debt-to-GDP ratio is climbing, reaching nearly 70% last year, up from 60% in 2022.

A Netanyahu victory would likely preserve coalition priorities, including funding for ultra-Orthodox communities and West Bank settlements. Moav sees these allocations, which subsidize low workforce participation and divert resources from public services, as threats to the country’s economic future.

“The sweeping cross-departmental budget cuts — plaguing education, healthcare, infrastructure and social welfare for the general public — serve as a direct substitute for cutting politically motivated coalition funds,” he said. Therefore, maintaining the current course means leaving structural weaknesses unaddressed. “It is impossible to point to a single meaningful structural reform [Netanyahu’s government] has advanced,” said Moav.

What could change?

An opposition victory could shift economic priorities, but its first dividend might come from restoring confidence in Israel’s institutions. “The biggest possible shift is reversing democratic backsliding,” said Eran Yashiv, an economics professor at Tel Aviv University. “That will have an economic impact including potentially credit upgrades.”

This election will prove pivotal for Netanyahu’s controversial judicial overhaul, which has raised concerns about institutional stability. In July, Moody’s warned that a weakened judiciary could threaten Israel’s credit standing.

Opposition proposals also suggest different spending priorities, including those of Netanyahu’s leading challenger Gadi Eisenkot. The former army chief’s "Yashar!" party has outlined an economic strategy spearheaded by economist and politician Shaul Meridor, emphasizing employment, military and national service, and lower living costs.

The party proposes prioritizing working families, young people and reservists for housing assistance and childcare subsidies. To reduce prices, it pledges to lower import barriers and bureaucracy, increase competition, reform kosher certification and tackle protection rackets affecting small businesses.

Such proposals aren’t a guaranteed program for every opposition coalition. Implementation would depend on political agreements, fiscal constraints and how long a government survives.

Yashiv sees scope for better education and infrastructure investment, but doubts a new coalition could quickly resolve low workforce participation and military service among ultra-Orthodox men. “They want to tackle [the] problem of ultra-Orthodox men not serving in the army or being in the labor force, but I doubt that they make progress,” he said.

Tech test

Either government would need to protect the country’s technology sector, an economic growth engine that accounted for 18.3% of GDP last year, according to the Israel Innovation Authority. The industry has benefited from global demand for artificial intelligence and cybersecurity, while defense technology firms have gained from rising military spending.

Yet the sector faces headwinds. A strong shekel makes Israeli exports more expensive and has raised the costs of employing local tech talent, which has encouraged companies to move jobs abroad. The tendency for startups to incorporate in the United States also raises questions about whether Israel can retain the benefits of its innovation economy.

International isolation

Israel’s trade partnerships have come under pressure ahead of October’s vote, which could determine whether the country’s isolation worsens.

In September, the UK, Canada, France and other European countries unveiled plans to sanction West Bank settlement-related trade. The coordinated decision sparked a furious response from Netanyahu’s government, under which illegal settlement expansion has accelerated.

Although largely symbolic, as trade is limited, the measures could establish a precedent for broader restrictions. An opposition government might seek to ease diplomatic friction, but if Netanyahu’s coalition is reelected and policies don’t change, international pressure could hit Israel’s economy more directly. One possible action flagged by analysts is the suspension of the EU-Israel Association Agreement, a treaty giving Israeli goods preferential access to European markets.

Post-election escalation?

Heading into 2026, the IMF expected Israel’s economy would expand 4.8% this year, before slashing that forecast to 3.5% by July after the war erupted. The fund has since revised growth back upwards but has cautioned that prolonged hostilities could further weaken growth — a warning that hasn’t deterred war planning.

On Oct. 20, the Financial Times reported that Netanyahu had pushed to resume large-scale strikes against Iran earlier in the month. The offensive reportedly didn’t proceed because US President Donald Trump opposed restarting the conflict before US midterm elections on Nov. 3.

Regardless of whether direct confrontations with Iran resume, Israeli military spending is positioned to grow and impact the fiscal situation. Yashiv pointed to a prospective annual defense budget reaching 9–10% of GDP in the next 1–2 years, making it a key issue to watch. Another, he added, is whether emigration continues at elevated rates seen from 2023 to 2026.

With polls indicating a tight contest, Israel’s near-term economic outlook remains in flux — but the longer-term challenges are clear. “Israel has numerous very substantial structural economic problems,” said Yashiv, who predicts that the country will see a sizable drop in GDP per capita in the next 15–20 years.