The Organization for Economic Cooperation and Development (OECD) released an economic report on Wednesday focusing on Israel, pointing at the financial challenges the country has faced in the wake of the Israel-Hamas War.The report highlighted that while Israel’s economy has seen partial recovery during the Israel-Hamas war, overall activity remains weak in 2024.
By the end of the year, investment levels were still 15% lower than before the latest fighting, with labor shortages hindering recovery – particularly in construction due to the suspension of work permits for Palestinian workers. The survey also noted that exports remained sluggish.
Looking ahead, economic growth is expected to accelerate as geopolitical conditions improve, but labor shortages will likely continue to weigh on the construction sector which, as anyone who has looked at the Jerusalem and Tel Aviv skylines in recent years knows, is vital to the development of major cities across the country.
The OECD also projects a GDP growth of 3.4% in 2025 and 5.5% in 2026. However, an escalation of conflict on multiple fronts could further strain public finances and, therein, weaken economic activity.
All in all, the point is clear: While Israel’s economy is resilient, it is not immune to prolonged instability. If this latest round of fighting continues, it will erode investor confidence, strain public finances, and limit economic potential. Stability in the region and an effective end to the conflicts on all fronts are vital to economic growth.
Indeed, Israel’s sovereign risk premium has risen by 50 basis points since October 7, 2023, meaning that concerns over Israel’s ability to meet loan and bond obligations have risen. The country’s fiscal balance, which previously showed a surplus, has now shifted into a significant deficit. That is a negative outlook for prospective investors in the Start-Up Nation.
The improvements Israel needs to make
The OECD additionally emphasized the need for structural reforms in education and the labor market to boost employment and productivity. As has been the source of many an internal conflict in recent years, the report noted that many young haredi (ultra-Orthodox) and Arab Israelis receive lower-quality education, limiting their job opportunities and wages. To address this, the OECD recommends conditioning school funding on teaching core subjects and ensuring equal per-student funding for schools with similar socioeconomic backgrounds.
This, however, has been one of many points of contention between the haredi sector and the secular majority.
Indeed, the Chief Economist’s Office in the Finance Ministry released a study in May 2024 revealing that full-time wages for young ultra-Orthodox men with no secondary education were 16% lower than for their non-haredi Jewish counterparts because their education system was not as effective as the non-ultra-Orthodox system in preparing students for the workforce.
Nevertheless, the haredi community in Israel has been diametrically opposed to any reform in terms of their education system.
Additionally, removing financial benefits that discourage ultra-Orthodox men from working could improve labor force participation, the OECD said. Indeed, financial benefits for the haredi community have been stamped into the economic system as a means of supporting a less workforce-focused, more religious-community-based society at the expense of the rest of the country’s taxes.
The OECD suggests that Israel adopt fiscal measures that minimize harm to growth, including taxing sugary drinks and single-use plastics – a policy that had been put in place by the previous government and reversed under Prime Minister Benjamin Netanyahu’s government as a bone to his haredi coalition partners, as well as ending VAT exemptions, and raising carbon tax rates.
The report also highlights Israel’s strong AI sector, which has benefited from the country’s dynamic hi-tech ecosystem. However, to sustain this growth, Israel must expand access to STEM education – another problem which has risen due to the disparities in core curricula – and address gender disparities in the field (where women make up only 23% of AI professionals), while maintaining a flexible approach to AI regulation.
The implications are clear. Israel’s systemic inequalities are harming its economic stability. An evenness in education, equal opportunities across the board, and a flexible, dynamic approach to cultural differences in order to create accessibility across sectors is vital to promoting a healthy, growing economy.
As much as we rely on the Start-Up Nation’s reputation, beauty doesn’t last forever. A society that works does.
