Three Years Into the War, Israel's Economy Is Booming Against the Odds — Yet Voters Anxious Over Prices and Debt

After nearly three years of multi-front conflicts in Gaza, Lebanon, Syria, Iraq, Iran and Yemen, one might expect Israel's economy to be struggling on the eve of its October 27 parliamentary election. Yet the reality is the opposite — according to Al Jazeera, citing Israeli government data, Israel is becoming one of the fastest-growing developed economies in recent years.

According to Al Jazeera, Israel's GDP grew 2.9% in 2025, rebounding from a low of 1% in 2024, with first-half growth reaching 3.2%. The Bank of Israel projects full-year growth of 4% in 2026 and 5.5% in 2027 — a forecast that far outpaces the United States, the United Kingdom, France, Canada and Japan. Over the past three years, the new shekel has appreciated steadily against the U.S. dollar, touching a three-decade high in May, while the benchmark TA-125 index has risen more than 110% cumulatively. Meanwhile, unemployment has remained at 2.8% and inflation has held at a modest 1.5%.

Driving this wartime economic resilience is a high-tech sector that has kept its distance from the fighting. According to Al Jazeera, the tech sector — accounting for roughly one-fifth of economic activity — has attracted record capital amid the global artificial intelligence boom: last year, direct foreign investment in Israel reached $26.2 billion, up 78% from 2024, with Alphabet and Palo Alto Networks acquiring Israeli cybersecurity firms Wiz and CyberArk respectively in record-breaking deals. In the first quarter of this year, quarterly foreign investment inflows hit another historic high of $14.1 billion. Israel's tech industry has simultaneously benefited from surging orders from the domestic defense sector, with hundreds of startups supplying products ranging from radar systems to communications platforms and counter-drone technology.

Karen Uziah, the Middle East and Africa senior analyst at the Economist Intelligence Unit, told Al Jazeera that Israel's economic resilience is "essentially an export-driven story, reflecting strong global demand for technology, especially in cybersecurity and AI where Israel and multinationals operating in Israel are globally competitive." She added that interest in Israeli tech products and services is driving high levels of foreign investment and venture capital fundraising and boosting capital markets, in turn generating significant wealth effects and increasing government revenue.

Yet behind these glittering growth figures, public finances are bearing the weight of the war machine. According to Al Jazeera, the Bank of Israel estimated in March this year that the cumulative cost of the war had reached approximately 350 billion new shekels (about $114.6 billion) — a figure that does not yet include the subsequent war with Iran.

The right-wing coalition led by Prime Minister Benjamin Netanyahu, which has packaged security as "the foundation of everything else," is pushing to raise the annual defense budget to 183 billion new shekels (about $60 billion), equivalent to roughly 9% of GDP and 2.5 times the level before the October 7, 2023 attack. Opposition leader Yair Lapid supports expanding the defense budget but is publicly at odds with Netanyahu over where the money should come from.

According to Al Jazeera, Israel's government debt-to-GDP ratio stands at roughly 68% — well below that of the United States, the United Kingdom, France and Italy — but the gap between government revenue and expenditure has widened dramatically over the past three years. In its latest annual report, the Bank of Israel warned that "restoring an orderly budgetary process" and implementing "credible measures" to reduce public debt are "essential." Omer Moav, a professor of economics at the University of Warwick and Reichman University, told Al Jazeera bluntly: "The costs of military operations and mobilization have severely squeezed public finances, and the deficit and national debt have expanded significantly, making the current spending trajectory unsustainable without fiscal consolidation."

On the surface, the election has been dominated by national security issues. According to Al Jazeera, a poll released last month by the Israel Democracy Institute found that 38% of Jewish Israelis and 46% of Palestinian citizens of Israel — the latter group making up roughly one-fifth of the population — still rank the economy and cost of living as the first or second most important election issue. That figure reflects the gulf between macroeconomic data and household budgets.

According to the consumer rights organization Lobby 99, food prices in Israel rose 8% from early 2024 to mid-2026, far outpacing overall inflation. Israel has long ranked among the OECD countries with the highest cost of living, a phenomenon economists attribute to limited trade relations with neighboring countries and burdensome regulation. Yosef Zeira, a professor of economics at the Hebrew University of Jerusalem, told Al Jazeera: "Real living standards vary by region, and Israelis are bearing 'higher prices, or rather lower real wages and income,' along with a decline in the quality of public services." He added that the only visible improvement is a certain decline in housing prices brought about by large-scale construction in recent years.

Long-term challenges are equally daunting: raising the labor force participation rates of Haredi Jewish men — whose exemption from military service has become a major election issue — and Palestinian women in Israel, both of whom are far below the general population, is a chronic structural problem. Ayal Kimhi, deputy director of the Shoresh Institute for Socioeconomic Research, told Al Jazeera that voters "are more worried about the economy, but rather at the personal level than the macro level, especially the cost of living," while acknowledging that "the security situation clearly dominates public discourse" and that economic issues are unlikely to play a central role in voting. He said bluntly that some parties do not even bother to put forward a vision or agenda, while others differ little on economic issues.

Uziah told Al Jazeera that the Economist Intelligence Unit expects Israeli growth of around 4% in 2026, with 2027 exceeding that level, but she warned: "If conflicts on the Gaza, Iran or Lebanon fronts resume, economic growth will face significant downside risks." Kimhi was more direct: "The outlook depends to a large extent on the security situation. If we can end the war and cut military spending, the future can be brighter."

Regardless of the election's outcome, the paradox of war and prosperity running in parallel has begun to show cracks: when government debt finances multi-front wars, when expanding military spending squeezes public investment, and when food price increases outpace wages — whether the brilliance of macroeconomic growth can translate into a sense of gain on ordinary Israeli household budgets will determine the economic trajectory after this election.