Analysis
OECD's optimistic report reveals Israel's big problem
The OECD forecast paints a rapid recovery for the Israeli economy, and highlights the main warning: Even in a positive scenario of growth and low inflation, Israel continues to run huge deficits. With security risks looming in the region, greater budgetary room for maneuver is needed
When you read the OECD forecast published yesterday, you can feel a certain sense of relief. After long months of wars, security uncertainty, and geopolitical upheavals, the organization paints a picture that seems almost encouraging: The Israeli economy is expected to grow by 3.3% this year — 0.5% higher than the global average — and by 2027 it will accelerate to 5.6%, almost double the growth rate predicted for the global economy. Private consumption is expected to recover, the construction industry is expected to expand rapidly, inflation is expected to remain under control, and the Bank of Israel is even expected to continue reducing interest rates.
In fact, this is one of the most optimistic reports written about Israel since October 7. The OECD assumes that the Israeli economy will recover relatively quickly from the recent shocks and return to an impressive growth path. But precisely because the report is so optimistic, it reveals a deeper problem: the real story is not growth — but the deficit. After all, even under the relatively positive scenario outlined by the organization — a scenario of economic recovery, a decline in inflation, a return to demand, and an easing of the security situation — the government deficit is expected to stand at 5.3% of GDP in 2026 and only drop to 4.2% in 2027. This is the fourth year in which the Netanyahu-Smotrich government has been running with a deficit of over 5% of GDP. This has been the policy since its establishment. The result is clear and well reflected in the data: the debt-to-GDP ratio is expected to rise to about 71% this year and remain around 70% next year as well. This compares to a ratio of 60% of GDP on the eve of their coming to power.
This is the most important figure in the report, because it shows that Israel's problem is no longer cyclical but structural. If we were to see a 5% deficit during a deep recession, high unemployment, and a collapse in activity, it could be explained as a temporary response to the crisis. But this is not what the OECD describes. It describes an economy that is growing, an economy in which unemployment is low, an economy in which inflation remains under control, an economy in which private consumption is set to soar in 2027. And yet, even in this scenario, Israel does not return to the deficit areas that characterized it on the eve of the war.
Rebuilding the safety cushions
This is precisely the point: The central debate about the Israeli economy is no longer whether it will grow, but whether it can afford to continue growing without rebuilding its fiscal safety cushions, which are currently nonexistent. OECD economists answer this question clearly and concisely: Their main recommendation to the government is to rebuild the fiscal “buffers” or “cushions” that have enabled Israel to successfully cope with previous crises. The organization calls for faster debt reduction, preservation of the revenue measures taken in the 2025 budget, and reductions in spending when security conditions permit. This is the most important line in the chapter on Israel.
Israel's economy is different from many other OECD countries. Israel does not enjoy the privilege of Switzerland, Denmark, or Germany. It operates in an unusual security environment, exposed to geopolitical shocks much more frequently, and therefore needs greater budgetary leeway. For many years, the policy of rebuilding cushions has been one of Israel's great advantages.
On the eve of the coronavirus, the debt-to-GDP ratio was 60% of GDP, similar to the situation on the eve of the October default, when the government of change decided to take advantage of the growth provided by the "rebound" after the coronavirus. Those buffers allowed the government to increase spending during a crisis without immediately losing investor confidence. But buffers are not an infinite resource. They can be used when they exist. Then they have to be rebuilt.
And here begins the interesting gap between the OECD report and the messages presented hours earlier by the Governor of the Bank of Israel, Amir Yaron. Both bodies describe essentially the same reality. Both emphasize the impressive resilience of the Israeli economy. Both point to a recovery in activity, relative stability of the financial markets, and the return of investor confidence. In the Governor's presentation, we can see how risk premiums have fallen, the shekel has strengthened again, the local stock market has recovered, and confidence indicators have improved. But while the OECD focuses on the growth forecast, the Bank of Israel focuses on a different question: what will happen in the next crisis. This is not a theoretical question, and it is critical for a country like Israel. Budgetary pressures ahead of the elections
Budgetary pressures ahead of the elections
The OECD itself presents two completely different scenarios for the future. The positive scenario is based on a security calm and even regional integration, which could lead to significantly higher growth. On the other hand, a scenario of renewed fighting or prolonged disruption in the Middle East could lead to a significant slowdown in activity and worsen the fiscal situation. In other words, even the OECD's optimistic report is based on an implicit assumption: Israel will also need the ability to respond quickly to shocks in the future.
And this is precisely why the deficit is more important than growth. Because a country can live with a high deficit during a war. It cannot live with a high deficit permanently if it knows that more wars are still to come. This is the dilemma — or “trilemma,” as the governor calls it — of the next Israeli governments, whoever they may be. On the one hand, security needs have increased dramatically; on the other, the real need to increase civilian spending, which is small relative to the OECD; and on the other, the capital markets and rating agencies still expect to see a clear path of fiscal convergence and debt reduction.
Therefore, the claim that "the economy is strong and therefore we can continue" not only misses the point, but is also dangerous. Precisely because the economy is strong, it is time to rebuild the reserves. After all, the report praises the current government in only one place: for enacting the adjustment package included in the 2025 budget — the VAT increase, additional revenue measures, and convergence measures taken after a long period of deterioration. This package was not born in a vacuum. It was formulated after five rating downgrades, a sharp jump in the risk premium (CDS), and after heavy pressure from the Bank of Israel, alongside repeated warnings from the Budget Division. In this sense, it is not evidence that the problem has been solved. It is evidence that the problem has been recognized. And it is still far from being solved.
These things are doubly important because Israel is already effectively entering an election period. The discussions about tax breaks for political reasons, budgetary expansions without coverage, and new promises are only just beginning. The Knesset has not yet dispersed, and the budgetary pressures are already evident. Therefore, the big question is not what will happen in 2027. The OECD has already given a relatively optimistic answer to that. The question is what will happen after the elections. Will the next government continue to rebuild the fiscal buffers that both the OECD and the Bank of Israel recommend, or will it see the expected growth as proof that it is possible to continue living with deficits of 4%–5% of GDP over time?
This is no longer a question of forecasting. It is a question of policy. Precisely because the OECD is so optimistic about Israel, it is much harder to ignore the warning it is issuing. If even in the best-case scenario the deficit remains high and the debt continues to climb, it is a sign that the problem is no longer just the war — but the government.
