Post-War Economic Strategy for Israel - Policies to Accelerate Growth

Over the past two decades, Israel maintained robust annual growth of 3.5%, driven primarily by high-tech expansion and rising employment. The October 7th multi-front war diverted the economy from this trajectory. GDP growth fell sharply – 1.7% in 2023 and 0.7% in 2024 – resulting in declining per capita GDP and a rising debt–to–GDP ratio. The implementation of Trump’s initiative appears to be leading toward the end of the war, helping to restore economic activity and reducing risks associated with prolonged Israeli control of Gaza, including potential sanctions and brain drain.

To secure recovery and restore pre-war robust growth, Israel must implement long-term growth-enhancing reforms. The Aaron Institute has developed a comprehensive set of reforms that address both the weaknesses and strengths of the Israeli economy. The recommended reforms are grounded in empirical research, supported by detailed implementation plans, and can be applied immediately, some with only modest fiscal investment.

The Institute’s analysis indicates that growth-enhancing reforms could raise average annual growth to 3.7% over the next decade and place the debt-to-GDP ratio on a converging path. Without them, growth may slow to around 2.5% annually, leaving income per capita stagnant and risking a diverging debt trajectory.

This paper outlines the key challenges and the Aaron Institute’s recommended reforms in these areas: investment in transportation infrastructure; public-sector digital transformation; reducing the cost of living through regulatory streamlining; housing affordability; the high-tech sector; employment; and strategies to promote the economic participation of Arab and ultra-Orthodox society.