Israel’s economy was struggling long before October 7, expert says

Israel’s economy was struggling long before October 7, and financial difficulties have had an impact on the country’s defense capabilities, Israeli economist Yaron Zelekha argued during the latest episode of Conversation Corner, a series powered by The Jerusalem Post and Ono Academic College.

Zelekha, a former Accountant General for the Israeli Finance Ministry and the director of Accountancy Studies at Ono Academic College was interviewed by Jerusalem Post's Deputy Editor-in-Chief Tamar Uriel-Be’eri.

"For the past 17 years Israel has witnessed a slow deterioration in the state of the economy," Professor Zelekha said. He stressed the stark contrast between the economic boom of 2007-2008 and the decline observed since then, noting that during the economic peak, Israel's GDP per capita reached 62% of that in the United States, but has since fallen below 50%.

Uriel-Be’eri pressed on, "How does Israel finance this war right now?" Zelekha responded with a detailed analysis of the shifting economic policies over the years, explaining that the government has increasingly relied on raising real estate prices and the consumer price index to boost revenues. "From 2008 until 2023, the government has brilliantly, or should I say, viciously, structured the economy in a way that it can take a larger share of our income," he elaborated. This strategy, he argued, has enriched the government while impoverishing the citizens.

The discussion turned to the impact of these policies on Israel’s defense capabilities. "On October 7, we were facing our enemies with a smaller army than we needed," Zelekha said. He explained that the reduction in GDP allocated to defense from 7% to 5% has resulted in significant budget shortfalls, affecting the country's military readiness. "That explain why on October 7," he said "we were facing our enemies with a smaller army than the one we needed. I don't want to mention the number of divisions, including armed divisions with tanks that were closed in these 17 years, while according to reports, half of our fighting helicopters were dismantled."

When asked whether Israel is on the right track to economic recovery, Zelekha's response was both optimistic and cautionary.

"Israel's economy is very stable and robust to external shocks because of its experience,” he said. “I'm not afraid of the stability of the economy. I'm afraid of our level of income, which has deteriorated."

The conversation shifted to the high-tech sector, a vital engine of Israel's economy. Zelekha emphasized the sector's resilience but cautioned against over-reliance on it. "High tech is important, however, it's not important enough to be a sole engine to the Israeli economy," he explained.

Instead, he advocated for policies that support the 90% of the workforce employed in other sectors.

"We cannot expect the 10% to become 30%, 40%, or 50%," he explains "It will not happen. It's only growing by a half percent a year, so in 10 years, it can be 15%. We need to take care of the other 90% of workers, and in order to do that, we need to change our economic policies."

According to Zelekha, a key issue for this purpose is the education system. "You cannot teach 40 children in a classroom in 2024," Zelekha stated emphatically. He argued for smaller class sizes and better resource allocation, noting that increasing the number of teaching hours without addressing class size would be ineffective. "You can teach 10,000 hours, but the outcome with 40 pupils a classroom will be zero," he said.

This article was written in cooperation with Ono Academic College.