Israel's Economy

Phase one, 1948–1985: A state-led economy and the road to near-hyperinflation

After independence in 1948, the state, the Histadrut labour federation and the Jewish Agency owned or directed a large part of the economy. The Histadrut owned major employers, including the construction firm Solel Boneh, the industrial group Koor and Bank Hapoalim. It also ran the largest health fund. The government allocated credit, set many prices and controlled foreign exchange. Mass immigration in the first years led to a period of rationing known as tzena, or austerity. Growth was fast through the 1950s and 1960s. Immigration, capital transfers from abroad and German reparations supported it. The years after the 1973 war broke this pattern. Defence spending, the global oil shock and large budget deficits pushed prices up. Wages, savings and many contracts were linked to the price index, so each price rise fed the next one. In 1983 bank shares collapsed, and the state took over the major banks. Annual inflation reached a rate close to 500 %. [1] The Economic Stabilisation Plan took effect in July 1985 under a national unity government. It cut the budget deficit and devalued the shekel before fixing its exchange rate. It also froze wages and prices for a period, under an agreement among the government, the Histadrut and employers. The Bank of Israel stopped financing the government deficit. Within about two months, the plan reduced annual inflation from close to 500 % to under 20 %, with little harm to employment. In monthly terms, this was a fall from an average of 16.1 % to 1.5 %. [1] The economist Don Patinkin described the plan as a heterodox programme. It combined tight fiscal and monetary policy with temporary wage and price controls, often agreed through a social contract. [1] The plan ended the older model, in which the central bank financed the state's deficits.

Phase two, 1985–2011: Liberalisation, trade opening and OECD entry

Trade with the United States opened in the same year. The US–Israel Free Trade Agreement came into force in 1985. It was the first free trade agreement the United States concluded. [2] In 2024, US goods exports to Israel were $14.8 billion, and US goods imports from Israel were $22.2 billion. [2] Over the next two decades, governments sold state and Histadrut holdings. These included the major banks, the telephone company Bezeq and the airline El Al. Foreign exchange controls were removed in stages. The Histadrut lost most of its business assets. A large wave of immigrants from the former Soviet Union arrived in the 1990s, and many had scientific and engineering training. The government adopted inflation targets, and the Bank of Israel gained more independence. These reforms prepared the ground for membership in the OECD, the organisation of advanced market economies. Between 2007 and 2009, 18 OECD committees reviewed Israeli policies. The OECD invited Israel to join on 10 May 2010. The two sides signed an accession agreement on 29 June 2010, and Israel signed the OECD Convention on 7 September 2010. [3] Growth did not ease pressure on household budgets. In the summer of 2011, protests began over the price of housing and food, including cottage cheese. The protests grew into tent camps in several cities. Prime Minister Benjamin Netanyahu appointed a committee under the economist Manuel Trajtenberg to propose responses. The committee's proposals covered taxation, housing and the defence budget. The cabinet approved the recommendations by 21 votes to 8. A final draft was still due, and the measures needed Knesset approval. The defence minister said his ministry would contribute to the cost. [4]

What makes up the technology sector?

The technology sector grew out of military research, the universities and the skills of the 1990s immigrants. In 1993 the government launched Yozma, a programme that matched foreign venture capital with public money and later sold its stakes. Yozma helped create a local venture capital industry. Large foreign companies, including Intel, Microsoft, Google, Apple and Nvidia, run research and development centres in Israel. Many Israeli start-ups are sold to companies of this kind. In 2024, high-tech output was about NIS 317 billion, or 17 % of GDP. In the first half of 2025, the sector employed about 403,000 people, or 11.5 % of all workers. [5] Software services made up 72 % of high-tech exports, and hardware industries made up 28 %. [5] According to the Israel Innovation Authority, high-tech output rose 8.2 % in 2025. Capital raised rose 30 %, to nearly $15 billion. Exits totalled $84 billion, and exports totalled $85 billion. [6] High-tech contributed 1.44 %age points of the economy's 2.9 % growth in 2025, or about half. [6] The same report recorded the first fall in a decade in the number of R&D workers in Israel. It also recorded more requests to relocate and a continued move of management and R&D work abroad. [6] The largest single exit closed in March 2026. Google completed its $32 billion all-cash purchase of the cybersecurity firm Wiz, the largest acquisition in Google's history, a year after the deal was announced. [7] Access to the sector is uneven across the population. About 20 % of non-Haredi Jewish men work in high-tech. The figure is about 5 % for Haredi men and women, about 2 % for Arab men and about 1 % for Arab women. [8] Agricultural technology grew from water scarcity. Drip irrigation, sold worldwide by Netafim, a company founded on Kibbutz Hatzerim, is the best known product. Other firms work in desalination, wastewater reuse, crop genetics and farm data.

Which other industries earn foreign currency, and under what trade rules?

Defence is the second large technology-based export. The main firms are Elbit Systems, Israel Aerospace Industries and Rafael. The Defence Ministry's SIBAT directorate licenses and promotes their sales. Defence exports reached $19.2 billion in 2025, almost 30 % more than in 2024 and the fifth record year in a row. This was more than double the level of five years earlier and four times the level of a decade earlier. [9] Government-to-government agreements made up about $10 billion, or more than half of the total deal volume. [9] The ministry's figures measure signed deals, not deliveries. The diamond industry is centred on the exchange in Ramat Gan, where stones are cut and traded. The Diamond Controller's Office reported exports of $2.4 billion from January to June 2026, the lowest figure in the industry's history. Polished diamond exports had been about $7 billion in 2015, the peak year. [10] The decline has been linked to weaker global demand, competition from Dubai and its tax advantages, lab-grown stones and a new 10 % US tariff. [10] Tourism fell sharply after October 2023. Tourism Ministry figures show 4.5 million tourists in 2019, 3 million in 2023, fewer than 1 million in 2024 and 1.3 million in 2025. [11] About half of the visitors in 2025 came to see family or friends. [11] These exports travel under a wide set of trade agreements. Israel's first free trade agreement was with the European Community in 1975. The agreement with the United States was its second. [12] Later agreements cover EFTA, Mercosur, Canada, Mexico, the United Kingdom and other partners. In 2022, Israel and the United Arab Emirates signed the first free trade agreement between Israel and an Arab state. It removes duties on about 96 % of trade between the two countries. [13]

How did natural gas change the economy?

For most of its history, Israel imported nearly all its fuel. This changed after large offshore gas finds. Production at the Tamar field began in 2013. The Bank of Israel named it as one of the causes of the shekel's rise that year. [14] Power stations then shifted from coal and oil to gas. Leviathan, operated by Chevron, holds an estimated 600 billion cubic metres of gas. It began supplying Egypt shortly after production started in 2020, and it also supplies Jordan. [15] In August 2025, the Leviathan partners agreed to sell about 130 billion cubic metres of gas to Egypt through 2040. [15] In December 2025, Prime Minister Netanyahu and Energy Minister Eli Cohen announced that the 35billiondealwassealed.NetanyahusaiditwouldbringNIS58billion(18 billion) to the state and would not raise energy prices for the Israeli public. [16] The same Times of Israel report argued that the deal would use up reserves and that the public would bear the cost. [16] A route to Europe was planned but not built. Israel, Greece and Cyprus signed the EastMed pipeline agreement in January 2020. The pipeline was planned at 1,900 kilometres, with a first-stage capacity of 9 to 12 billion cubic metres a year. [17] In January 2022, the Biden administration said in a "non-paper" that it no longer supported the project. [17] As a result, exports travel by pipeline to Egypt and Jordan. Part of the state's gas income goes into a sovereign wealth fund. A tax on excess profits from gas fields has applied since 2011. The law creating the fund was passed in 2014, and the fund could start only after NIS 1 billion had been collected. That threshold was crossed in 2022, and the order founding the fund was signed on 1 June 2022. [18] By the end of 2025, the fund had received NIS 8.8 billion. Gas producers pay a 12.5 % royalty, a 23 % company tax and a super-profits levy of 20 to 46.8 % after a 150 % return on investment. The Bank of Israel manages the fund. [19]

Phase three, 2023–2026: War costs, interest rates and the labour force

The war that began on 7 October 2023 raised spending sharply. The 2024 budget was revised three times, adding about 5 % of GDP. The budget deficit was 6.8 % of GDP, and the general government deficit was 9.4 %. Public debt rose from 61.5 % of GDP at the end of 2023 to 67.8 % at the end of 2024. [20] The Finance Ministry's accountant general estimated war-related military, defence and civilian spending at about NIS 91 billion ($29 billion) in 2025. The ministry put the 2025 deficit at 4.7 % of GDP and debt at 68.6 %. [21] The Bank of Israel puts debt at 68.5 % of GDP for 2025. It reports a loss of output against the prewar trend and a fall in income per person. [22] These are two separate estimates from two producers. Operation Roaring Lion began on 28 February 2026 with Israeli airstrikes on Tehran. [23] The Bank expects the resulting rise in the defence budget to increase debt in 2026, the fourth year of increase in a row. [22] The Bank of Israel's independence rests on law. Its Monetary Committee sets interest rates to meet an inflation target chosen by the government. [24] The target range is 1 to 3 %. [25] In November 2025 the Bank cut its rate from 4.5 to 4.25 %, its first cut in almost two years. In January 2026 it cut the rate to 4 %. [26] On 6 July 2026 it lowered the rate to 3.5 %. [24] On 1 September 2026 it lowered the rate to 3.25 %. Inflation over the 12 months to July was 1.5 %, and second-quarter GDP grew at an annual rate of 15.4 %. [23] The labour force is the main long-term constraint. The Labour Ministry's 2025 report put Haredi men's employment at 53 % in 2025. The figure was 53.1 % in 2022 and 52 % in 2015. The report doubts that the government target of 65 % by 2030 will be met. [27] The Taub Center found that Arab men's employment was 77 % in early 2025, below its 2023 peak of 79 %. It also found that Haredi men's employment fell again compared with the prewar period. [8] The Social Equality Ministry reported that Arab women's employment rose from 42.1 % in the first half of 2022 to 44.7 % in the first half of 2023. [28] For all Israelis aged 25 to 64, the employment rate was 78.9 % in July 2026. [23]

In One Paragraph

Israel's economy began as a state- and Histadrut-led system after 1948. It came close to hyperinflation in the early 1980s, with annual inflation near 500 %. The July 1985 stabilisation plan brought inflation below 20 % within about two months. Liberalisation followed, including the 1985 free trade agreement with the United States and OECD membership in 2010. The 2011 cost-of-living protests led to the Trajtenberg reforms. Technology now provides most exports: $85 billion in 2025, alongside $84 billion in exits. Defence exports reached $19.2 billion. Diamonds and tourism have declined. Gas from Tamar and Leviathan supplies the domestic market, Egypt and Jordan, and funds the Citizens' Fund. The EastMed pipeline to Europe lost US support in 2022. The wars since 2023 raised public debt to about 68.5 % of GDP. The Bank of Israel has cut its rate to 3.25 %. Haredi men's employment stays near 53 %.

Sources

1. Patinkin, Don. "Israel's Stabilization Program of 1985, or Some Simple Truths of Monetary Theory." Journal of Economic Perspectives 7, no. 2 (Spring 1993): 103–128.https://www.aeaweb.org/articles?id=10.1257/jep.7.2.103.
2. Office of the United States Trade Representative. "Israel Free Trade Agreement." Accessed October 6, 2026.https://ustr.gov/trade-agreements/free-trade-agreements/israel-fta.
3. Organisation for Economic Co-operation and Development. "Israel." OECD accession process and member profile. Accessed October 6, 2026.https://www.oecd.org/en/countries/israel.html. See also OECD, Corporate Governance in Israel 2011 (Paris: OECD Publishing, 2011),https://www.oecd.org/en/publications/corporate-governance-in-israel-2011_9789264097698-en.html, and OECD Council, "Accession of Israel to the Organisation," C(2010)42/FINAL, May 10, 2010,https://one.oecd.org/document/C%282010%2942/FINAL/en/pdf.
4. Somfalvi, Attila. "Cabinet Approves Trajtenberg Report." Ynetnews, October 2011.https://www.ynetnews.com/article/4133108.
5. Israel Innovation Authority. "Israel Innovation Authority 2025 High-Tech Report: Record Year in Exits and Deep-Tech Growth; Stagnation in Output, Employment, and VC Fundraising." Press release, September 17, 2025.https://innovationisrael.org.il/en/press_release/innovation-report-2025/.
6. Israel Innovation Authority. "Israeli High-Tech Annual Report Demonstrates Strength with Increase in GDP, Fundraising, Exits, and Exports, Alongside the First Decline in R&D Employees and an Expansion of Activity Abroad." Press release, May 31, 2026.https://innovationisrael.org.il/en/press_release/israeli-high-tech-report-2026/.
7. TechCrunch. "Google Wraps Up $32B Acquisition of Cloud Cybersecurity Startup Wiz." March 11, 2026.https://techcrunch.com/2026/03/11/google-completes-32b-acquisition-of-wiz/.
8. Taub Center for Social Policy Studies in Israel. "The Israeli Labor Market 2025: From Strategic Dangers to Technological Ones." January 20, 2026.https://www.taubcenter.org.il/en/research/snr-2025-labor/.
9. Israel Ministry of Defense. "All-Time Defense Export Record: Israel Crosses the $19 Billion Threshold." Press release, June 2, 2026.https://mod.gov.il/en/press-releases/press-room/all-time-defense-export-record-israel-crosses-the-19-billion-threshold.
10. Ynetnews. "Israel's Diamond Exports Plunge to Historic Low as Exchange Chief Resigns." 2026.https://www.ynetnews.com/business/article/h100005gxrfg.
11. JNS. "1.3 Million Tourists Visited Israel in 2025." December 2025.https://www.jns.org/israel-news/1-3-million-tourists-visited-israel-in-2025.
12. Embassy of Israel to the United States. "Economic & Trade Mission." Government of Israel. Accessed October 6, 2026.https://embassies.gov.il/usa/en/node/2750.
13. Globes. "Israel and UAE Sign Free Trade Agreement." May 2022.https://en.globes.co.il/en/article-israel-and-uae-sign-free-trade-agreement-1001413776.
14. Bank of Israel. "The Bank of Israel Reduces the Interest Rate by 0.25% to 1.5%." Press release, May 2013.https://boi.org.il/en/communication-and-publications/press-releases/the-bank-of-israel-reduces-the-interest-rate-by-025-to-15/.
15. Offshore Magazine. "Leviathan Partners Seal $35-Billion Gas Export Deal with Egypt." August 2025.https://www.offshore-mag.com/regional-reports/middle-east/news/55309072/newmed-energy-leviathan-partners-seal-35-billion-gas-export-deal-with-egypt.
16. Times of Israel. "As Major Egypt Gas Deal Burns Through Reserves, Public Will End Up Paying the Price." December 26, 2025.https://www.timesofisrael.com/as-major-egypt-gas-deal-burns-through-reserves-public-will-end-up-paying-the-price/.
17. Krasna, Joshua. "Politics, War and Eastern Mediterranean Gas." Moshe Dayan Center for Middle Eastern and African Studies, Tel Aviv University, vol. 16, no. 4, March 24, 2022.https://dayan.org/content/politics-war-and-eastern-mediterranean-gas.
18. Government of Israel. Annual Report 2022: The Citizens of Israel Fund. 2023.https://www.gov.il/BlobFolder/news/press_04042023/en/israel-citizens-foundation_israel-citizens-foundation-annual-report-2022-eng.pdf.
19. Globes. "Israel's Sovereign Wealth Fund Accumulates NIS 8.8b." 2026.https://en.globes.co.il/en/article-israels-sovereign-wealth-fund-accumulates-nis-88b-1001531729.
20. Bank of Israel. Bank of Israel Annual Report 2024. Summary page. March 2025.https://www.boi.org.il/en/communication-and-publications/regular-publications/bank-of-israel-annual-report/bank-of-israel-annual-report-2024/.
21. Israel. Ministry of Finance, Accountant General. "Initial Estimate for 2025 Debt-to-GDP Ratio." January 25, 2026.https://www.gov.il/BlobFolder/news/press_25012026/en/PressReleases_eng_press_25012026-en-file.pdf.
22. Bank of Israel. Bank of Israel Annual Report 2025. Summary page. March 2026.https://www.boi.org.il/en/communication-and-publications/regular-publications/bank-of-israel-annual-report/bank-of-israel-annual-report-2025-1/.
23. Cohen, Daniel. "Third Consecutive Cut: Bank of Israel Lowers Interest Rates to 3.25%, Following Economic Review." Jerusalem Post, September 1, 2026.https://www.jpost.com/business-and-innovation/banking-and-finance/article-907255. Also see Israel Defense Forces, "February 28, 2026: Iran-Israel War 2026—Live Updates," February 28, 2026.https://www.idf.il/en/mini-sites/iran-and-israel-war-2026/february-28-2026-iran-israel-war-2026-live-updates/.
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28. Siegel-Itzkovich, Judy. "Arab Workers at Higher Risk of Injury at Israeli Workplaces - Survey." Jerusalem Post, September 5, 2023.https://www.jpost.com/health-and-wellness/article-757712.