The International Monetary Fund (IMF) published preliminary findings on the Israeli economy today from a regular staff visit to Israel. The findings are ambivalent. On the one hand, there is admiration for the resilience of the economy and its rapid recovery following the ceasefire in the Gaza Strip. Other the other hand there are clear warnings that current fiscal policy is inadequate, and recommendations that the government will probably not be keen to adopt.
The IMF sees the Israeli economy growing by 4.8% in 2026, a lower forecast than those of the Bank of Israel and the Ministry of Finance, which both predict growth of 5.2%. The gap reflects the IMF’s more cautious assessment of the economy’s ability to rebound after the war.
For the medium term too, the IMF is less optimistic than Jerusalem. It projects annual growth of 3.5%, down from 4% in its pre-war findings, and substantially lower than the Bank of Israel’s forecast of 4.3% growth in 2027. The reasons that the IMF gives for its reduced growth forecast are “the lingering conflict-related effects-including elevated defense spending and mobilization, higher risk premia, and reduced availability of non-Israeli workers,” in addition to “pre-existing structural challenges, such as falling working-age population growth and low labor market participation and skills among specific groups.”
Raise taxes
The IMF staff raise fears concerning the government’s fiscal policy. They state that “the draft 2026 Budget deficit ceiling of 3.9 percent of GDP is a step in the right direction, but insufficient to place the public debt ratio on a downward trajectory.”
The IMF recommends reaching a deficit of 2.4% of GDP by 2029 in order to restore the level of government debt to 60% of GDP, the level reached in 2022 before it shot up to 68.6% at the end of 2025. Israel’s Ministry of Finance proposes a much longer timeline of a whole decade for reducing debt to that level.
The recommendations of the IMF, unlike those of the Ministry of Finance, are not restricted by political feasibility. Thus the IMF recommends, as a way of achieving a more rapid reduction of the debt:GDP ratio, raising taxes, first and foremost by adjusting tax rates in the lower income tax brackets, which is contrary to the plan of Minister of Finance Bezalel Smotrich to reduce income tax, which is his main benefit to the public in the 2026 budget.
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The IMF also points to a need to reduce tax exemptions, to expand taxation of polluters, and to raise the rate of VAT. “A comprehensive review of the tax system, including tax expenditures, is needed to enhance simplicity, efficiency, and equity,” the report adds.
On the other hand, the IMF warns against the surtax on the super-profits of the banks that Smotrich is promoting, saying that it is liable to damage investor confidence. Smotrich set the surtax rate at 15%, higher than the 7-10% rate recommended by the professional team that he himself appointed. The tax is due to come into force this year and to continue until 2030. According to the Ministry of Finance it will raise NIS 1.5 billion annually.
Moral hazard
Further criticism is levelled at the plan for subsidizing mortgages promoted by Prof. Avi Simhon, chairperson of the National Economic Council and economic adviser to Prime Minister Benjamin Netanyahu. The plan proposes compensating mortgage borrowers hit by the rise in interest rates at an annual cost estimated at NIS 3 billion. “Staff caution against the government’s proposal to subsidize existing mortgages: delinquencies remain low, and subsidies would weaken monetary transmission, entail fiscal costs, be regressive, and raise moral hazard concerns,” the IMF report states. The Bank of Israel has also expressed opposition to the subsidy plan, describing it as “devoid of economic logic.”
On structural reforms, the IMF repeats the familiar message about integrating haredim and Arabs into the workforce, but with a sharper tone than usual. Concerning haredi men, the report notes that “progress has been limited despite multiple initiatives,” and says that “more decisive action is needed, including enforcing core curricula in mathematics, science, and English, expanding vocational and technological training, and redesigning fiscal incentives to encourage labor market entry.”
As far as monetary policy is concerned, the IMF finds the Bank of Israel’s current interest rate appropriate, and says that it will be possible to lower it towards the end of the year if inflation continues to moderate as expected.
Published by Globes, Israel business news – en.globes.co.il – on February 5, 2026.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2026.
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