Israel's economic paradox: The view from the Treasury

In February this year, Yali Rothenberg left the post of accountant general in the Ministry of Finance. From one of the most senior positions in Israel’s economy, he saw everything. He represented the country vis-à-vis investors, rating agencies and banks, was responsible for control of government expenditure, and handled huge infrastructure tenders.

Four months after stepping down as accountant general, Rothenberg told “Globes”: “The Israel story is not one of a weak economy with nice figures. On the contrary: this is a strong economy, with severe bottlenecks. If we free them up, the strong macro performance will be able to percolate more significantly to the daily life of the country’s citizens.” He even sketches a plan for structural changes in the Israeli economy that will make this possible.

What’s the explanation for the gap between the macro picture and the astonishing figures despite the war, and day to day life?

“There’s a contradiction between a strong macro position and painful micro existence. We have very impressive macro numbers, such as growth, in comparison with other places in the world at times of war and uncertainty; we have a strong labor market, the shekel is strong, the capital market is strong, and our ability to raise debt on the markets is high; and we enjoy investors’ confidence.

“But that isn’t reflected in the life of ordinary citizens. They don’t experience gross national product; they experience their shopping baskets, their rent, and their mortgages. They experience the expensive kindergartens, and the traffic jams from which we all suffer, and the service from public agencies and the banks. So in my view, the question is not whether the macro figures are correct or the cost of living is correct. They’re both correct. The question is why doesn’t the success on the macro level percolate down to everyday life sufficiently?”

So what’s the answer?

“The strong figures are concentrated in certain areas and in certain economic strata, and the question is how to channel this to the micro level. On the one hand, this is the nation of innovation and startups, technology and global markets, and on the other hand we have a very high cost of living, productivity gaps, and a public service that is not keeping up.

“It’s not that high tech is too strong. On the contrary, it’s a strategic asset. The problem is that the rest of the economy is not sufficiently similar to high tech in productivity, management, digitization, competition, adoption of technology, and so there’s a national challenge here to turn our technological advantage into something broad that encompasses the entire economy: construction, transport, retailing, government, education, and health.”

Rothenberg say that the gap is particularly wide in housing. “That’s where it blows up. Even when wages are rising and unemployment is low, home prices and rents erode the growth in average income, and the public feels no improvement. Unless we deal with the supply of housing, together with transport and infrastructure, any rise in wages will be swallowed up there.

“Another area in which the gap cries out is in infrastructure. For years, the economy has grown faster than investment in infrastructure, and the result is congested roads and public services that are falling behind. They don’t match the rate of growth and the fact that we have a high rate of population growth in comparison with Europe. We’re a young country that has not yet managed to accumulate the quantity of public capital required for the standard of service that we as citizens should receive from it.”

“Not just exits”

How can we create the kind of percolation effect you talk about?

“I believe that the economy needs to boost competition, open up imports, and cut down on surplus regulation and adopt international standards. Investors who talk to me say, ‘I want to invest in Israel, but I’m frightened that you’ll suddenly turn on me with legislation, and I don’t understand your taxation policies.’ International standards and reducing barriers to entry are critical, alongside reforms in food, in order to bring about lower prices at the supermarket.

“The second element that is required is basically to give a push to productivity outside of high tech. The next revolution in high tech in Israel in my view shouldn’t be just exits and flotations on Nasdaq but in productivity within the economy, and also the ability to create growth for companies within Israel, and strengthening of the trend of flotations here on the Israeli stock market.

“The third element is urgent investment in infrastructure: transport, energy, water, the government cloud and AI data centers, because all these things greatly magnify the economy’s ROI. With interest rates falling, this is exactly the time to make this investment. To do this without expanding government debt we should make use of financial structuring, of investors, and encourage competition in the economy. The government doesn’t necessarily have to pay for everything from its budget.”

Bureaucracy is a hidden tax

A fourth element according to Rothenberg is to make government digital, and to improve its performance, while managing the tension between defense and civilian spending. “The government also delivers productivity in the economy, and every hour that a citizen spends on bureaucracy represents a hidden tax on productivity.

“The defense budget has doubled as a percentage of GDP since the war broke out. Israel has the civilian needs of a crowded, young, growing country, but with the defense burden of a country continually at war. How can all this be squared? In my opinion, we should be wary of the simplistic notion that we just need to increase civilian spending. We should rather examine the quality of spending of every shekel allocated.”

Rothenberg says that we also need to improve the efficiency of government spending. “The State of Israel’s education budget is NIS 100 billion. Is it effective? I would question whether it is. We also can’t ignore that fact that Israel is in a unique security environment, and security is basic for the economy, but when defense spending keeps rising, it shuts out civilian spending, and that is liable to erode the country’s growth potential.

“The first thing is efficiency in the budget. There are small budgets, not just allocations for coalition parties and specific sectors, and that’s a source of lack of focus and duplication, and there aren’t enough broad programs.

“The second thing is performance. Even when there is a budget, it’s difficult to spend in such a way as to obtain a high-quality result, particularly in digitization, inter-ministerial projects, and complicated procurement, which takes a long time. Often the budget itself comes late, because there’s a wide gap between the approved budget and the actual budget as it changes over the course of the year. This is a disease that reduces the level of certainty and the capacity to perform.

“The third issue is measurement. Has the journey time been shortened? Has school students’ attainment changed? Has the time taken to obtain a license changed? What change has taken place in productivity.”

“Consolidate real estate regulators”

Still, the defense budget has a dramatic impact on government spending.

“I think that there should be a multi-year defense plan with clear limits and priorities. The budget is reopened time and again, and there are no output metrics.

“The defense establishment is currently coping with dramatic disruption. Defense is moving towards cheap autonomous systems operated remotely that incorporate AI. When a weapon that costs $500 destroys weapons that cost millions, we have a problem.

“It’s very important not to manage defense through annual budget supplements and through crises. We’ll shortly have been in this situation for three years.

“The second thing that needs to be done is to anchor and fix civilian investment in national infrastructure and in the ability to grow new companies in high tech, and to boost investment in AI.”

After that comes something that is not new, but is critical in Rothenberg’s view, and that is a thorough overhaul of the real estate market. He says that the activity of the government bodies that deal with the matter should be pooled and consolidated: the Israel Land Authority, the Planning Administration, the Land Registry (Tabu), and other entities. “The duplication cerates a great deal of friction in the economy. At the planning level too, there are planning agencies in the various government ministries that operate without coordination.”

Published by Globes, Israel business news – en.globes.co.il – on May 24, 2026.

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