OECD sees Israel economy grow above global average in 2025, warns of high cost of living
Israel needs to address infrastructure gaps, improve educational outcomes and labor‑market participation among ultra‑Orthodox and Arabs, organization says
Sharon Wrobel is a tech reporter for The Times of Israel
The Organisation for Economic Co-operation and Development (OECD) expects Israel’s economy to rebound this year but is more pessimistic about the pace of growth than local projections, citing the risk of war-related spending that continues to take a toll on the country’s finances.
In the Economic Survey report for 2025 published on Wednesday, the OECD urged Israel to focus on closing socioeconomic gaps by removing government subsidies for yeshiva students, cutting bureaucratic red tape, and boosting competitiveness and productivity in its economy beyond its vibrant tech sector to help bring down the high cost of living.
“Removing barriers to domestic and foreign trade, by cutting red tape and easing border processes, would strengthen productivity, increase incomes and lower consumer prices in a durable way,” said OECD Secretary-General Mathias Cormann. “Given demographic trends, long-term economic performance rests on reforms to address infrastructure gaps and improve educational and labour market outcomes across the Israeli population.”
The OECD said Israel’s high cost of living continues to reduce welfare and spur social tensions. Israel is ranked fourth place in the organization’s list of developed countries with the highest comparable prices. It cited a combination of geographical factors, trade barriers, and stringent product market regulation as reasons that continue to contribute to the high prices of essential goods and services.
The organization said Israel needs to relax stringent product market regulations and reduce technical trade barriers to facilitate market entry for new companies and help foster competition. Negotiating new free trade agreements would also help lower trade costs, the OECD said.
“The economy remains heavily influenced by the conflicts, which hit investment and exports while war-related expenditure soared,” the OECD said in the report. “Growth is set to pick up when the economic environment becomes closer to normal.”
On the assumption that Israel’s fighting in Gaza and Lebanon will ease, the OECD forecasts that the country’s economy will grow at a rate of 3.4 percent in 2025 and 5.5% in 2026, which is faster than the organization’s average growth forecast for the global economy of 3.1% in 2025 and 3% in 2026. However, the OECD’s 2025 growth forecast is lower than the 4% projection by the Bank of Israel and the Finance Ministry’s 4.4%.
“Policies need to keep the economy steady, and securing solid growth requires curbing inflation and containing fiscal deficits while funding future spending needs,” the organization remarked. “Economic performance would strongly benefit from reforms that address infrastructure gaps and improve educational outcomes and labour‑market participation among ultra‑Orthodox and Arab Israelis.”
Israel’s economy grew by around 1% in 2024, down from 1.8% in 2023 and 6.3% in 2022, before the outbreak of the war with the Hamas terror group. The growth rate last year surpassed forecasts even as the war with Hamas and with the Iran-backed Hezbollah group increased government spending on military and civilian needs and took a toll on the country’s exports and investments.
The OECD commended the resilience of Israel’s economy during the 17-month war period, which it attributed to “sound fiscal position before the war, deft monetary management, a resilient financial system and strong growth potential owing to high employment rates and a vibrant high-tech sector.”
“The OECD report is a testament to the resilience of the Israeli economy and the hard work that has been done in recent years,” said Finance Minister Bezalel Smotrich. “It presents us with significant challenges but also opportunities for growth and progress.”
“We will continue to work in cooperation with the organization to ensure the stability of the economy and promote reforms that will benefit Israeli citizens,” Smotrich said.
The OECD cautioned that the war prompted a big jump in military expenditure that has widened the fiscal deficit while harming investment and exports.
Spending on the war pushed the budget deficit to near 7% of the GDP in 2024. The central bank and rating agencies, all of which cut Israel’s credit rating last year, had criticized the government for raising military spending without cutting other areas. The central bank expects a 4.7% budget deficit and a debt-to-GDP ratio of 69% in 2025. The government has set a goal of 4.9% of GDP.
“Monetary prudence and fiscal discipline, relying on least distortionary taxes to reduce the deficit, are essential to chart a safe way out of the economic turbulences created by the conflicts,” the OECD said.
To increase state revenue and keep fiscal discipline, the organization recommended that the government end VAT exemptions and increase carbon tax rates, while taxing sugary drinks and single-use plastic items.
The OECD warned that low labor-force participation among specific population groups, including ultra-Orthodox men and Arab women, is holding back the growth potential of the country’s economy.
“Many Haredi [ultra-Orthodox] men and Arab Israeli women stay out of employment,” the organization noted. “Demographic trends mean key determinants of Israel’s growth trajectory in future decades will be the share of Haredim in employment and the productivity levels of the jobs they take.”
The report called on the government to remove disincentives that discourage labor-force participation, including subsidies for yeshiva students and recommended that policymakers condition childcare support on fathers’ employment in addition to mothers’ employment.
In addition, it said, the government should make school funding dependent on the teaching of core subjects and “equalise funding for Arab schools with other schools presenting similar socio-economic characteristics.”
“Coverage of the core curriculum is incomplete in ultra-Orthodox streams and under-resourced in many Arab schools, impairing pupils’ employment, productivity and wage prospects,” the OECD said. “Improving their future employment and wages would strengthen fiscal sustainability.”
Furthermore, the OECD believes that Israel’s economy could “capitalize on an already strong artificial intelligence (AI) industry by maintaining a flexible regulatory approach and further nurturing links between higher education institutions and AI firms.”
“AI has become a core part of new high-tech activity in Israel, accounting for almost half of all new high-tech startups and funding rounds,” it said. “This makes AI critical to the continued performance of the high-tech sector, a key engine of export and GDP growth.”
However, to nurture talent pool and future growth of the AI industry in Israel, public authorities need to broaden the supply of higher education in the fields of mathematics, statistics, computer science and physics, the OECD recommended.
The Times of Israel Community.