Israel's economic future at risk as productivity falls behind G7 nations, report warns

OCTOBER 15, 2026 05:57Israel has fallen from outperforming the world’s leading advanced economies on a key productivity measure to trailing them, according to a Shoresh Institution report warning that the next government must address educational and budgetary priorities that threaten the country’s long-term economic viability.The report, published last Thursday by the Shoresh Institution for Socioeconomic Research, places Israel’s total factor productivity at 15% below the G7 average in 2023, compared with 9% above it in 1975. The measure assesses how efficiently an economy combines labor and capital to produce goods and services.Written by Shoresh President Prof. Dan Ben-David, the report said weak education, rapid demographic change, and the departure of skilled Israelis reinforce one another, leaving the country increasingly dependent on a narrow group of workers to sustain its economy, healthcare, and defense capabilities.“The upcoming election will determine who governs Israel, but the deeper question is what kind of country the government will govern a generation from now,” Ben-David said in a statement accompanying the report.The historical comparison showed how sharply Israel’s relative position changed. In 1954, its total factor productivity was 27% below the G7 average. It overtook that benchmark within roughly two decades, then fell behind again.A nighttime view of the Haifa Port and the surrounding area in the northern Israeli city of Haifa, September 17, 2026. (credit: Sharon Leibel/Flash90)Israel exceeded every G7 country in 1972, slides massively by 2024A separate measure, output per hour worked, tells a similar story. According to Shoresh’s calculations, Israel exceeded every G7 country in 1972 but trailed six of the seven by 2024. Its output per hour was 34% below Germany’s and 30% below the United States'. Japan was the exception.These are relative comparisons: falling behind other countries does not necessarily mean Israel produces less than it did in the past. It means, rather, that its performance has failed to keep pace.Ben-David attributes the change to a shift beginning in the 1970s away from investment in infrastructure, education and public services toward sectoral interests. He said that defense spending alone cannot explain the shortfalls, pointing to decades when civilian government expenditure, measured against the size of the economy, matched or exceeded the OECD average.Israel’s hi-tech success masks a much weaker performance across the rest of the economy. According to the report’s 2022 figures, each hour worked in hi-tech generated 22% more economic value than the average hour worked across OECD economies. But outside hi-tech, where roughly nine in 10 Israeli workers were employed, each hour generated 24% less than that average.Highly-skilled workers incentivized to leave by taxesThe report also said the highest-earning fifth accounted for 93% of income-tax revenue in 2024, up from 83% in 2000. That concentration, Ben-David said, makes the country vulnerable when highly skilled workers leave.Expanding that skilled workforce will depend on the education children receive today. According to the report, haredi (ultra-Orthodox) children account for 25% of first graders in 2026 and Arabic-speaking children for another 23%. Haredim make up approximately 6% of Israelis aged 50-54, but 26% of children aged four and under.The question, Ben-David asked, is whether today’s pupils receive the education needed to become tomorrow’s engineers, physicians and other skilled workers.Shoresh’s analysis of the 2025 PISA assessments places pupils in state-religious schools below 76% of OECD countries and those in secular Jewish schools below 81%, based on average performance across mathematics, science and reading. Arabic-speaking pupils scored below every OECD country and six of the seven participating Arab countries.Most haredi boys, who do not study the full core curriculum, do not participate in the tests, the report noted.When the PISA results were released, the Education Ministry stressed the wartime conditions under which students took the assessments, including displacement and interrupted schooling.The report also points to a growing number of Israeli physicians abroad. In 2000, the number working in other OECD countries, excluding the United States, was equivalent to 0.7% of the number of physicians in Israel. By 2023, that ratio had risen to 1.9%, according to Shoresh’s analysis.Ben-David warns that departures could increase the burden on those who remain, encouraging further emigration.His proposed “Israel 2.0” program calls for an upgraded compulsory core curriculum for all pupils, public funding only for compliant schools, and a shift in national spending priorities. It also proposes electoral and governance reform, stronger checks and balances.“The window for change is still open – but it is closing,” he said.Follow us on Google