The worsening of inequality in income distribution may cause a social explosion | Prof. Yair Zimon and Oded Shorer
Since the outbreak of the war, public spending has been expanded, but the bulk of the addition was directed to emergency response, evacuation, compensation, and initial rehabilitation, rather than to strengthening broad, universal, and stable public services.
The Adva Center's 2026 report on income inequality in the economy presents a harsh picture of social gaps and points to the collapse of the welfare state in Israel. The report emphasizes that while the Israeli economy has grown over the past decades, the fruits of growth have not trickled down to the average citizen but have concentrated at the economic top. The growing inequality is not just a moral problem but a danger to social stability, and it is worsening in the face of a destructive budgetary policy that leaves the main burden on households.
It turns out that emergency response is not enough. Israel's ability to cope also depends on its civilian foundation — on stable public services, broad economic security, and a policy that does not leave the main burden in the hands of households. This is not a question that can be postponed to the day after the war. It is one of the questions of the present. The fight against inequality is necessary for recovery from the civilian and security crisis, especially in light of the high cost of living in Israel compared to developed countries.
The Adva Center's data is hard to digest. Household income in the top decile is 13 times greater than household income in the bottom decile. The top two deciles concentrate 45% of the income of households headed by employees. The worsening of inequality in income distribution may cause a social explosion, to the alienation of parts of the population that will contribute to high economic costs. The cost of living, the deficit, and the lack of growth are problems that stand on their own, but in addition, they contribute to the increase in inequality in income distribution in the economy.
Since the outbreak of the war, public spending has been expanded, but the bulk of the addition was directed to emergency response, evacuation, compensation, and initial rehabilitation, rather than to strengthening broad, universal, and stable public services. That is, even when the public budget increased, it did not strengthen the civilian foundation but remained primarily an emergency response. Therefore, the social price of the war is measured not only in security spending or the damage of the fighting, but also in the gap between the needs of society and the ability of weakened civilian systems to provide an adequate response in the fields of housing, education, welfare, and health. Years before the outbreak of the war, civilian expenditure per capita in Israel was significantly lower compared to developed countries that are members of the OECD — a gap that translates into a shortfall of about 110 to 120 billion shekels per year in investment in citizens.
It is not only the war economy and the needs of security, emergency, and initial rehabilitation that push civilian services out of the budgetary priority list. To this is added a government that chooses again and again to cut these services across the board, while simultaneously budgeting sectoral and controversial goals. This is a policy based on short-term coalition considerations, and its result is a continuous damage to the principle of universality of the welfare state.
Low civilian expenditure directly affects the level of public services that the citizen receives in Israel. The gap compared to the group of developed countries in the world is most felt in the health system, the welfare system, infrastructure and transport, and the education system. Low national expenditure in the field of health causes a very high burden of private financing (supplementary insurance, medicines, and private treatments) in Israel. Old-age, disability, unemployment, and family support allowances are significantly lower in Israel compared to the average in the developed world. A growing gap has been recorded over the years in investment in public transport infrastructure and the economy compared to the developed world. When examining expenditure per student, Israel lags behind, especially in early childhood and in primary and secondary education.
There are many reasons for this. Security expenditures in Israel (even in routine years, and certainly in times of fighting) are the highest in the OECD by a huge margin, which "chokes" a large part of the state budget and leaves fewer resources available for civilian needs. Israel's public debt generates high annual interest payments that reduce the available budget. And of course, macroeconomic policy: for decades, it advocated reducing government involvement, lowering direct taxes, and maintaining restrained budget frameworks (strict "fiscal rules"), based on the perception that the private market should lead growth. The reduction of taxes led to lower state revenues, and consequently to a lower ability to finance civilian services at a level comparable to Europe.
To finance the deficit, the state borrows money at a high interest rate. A growing share of the budget is directed to interest payments to capital owners, while public services are cut. At the same time, the government turns to raising indirect taxes (such as VAT), which is a regressive tax, harming the weak who are forced to direct a high percentage of their income to the purchase of basic consumer goods. Inflation acts as a hidden tax that erodes the purchasing power of the middle class and the poor, while the rich are protected through real assets. To fight inflation, the Bank of Israel raises the interest rate — a step that transfers wealth from borrowers (the weak layers bearing the burden of mortgages and credit) to lenders (holders of deposits and capital). The rise in mortgage costs passes the costs on to apartment renters and deepens the crisis.
Inequality in income distribution is not a decree from heaven. It grows on the soil of long-term macroeconomic policy that advocates reducing the government and lowering direct taxes. The current government avoids root treatment of concentration and large monopolies, and abandons growth-supporting reforms and investment in productivity and core studies. Political shocks (such as the judicial reform in 2023) and the expansion of deficits led to downgrades in Israel's credit rating and increased the state's recruitment costs. The irresponsibility reaches its peak in the Knesset. In the week before its dissolution, critical structural laws in the economic field that were supposed to save tens of billions for the economy were pushed off the agenda, and instead, controversial legislation is being promoted that will require future additional tax increases to maintain the level of existing services. The result is that the Israeli public is forced to pay more and receives much less.
