Hey everyone, welcome back to My Weird Prompts. We are coming to you from a somewhat noisy Jerusalem today. I do not know if you can hear the jackhammers in the distance, but it feels like this city is constantly being torn up and put back together.
It is the eternal state of urban renewal, or at least the attempt at it. I am Herman Poppleberry, and I actually think that noise is the perfect soundtrack for today. Our housemate Daniel sent us a voice note while he was literally navigating one of those construction zones. He was talking about how the physical state of the city, the infrastructure, and the social services often feel like they are playing second fiddle to the national security situation.
Right, and he hit on that classic Israeli argument. We hear it every budget cycle. People look at a crumbling sidewalk or a crowded emergency room and they say, well, if we were not spending billions on Iron Dome interceptors and fighter jets, we would have the best schools in the world. It is the guns versus butter debate, but on steroids because of our specific geography.
Exactly. And Daniel specifically asked about the numbers. How much are we actually spending on defense? How does that stack up against other countries that also have high-security needs? And then there is the big one, the question of American aid. If Israel decides to go it alone and phase out that three point eight billion dollars a year from the United States to build up domestic autonomy, what does that do to the rest of the pie?
It is a massive question, Herman. And I think we need to start by grounding this in the actual fiscal reality of February twenty twenty-six. Because the numbers have shifted drastically since the escalations that began in late twenty twenty-three. Before that conflict, Israel's defense budget as a percentage of gross domestic product was actually on a long-term downward trend, right?
You are spot on. If you look back at the nineteen eighties, defense spending was taking up something like twenty percent of the gross domestic product. It was astronomical; it almost broke the economy. But by twenty twenty-two, that number had dropped to around four point five percent. For context, the United States usually sits around three point five percent. So we were higher, but we were in the same ballpark as a global superpower.
But then the reality changed. The supplemental budgets for the multi-front conflict and the subsequent military buildup have pushed that back up. Where are we sitting now, deep into twenty twenty-six?
Current estimates for the twenty twenty-six budget cycle put the defense expenditure closer to seven or even eight percent of gross domestic product. That is a massive jump. In raw numbers, we are talking about a defense budget that is now well over one hundred and thirty billion shekels. When you add in the American aid, which is roughly another fourteen or fifteen billion shekels depending on the exchange rate, it is a staggering amount of money for a country of ten million people.
So when Daniel is walking past a construction site that has been stalled for six months, or when he is looking at the state of public transport, is he right to blame that one hundred and thirty billion shekels? Is it a direct trade-off?
It is a trade-off, but it is not as simple as a one-to-one transfer. This is where the public debate gets a bit shallow. People assume that if you cut ten billion from defense, you can just move ten billion into education. But the Israeli budget has these massive structural rigidities. We have huge debt servicing costs—which have spiked because of the war loans—and we have a very large public sector wage bill. Even if you trimmed the military, you would still have to deal with the fact that the population is growing faster than the infrastructure can keep up.
Let us talk about the comparisons Daniel asked for. Other countries with persistent security challenges. Who are we looking at? South Korea? Taiwan?
Those are the best examples. South Korea spends about two point seven or two point eight percent of its gross domestic product on defense. Now, that sounds much lower than Israel, but their gross domestic product is massive—they are a top twelve economy globally. Taiwan has been ramping up significantly, pushing toward three percent or even higher recently due to regional tensions. But even then, nobody is in the same league as Israel when it comes to the sheer intensity of the spend relative to the size of the population.
And there is the hidden cost, right? The opportunity cost of the soldiers themselves.
Exactly. That is the "shadow budget." When you have twenty-year-olds working for basically pocket money, the actual economic cost to the country is much higher than what shows up in the budget because you are taking those people out of the productive workforce. Some economists estimate that when you factor in the loss of labor from conscription and the massive reserve duty spikes we have seen lately, the actual burden is closer to twelve percent of gross domestic product.
So we are an outlier. But Daniel's second question is really the one that I think we need to dig into. The idea of phasing out United States aid. This has been a talking point in some Israeli political circles for a few years now. The argument is that the aid makes us beholden to Washington's interests and that we should be self-reliant. If we lose that three point eight billion dollars, where does that money come from?
This is where the math gets really painful. That three point eight billion dollars is what is called Foreign Military Financing, or FMF. Under the current ten-year agreement, which runs through twenty twenty-eight, almost all of that money has to be spent in the United States. We use it to buy F-thirty-fives, heavy transport, and munitions. If we phase that out, we are not just losing the money. We are losing the ability to buy American hardware at a subsidized rate.
Right, because right now, we are essentially getting that hardware for free. If we decide to build our own equivalent systems, or even if we just buy them with our own shekels, that is an immediate hole in the budget that has to be filled by domestic taxes.
Exactly. And the wiggle room Daniel asked about? It is almost non-existent. To replace that aid, you would either have to raise taxes significantly—which is already a sore spot given the cost of living—or you would have to slash social services even further. It is the ultimate irony. The people who want more strategic autonomy from the United States are often the same people who are frustrated with the lack of funding for domestic issues. But you cannot have both unless you find a way to grow the economy at an even more breakneck pace.
But wait, Herman, let us look at the other side of that. If we spend that money domestically, does it not stay in the Israeli economy? If instead of buying a Boeing jet, we fund a project at Israel Aerospace Industries or Rafael, aren't we creating jobs and driving research and development?
That is the argument for the domestic multiplier. And it is a strong one. Israel's defense industry is one of our biggest exporters. Companies like Elbit, I-A-I, and Rafael are world leaders. When the Ministry of Defense buys from them, that money goes toward Israeli engineers and technicians. That technology then gets exported, which brings in foreign currency. So there is a version of this where phasing out American aid actually strengthens the domestic industrial base.
But there is a catch, right? There is always a catch.
The catch is scale. There are some things we just cannot build efficiently. We can build world-class drones, missiles, and electronics. But building a front-line stealth fighter jet? We tried that in the eighties with the Lavi project. It was a beautiful plane, but the costs were so high that it threatened to bankrupt the state. We eventually had to cancel it under American pressure and our own fiscal reality.
I remember you telling me about the Lavi. It is almost a mythic story in Israeli tech circles. It was the moment we realized we could not do everything.
Exactly. And that lesson still applies. If we phase out United States aid, we would have to be very selective. We would probably still end up buying the big-ticket items from the United States, but we would be paying for them with our own money. That means less money for the light rail in Tel Aviv, less money for new hospitals in the Galilee, and less money for the education system that Daniel is worried about.
So, let us look at the social services side. Why is the perception so bad? Is it really just the defense budget, or is there a mismanagement issue? Because Israel's tax burden is not actually that low compared to the O-E-C-D average.
It is not. We are roughly in the middle of the pack. But the way the money is distributed is very uneven. We have a highly centralized system where everything goes through the Ministry of Finance in Jerusalem. This leads to massive bottlenecks. You mentioned the construction noise earlier. A lot of that infrastructure lag is not just about lack of money. It is about bureaucracy, planning committees that take ten years to approve a single line of track, and a lack of competition in the construction sector.
So even if we had an extra ten billion shekels from a defense cut, it might just get swallowed by the same inefficient systems.
That is my fear. If you look at healthcare, Israel has a very efficient system in terms of outcomes per dollar spent. We actually live longer than Americans while spending a fraction of what they do. But the system is at its breaking point because the population is aging and growing. To fix it, you do not just need a one-time infusion of cash. You need a structural change in how we train doctors and how we build hospitals.
It seems like we are caught in this permanent crisis mode. Because there is always a security threat, the long-term planning for things like the twenty-year education roadmap always gets pushed aside. It is easier to get a budget for a new missile defense system because the threat is immediate. It is harder to get a budget for a new university campus because the payoff is twenty years away.
That is the tragedy of the Israeli budget. It is a series of urgent fires being put out, while the foundation of the house is slowly cracking. And Daniel's point about the cost of living is the pressure cooker that makes this all so volatile. When people feel like they can barely afford rent or groceries, seeing billions of shekels going into defense feels like a personal affront, even if they agree that the defense is necessary.
I want to go back to the idea of the defense industry as an economic engine. We often hear that the military is the great incubator for the high-tech sector. All those kids coming out of Unit eighty-two hundred are the ones who started the companies that drive our gross domestic product. Is that still a valid justification for the massive military spend?
It is valid, but the return on investment is getting harder to calculate. In the nineties, the military was the only place you could play with advanced sensors or big data. Today, that is no longer true. A lot of the innovation is happening in the private sector first. AI, cloud computing, and even some satellite tech are being driven by commercial interests.
So the military is becoming a consumer of tech rather than the sole producer of it.
Exactly. So the argument that we must spend heavily on the military to support the tech sector is becoming a bit weaker. In fact, the military is now competing with the high-tech sector for the same talent. Every brilliant coder who spends three years in the army is a coder who is not working at a startup that could be the next Nvidia.
That is a fascinating flip on the traditional narrative. We are essentially taxing our most productive sector by taking their best talent for three years.
And that brings us back to Daniel's question about wiggle room. If we want to move toward a more autonomous defense model, we have to find a way to make it more efficient. We cannot just keep throwing more people and more money at the problem. We need to leverage things like autonomous systems and AI to reduce the need for a massive standing army of conscripts. But that transition itself costs an enormous amount of money upfront.
So what is the realistic path forward? If you were the Finance Minister, Herman, and you had to look Daniel in the eye and explain why the sidewalks are still broken while we are buying new submarines, what would you say?
I would have to be honest and say that Israel is paying a security tax that no other developed nation has to pay. If we lived in a neighborhood like Scandinavia, our gross domestic product per capita would likely be twenty percent higher, and our public services would be world-class. We are essentially running a marathon while wearing a weighted vest.
That is a vivid image. The weighted vest of the Middle East.
But I would also say that we need to stop using the defense budget as an excuse for poor governance in other areas. The reason the light rail took twenty years to build in Tel Aviv was not because of the Iranian nuclear program. It was because of a failure of local and national coordination. We have to separate the legitimate security costs from the administrative incompetence.
I think that is a crucial distinction. It is too easy for politicians to point at the border and say, "sorry, no money for schools today." It is a convenient shield.
It really is. And to Daniel's point about the United States aid, I actually think a slow, planned phase-out might be healthy for Israel in the long run. Not because we do not value the alliance, but because it would force us to have a real, adult conversation about our priorities. If we had to pay for every single bullet ourselves, we might be a lot more careful about how we use them.
But that is a decades-long process. You cannot just flip a switch and replace four billion dollars of hardware.
No, it would have to be a twenty-year plan. You start by shifting the F-M-F from being spent in the United States to being spent in Israel. We actually used to have an agreement where we could spend twenty-five percent of the aid domestically, but that is being phased out under the current deal. Bringing that back would be the first step. It would allow us to build up the local capacity to replace the American systems over time.
It is interesting because as we talk about this, I am thinking about the resilience of the Israeli economy. Despite all these challenges, the economy has been incredibly robust. We have one of the lowest debt-to-G-D-P ratios in the developed world, at least we did until recently.
We did. It was around sixty percent, which is the gold standard. It has spiked now because of the war costs, heading toward seventy percent. But that is still much better than the United States, which is over one hundred percent, or Japan, which is over two hundred percent. Israel has been very disciplined about its debt. That is actually what gives us any wiggle room at all. Because we have been responsible in the good times, we can afford to borrow now to cover the defense surge.
But borrowing has a cost. The interest payments on that new debt are going to be another permanent line item in the budget, competing with health and education.
Exactly. Every billion shekels we spend on interest is a billion shekels that is not going to a university or a highway. This is why the guns versus butter debate is so painful. It is not just about today's budget. It is about the burden we are placing on the next generation of Israelis.
Let us talk about the specific social services Daniel mentioned. Healthcare and education. If you look at the numbers, Israel's spending on education is actually quite high as a percentage of gross domestic product. It is one of the highest in the O-E-C-D. So why does it feel like it is underfunded?
This is a classic Israeli paradox. We spend a lot of money on education, but we have a huge number of children. Our fertility rate is the highest in the O-E-C-D by far, at nearly three children per woman. So when you look at spending per student, we are actually near the bottom. We are spreading a large amount of money over an even larger number of kids.
So it is a demographic challenge as much as a budgetary one.
Absolutely. If we do not integrate all sectors of society into the high-productivity economy, the tax base will eventually shrink relative to the population. And then it won't matter how much we cut from the defense budget. We simply won't have the money to sustain a first-world state.
That is the real existential threat, isn't it? It is not just the missiles; it is the internal economic structure.
I think so. The defense budget is the most visible target for frustration, but the deeper issues are demographic and structural. That being said, the defense budget is still a massive lever. If we could find a way to reduce it by even one percent of gross domestic product through better tech or a more stable regional situation, that would be roughly twenty billion shekels a year. That is enough to double the budget for hospital construction.
Twenty billion shekels. When you see it in terms of what it could buy, it makes Daniel's frustration very understandable. When you are standing in a traffic jam, knowing that there is a twenty-billion-shekel pot of gold that is going to things that explode, it is a hard pill to swallow.
It is. And I think we have to acknowledge that for many Israelis, that pill is getting harder to swallow every year. The social contract in Israel has always been: you give us your children for three years and a huge chunk of your paycheck, and in return, the state provides security and a basic level of European-style social services. If the social services start to feel more like third-world services, that contract begins to fray.
We saw a lot of that friction in the protests over the last few years. It was about judicial reform on the surface, but underneath, there was a lot of this economic anxiety. The feeling that the productive middle class is carrying the entire weight of the defense and the social subsidies for other sectors, while getting less and less in return.
Exactly. And the defense budget is the ultimate symbol of that burden. It is the thing that cannot be questioned without being accused of being unpatriotic. But in a healthy democracy, the defense budget should be questioned more than anything else, precisely because it is so large and so consequential.
So, to Daniel's question about how far the resources can be stretched. What is the limit?
We are nearing the limit, Corn. If the defense budget stays at seven or eight percent of gross domestic product long-term, and we also try to phase out American aid, we will likely see a significant decline in the quality of public life. We will see more brain drain as our best and brightest look at the tax rates and the quality of schools and decide that Berlin or New York or Austin looks better.
That is the real danger. The defense budget is meant to protect the country, but if it gets too large, it could end up hollowing out the very society it is supposed to defend.
It is the ultimate irony of national security. You have to be strong enough to deter your enemies, but not so burdened by that strength that you lose your internal vitality. It is a balance that Israel has managed for seventy-five years, but the current decade is testing that balance more than ever before.
I think this is a good place to pivot toward what we can actually take away from this. Because it can feel a bit overwhelming, right? We live here, we see the construction, we hear the jets overhead. What can a regular person do with this information?
Well, the first thing is to be a more informed consumer of political rhetoric. When a politician promises a massive new social program without explaining where the money comes from, or when they promise a massive new military capability without explaining the trade-off, we have to ask the hard questions. We have to look at the budget as a whole, not just the parts we like.
And I think we need to demand more transparency in the defense budget. It is often a black box for security reasons, but a lot of what goes on in there is just standard government spending. There is no reason we cannot have more oversight on procurement and pensions in the military, just like we do in the Ministry of Education.
Definitely. Efficiency in the military is just as important as efficiency in the civilian world. Every shekel saved on an inefficient military pension is a shekel that can go toward a better classroom.
And for our listeners abroad, I think it is important to understand that when you hear about American aid to Israel, it is not just a gift. It is a complex part of a very delicate economic and strategic ecosystem. Phasing it out sounds simple in a slogan, but the reality would be a massive shock to the Israeli social fabric.
It would be a total realignment. And it might be one that is necessary for Israel's long-term maturity as a state, but we should not pretend it will be painless. It will mean some very hard choices for people like Daniel who just want to walk down a paved street and have a functioning health system.
You know, talking about this makes me realize how much we take for granted. The fact that the economy functions at all under this kind of pressure is a bit of a miracle.
It really is. It is a testament to the ingenuity and the resilience of the people here. But miracles have a way of running out if you do not take care of the underlying mechanics.
Well, Herman, I think we have covered a lot of ground. From the Lavi project to the current debt-to-G-D-P ratios. It is a lot to digest.
It is. But I think it is essential. If we want to understand why Israel looks and feels the way it does, we have to follow the money. It always comes back to the budget.
Before we wrap up, I want to say thanks to Daniel for sending this in. It is a topic that affects all of us living here every single day, and it is something we probably do not talk about enough in this kind of depth.
Absolutely. And hey, if you are listening and you are finding these deep dives helpful, we would really appreciate it if you could leave us a review on your podcast app. Whether it is Spotify or Apple Podcasts, those reviews genuinely help other people find the show and join the conversation.
Yeah, it makes a huge difference. And if you have a topic you want us to tackle, or if you have a different perspective on the Israeli budget, you can get in touch with us through the contact form at myweirdprompts dot com. We love hearing from you.
We really do. Even the critiques. Especially the critiques. I am Herman Poppleberry, and this has been My Weird Prompts.
And I am Corn. Thanks for joining us in Jerusalem today. We will talk to you in the next episode.
Take care, everyone.
Goodbye.
