A sustainable national recovery requires new financial solutions
Nearly three years after October 7, the emergency has passed and the recovery has not arrived. Across the western Negev and the North, most evacuees have gone home to communities whose business base never came back with them. Emergency relief kept those communities alive. It did not restart their economies, and was never designed to.
The figures have still not sunk in. At the peak, the National Emergency Management Authority counted some 126,000 residents of the western Negev and the Northern border officially evacuated, with total displacement reaching roughly 218,000 — refugees in their own country. Proportionally, that is the United States evacuating the population of Massachusetts from an area larger than California.
The Tekuma Directorate reported in May 2026 that more than 92 percent of Western Negev residents had returned, joined by 3,000 new ones. Yet Nir Oz, Kfar Aza, Be’eri, Kissufim and Holit remain largely displaced, some residents expected to stay in evacuation centers into 2027. In the north, 32 communities totaling 60,000 residents were evacuated, and only about two-thirds were ever expected to return.
Return, in any case, is not recovery. These two regions together account for some 15-20% percent of Israel’s GDP. Their productive base has not been rebuilt, and no stable foundation for capital formation and job creation has been put in its place.
The fiscal picture has deteriorated well beyond the early estimates. Defense spending climbed from 5.2 percent of GDP in 2023 to 8.4 percent in 2024, and the cumulative bill has kept rising. By August 2026 the war had cost roughly NIS 420 billion — about $142 billion — the longest and most expensive in Israel’s history, adding some NIS 400 billion to the national debt. Defense-related spending is projected to reach NIS 1.5 trillion over the coming decade, while the American assistance covering roughly $20 billion of the war may decline sharply or end. That the macroeconomy kept functioning at all owes much to a resilient high-tech sector, deep foreign currency reserves, and a broad tax base — and to the professionals at the Bank of Israel, in the national health system, and across the country’s scientific and regulatory institutions.
The structural consequences matter more than any single figure. Public debt climbed from 61.3 percent of GDP at the end of 2023 to 69.0 percent a year later, and is projected near 70 percent through 2027, pushed by military spending settling at around 8 percent of GDP against roughly 4.5 percent before the war. Growth is forecast at 4 percent in 2026 and 5.5 percent in 2027, but per capita GDP has not returned to its former path, and the headline recovery reflects deferred consumption and government spending more than business growth. Innovation, Israel’s most critical national infrastructure, faces severe underinvestment in reinventing the next wave of growth.
This is precisely the pattern that produced the “lost decade” after the Yom Kippur War: a permanently higher defense floor crowding out investment in infrastructure, energy, and health, producing stagnation, recession, and runaway inflation. Only in the 1990s did Israel recover its competitive advantage — on the strength of Russian immigration and its emergence as a technological power. That escape route is now closed. Israel lost a net 58,600 citizens to emigration in 2024 and roughly 50,700 in 2025; the Taub Center calls the plunge into negative net migration a break with no precedent in the country’s history, and expects it to continue. Israel will not be repopulating its regions from abroad this time.
The government was right to establish the Tekuma Directorate (Recovery Authority). But returning people is not the same as returning an economy, and the two require different instruments. Emergency assistance is a transfer: disbursed, spent, gone. It restores households to a place; it does not rebuild the businesses, supply chains, and employers that make the place worth returning to. The harder half of the task is only beginning, just as the budgetary room to fund it closes. With defense absorbing a permanently larger share of public spending, the state cannot underwrite regional reconstruction from the budget — not at the scale required, and not for the decade it will take.
The first step is to retire the term “periphery” for Israel’s outlying regions. This is not a semantic matter but a change of conception, and it has a direct financial consequence. So long as these regions are classified as places requiring assistance, they attract grants. Treated as places offering returns, they attract capital — and capital is the only input available at the scale the task demands. The state cannot keep pushing any region to the margins and still expect growth that is fairly shared.
That emergency machinery cannot substitute for investment architecture is not a theoretical claim. It is in the audit record. The State Comptroller found in February 2025 that Tekuma had been operating without a permanent director, that temporary appointments were impeding inter-ministerial coordination, and that political disputes had stalled a rehabilitation plan approved back in December 2023. His June 2025 report on the north was harsher: the first government decision on the northern communities was only partially implemented, the ministerial committee created to oversee it never properly functioned, and the post of implementation chief went unfilled, then was vacated within weeks. As of February 2026 — more than two years after the evacuations — the government had still not approved a multi-year framework for the north. In under two years, Comptroller Englman observed, responsibility was shunted repeatedly between ministries and officials, in the middle of a war.
The Knesset has returned to this ground repeatedly: by early 2025 the State Control Committee had convened five joint sessions on northern rehabilitation. Its Research and Information Center found that in Kiryat Shmona, the principal city of the eastern Galilee, roughly a quarter of residents had not returned home, and that the economic damage was concentrated in small and micro businesses — the exempt dealers and sole traders least able to secure credit on their own. The head of the Mevo’ot HaHermon Regional Council put it more bluntly: this region of the country, he told the Knesset, is collapsing.
The comparison between the two regions is the most instructive finding of all, because it is close to a controlled experiment. The south received an institution with money and a mandate: Tekuma was allotted roughly NIS 19 billion over five years, has delivered more than 1,000 projects, and carries an explicit goal of doubling the Gaza-border population from 64,000 to 120,000 by 2033. The north received a rotating cast of ministries and, for over two years, no approved multi-year plan, no leveraging of private investment, and no targeted incentives. The outcomes track the institutions with uncomfortable precision.
None of this is new. We first documented net-negative migration from the north to the center during the Second Lebanon War. On reading those findings, the head of the National Security Council told me: you are right — and ultimately it will produce migration from the center to overseas. That is roughly what happened. Emigration today is not a periphery phenomenon: of Israelis who left in 2024, 51.4 percent had been living in the center, 26.4 percent in the Tel Aviv district alone, against about 11.5 percent from each of the Northern and Southern districts. People are leaving Israel from Tel Aviv, not from Kiryat Shmona. In the war-affected regions the loss registers as failure to return instead. And the Taub Center found the north was already losing population to internal migration between 2014 and 2021, so the war amplified a trend rather than created one.
The obvious lesson is that the north needed what the south got. The more important one is that what the south got will not be enough either. Tekuma’s mandate expires in 2028, two-thirds of its funds are committed, and its 2026 allocation is some NIS 2.8 billion — against a population target set for 2033. Even Israel’s most effective reconstruction vehicle is a fixed pot of public money on a clock. Its most devastated community, Kibbutz Nir Oz, spent months in a NIS 200 million dispute with the state and financed its own recovery in the interim.
This is what rationing recovery by budget line produces, without leverage and without crowding in private capital: the region with the strongest institution does best, the region without one falls behind, and both eventually run out of runway. The binding constraint is not administrative competence. It is that the model depends on an appropriation — and on a population that is no longer arriving. Doubling the Gaza-border population by 2033, or reversing decline in the Galilee or the Golan, cannot be done from a shrinking national pool. It can only be done by making these regions places people actively choose: a question of jobs, housing, transport, infrastructure, and enterprise, and therefore of capital.
The conclusion of our Financial Innovations Lab report, “Innovative Finance for the Recovery of Israel’s Regions,” and later Fellows’ research on energy reilience in the Western Negev by Einav Cohen (here) and on Blended Finance solutions by Etam Cohen (here) remains that recovery on this scale cannot be financed from the budget, and does not need to be. A catalytic investment fund — using public money not to pay for reconstruction but to make private reconstruction bankable — converts limited government capacity into multiples of institutional, philanthropic, and private capital. The mechanism of blended finance is well established: public funds absorb the first loss, take the subordinate position, or guarantee the downside, bringing a project’s risk-adjusted return within reach of investors who would otherwise stay out. A shekel deployed this way does not buy a shekel of reconstruction. It buys several. And unlike an appropriation, it does not expire when a directorate’s mandate does. It’s an investment contract financed by a capital market solution.
The report set out several core principles for building financing mechanisms that reduce risk, attract capital, and accelerate economic activity:
• Public-private investment structures — leveraging government funds as catalytic capital to attract institutional and philanthropic investment.
• Small business finance — developing structured credit solutions to broaden access to capital for the small and micro businesses where the Knesset’s own research found the damage concentrated.
• Strategic infrastructure investment — focusing on the energy, water, agriculture, and technology sectors to support long-term economic resilience.
• Tax incentives and risk mitigation — offering investment tax credits and joint government-philanthropic guarantees to encourage the deployment of capital.
The question is no longer whether Israel can afford to rebuild its regions; on current fiscal trajectories it plainly cannot, not from the budget alone. Nor is it administrative competence: the Comptroller has documented what improvised institutions produce, and the contrast between north and south has shown what a funded mandate can and cannot achieve. The question is whether Israel will build the financial architecture that lets other capital do the work — and whether it will do so while the political attention and philanthropic goodwill generated by the war still exist. Both are finite, and both are receding. The lesson of the lost decade is not that Israel spent too much on defense; it is that it never built the mechanisms to keep investing in growth, infrastructure, and technology at the same time. That is the mistake we must not repeat. This is the moment to act: to establish the regional funds, raise investment through public -private partnerships in our capital markets, and lay the foundations for sustained and adequate growth that is shared more equally.
