How Conflict and Cuts Drove the Palestinian Authority to the Brink of Fiscal Collapse

The Public Expenditure Review (PER) of June 2025, prepared by the World Bank in collaboration with the Palestinian Central Bureau of Statistics (PCBS), the Palestine Monetary Authority (PMA), the Ministry of Finance (MOF), the Ministry of Health (MOH), the Ministry of Education (MOE), and the Palestinian Pension Authority (PPA), presents a sobering account of an economy, and a government, stretched to its limits. It captures the economic devastation inflicted by the Gaza-centered conflict that erupted in October 2023, highlighting a dramatic 27% contraction in the Palestinian economy during 2024. Gaza’s economy collapsed by 83%, while the West Bank shrank by 17%. With unemployment soaring to 80% in Gaza and 33.5% in the West Bank, and damage to physical infrastructure estimated at nearly US$30 billion, the human and institutional toll is unprecedented.

Even before the conflict, the PA operated under severe constraints. Ongoing Israeli restrictions on movement, trade, and resource access, combined with the internal political divide between the West Bank and Gaza, created a situation of permanent fiscal fragility. Clearance revenues, taxes collected by Israel and transferred to the PA, made up about 60% of fiscal income but were subject to political deductions, particularly from 2023 onward. By the end of 2024, the PA’s deficit had ballooned to 15% of GDP. Foreign aid, once a vital lifeline, had fallen from 27% of GDP in 2008 to just 2% in 2023. Although it rose slightly to 6% in 2024, its long-term sustainability remains doubtful. With little access to external capital markets, the PA increasingly turned to domestic sources, banks, pension funds, and deferred payments to public employees and suppliers, pushing its debt burden to unsustainable levels.

The Wage Bill: A Heavy Fiscal Anchor

One of the central culprits of the fiscal crisis is the PA’s bloated and structurally flawed public-sector wage bill. Representing nearly half of total government spending and 14% of GDP, the wage bill is driven not by employment expansion but by growing salary allowances, particularly in health and education. This expansion has become unaffordable: since late 2021, public employees have received only 80–85% of their salaries, and this has fallen to 50–70% since the start of the conflict.

Moreover, wage imbalances have created distortions in the labor market. In the West Bank, low-income public employees earn nearly double what their private-sector counterparts make, while high-skilled professionals are underpaid, deterring talent from entering public service. These salary patterns are further undermined by non-merit-based hiring practices. Between 2010 and 2020, the West Bank and Gaza’s government effectiveness rating fell significantly, and surveys show widespread patronage in civil service appointments. To address these problems, the report recommends freezing wages, cutting unnecessary allowances, enforcing attrition rules (two exits for every new hire), and, over time, reforming the salary structure to align with labor market benchmarks.

Pension System: A Financial Time Bomb

The Palestinian public pension system, which consumed 3.5% of GDP in 2022, is another significant fiscal burden. The defined-benefit (DB) scheme remains overly generous, offering 2% accrual per year of service, early retirement options, and minimum service thresholds that strain fiscal resources. Worse, the system’s defined-contribution (DC) component exists largely on paper, with no real assets or returns. The PA has failed to transfer contributions regularly, leading to arrears of around US$3 billion.

The World Bank proposes a multipronged strategy. Parametric reforms would raise the retirement age to 63, reduce accrual rates, and reform benefit indexation. Systemic changes include separating contributory and non-contributory benefits and legally restructuring the fiscal responsibilities between the Ministry of Finance and the PPA. These changes are essential not just to reduce liabilities but to restore confidence in the state’s long-term financial commitments.

Health System on the Brink

Gaza’s health system has nearly collapsed under the weight of the conflict, with over 90% of facilities damaged or destroyed. Yet, even prior to the war, both the West Bank and Gaza struggled with chronic medicine shortages, high out-of-pocket (OOP) payments, costly referrals to private and NGO hospitals, and fragmented insurance coverage. Public spending on health, 13% of the PA’s total budget, is heavily skewed toward wages and referrals, which together account for 75% of the health budget. This leaves little room for investment in infrastructure or preventive care.

The PER outlines a recovery and reform strategy that begins with defining an essential benefits package and strengthening the Ministry of Health’s role as a strategic purchaser. Expanding insurance coverage equitably and reducing high-cost referrals are urgent tasks. Increasing taxes on unhealthy products, investing in primary care, and establishing an autonomous insurance agency could also improve financial protection and reduce OOP burdens. Reforming procurement, particularly for pharmaceuticals, is critical to control unit costs and avoid recurring arrears.

Education: Resilient Vision, Resource Constraints

Despite adversity, the PA has maintained consistent investment in education, allocating 5% of GDP and 16% of its public budget to the sector. Enrollment expanded steadily until 2022, but the conflict has since halted education in Gaza entirely. Pre-primary education remains highly unequal, with most kindergarten access restricted to wealthier families due to private provision. Meanwhile, the underpayment of teachers has triggered repeated strikes and lowered morale.

The report commends the PA’s commitment but notes that donor contributions are volatile and arrears are rising. To ensure sustainability, the PER recommends prioritizing full salary payments for teachers, expanding public access to early childhood education, and addressing learning inequalities, especially for boys and poor households. Efficient use of human resources, including increasing class sizes through natural attrition, is also suggested. Moreover, the education sector should adopt multi-year budgeting frameworks and improve coordination with donors to ensure stable, goal-aligned funding.