Given the two wars of survival the Israelis have fought in the past 50-ish years it seems very likely that it would reducing their military would reduce the freedom and literal existence of the Israelis.

For the Palestinians, perhaps reducing the Israeli would increase freedom in the short term. In the longer term, in the absence of Israel, it seems more likely they would end up dominated by either larger neighbors like Lebanon by Syria or experience low-freedom autocracies like Egypt, Iraq, etc.