It's not just the involvement of religion that's problematic. There are a few other things:

Ultra-Orthodox Jews basically get paid by the government to sit around and do nothing for the economy. Meanwhile everyone else is obligated to conscript and fight wars that are often driven by Ultra-Orthodox Jews as a voting block.

If Gaza and the West Bank were fully absorbed and everyone living there given citizenship with voting rights, Muslims would outnumber Jews. Ignoring Muslim parties would no longer be an option. Israel's moves seem largely to keep Palestinians permanently stateless, divided, disenfranchised, and continuously squeezed out of even the land they do have.