The ongoing conflict between Israel and militant groups like Hamas and Hezbollah has taken a severe toll, not just on human life but also on the nation’s economy. As military operations continue, the financial burden of the war is becoming increasingly apparent. The government faces tough decisions as it navigates the consequences of this long-lasting conflict, and there are significant concerns about its impact on Israel’s economic future.
Rising Military Expenses
Since the outbreak of the current conflict, Israel’s military spending has surged dramatically. Before the fighting escalated on October 7, 2023, the government allocated approximately $1.8 billion monthly for defense. By the end of last year, this amount skyrocketed to around $4.7 billion each month. Overall, the military expenditure reached an astonishing $27.5 billion last year, placing Israel 15th globally in military spending, which is notable considering its population size.
To put this into perspective, military spending accounted for 5.3% of Israel’s annual economic output. In comparison, the United States spends 3.4% of its GDP on military efforts, while Germany allocates only 1.5%. These figures are striking, particularly when compared to Ukraine, which dedicated a staggering 37% of its GDP to its military to combat Russia’s invasion.
Economic Struggles and Labor Market Challenges
The conflict has not only strained military resources but has also had a detrimental effect on Israel’s overall economic growth. Over the three months after the Hamas assaults, Israel’s economy contracted by 5.6%. This decline marked the worst economic performance among the 38 member countries of the Organization for Economic Cooperation and Development (OECD), which includes many of the world’s wealthiest nations.
While there was a partial recovery with a growth rate of 4% in the first quarter of this year, growth slowed to just 0.2% in the following quarter. The situation is particularly dire for Gaza, where 90% of the population has been displaced and unemployment is rampant. The economy in the West Bank has also suffered severely, with thousands of Palestinian workers losing their jobs in Israel and military operations disrupting daily life.
The war has created various economic burdens in Israel itself. With military call-ups and extended service periods, the labor supply is becoming constrained. Investors are hesitant to put their money into new businesses due to security fears, and the tourism sector has seen a significant decline as flights have been disrupted, leading to a decrease in visitors.
Additionally, the government has been financially responsible for housing thousands of displaced individuals from both the southern border with Gaza and northern regions affected by Hezbollah attacks.
One of the most pressing concerns is the uncertain duration of the conflict, which has lasted over a year. Historically, Israel has bounced back quickly from military confrontations, such as the 2006 war with Hezbollah, which lasted only 34 days. The prolonged nature of the current conflict poses new challenges for the economy.
Managing Debt and Government Financial Health
Despite these challenges, Israel’s economy is not in a state of collapse. The country boasts a diversified and highly developed economic structure, particularly in the information technology sector, which helps maintain tax revenues and supports defense spending. Unemployment rates remain low, and the stock market has shown resilience, with the TA-35 stock index increasing by 10.5% this year.
Israeli tech companies managed to secure over $2.5 billion in funding during the third quarter, despite the ongoing conflict. When the conflict began, Israel was already in a relatively strong financial position, with government debt at about 60% of GDP. Although this figure has risen to approximately 62%, it remains manageable compared to other nations, such as France, with 111% debt and Germany at 63.5%.
However, experts predict that Israel’s debt could reach 80% of GDP if the fighting continues without a clear resolution. Higher defense expenditures are expected, especially if Israel maintains military operations in Gaza post-conflict. In order to keep the nation’s debt under control, the Israeli Finance Ministry has set a budget for 2025 with a projected deficit of less than 4%.
Economic Pressures and U.S. Support for Israel
Nevertheless, concerns have been raised regarding the accuracy of these deficit figures, with some forecasts suggesting a more likely deficit of around 6%. The recent credit downgrade from Moody’s Ratings indicates that borrowing costs may rise, potentially leading to cuts in public services and increased taxes for citizens.
In response to these financial challenges, the U.S. has intensified military aid to Israel, providing critical financial support during this turbulent time. Before the conflict, American military assistance was around $3.8 billion annually, which accounted for about 14% of Israel’s prewar military spending. In the wake of the conflict, the U.S. has contributed at least $17.9 billion in military aid.
The U.S. has also provided financial backing in the past, including credit guarantees that allow Israel to borrow at lower rates during economic hardships. These guarantees could be vital for stabilizing government finances if borrowing costs become unaffordable.
As the situation unfolds, Israel continues to grapple with the financial repercussions of this prolonged conflict, balancing military needs with the broader economic landscape.
