Israel/ war costs/ military spending/ economy/ credit rating/ social services/ U.S. aid/ GDP/ Newslooks/ J. Mansour/ Morning Edition/ Israel’s war with Hamas and Hezbollah is imposing substantial financial burdens on the country, with military spending soaring and economic growth stalling. The rising costs may lead to cuts in social services, increased taxes, and declining foreign investment. Despite its resilient tech sector, Israel’s economic outlook remains uncertain due to the prolonged conflict.
Israel’s Economic Challenges from War: Quick Looks
- Military spending has risen from $1.8 billion to $4.7 billion monthly.
- Economic growth dropped 5.6% after the conflict began, the worst among OECD countries.
- Moody’s lowered Israel’s credit rating, citing the prolonged nature of the conflict.
- Disruptions in tourism, labor shortages, and investor concerns further strain the economy.
- U.S. aid to Israel, which includes $17.9 billion in military assistance, provides some financial support.
- Israel’s tech sector remains robust, raising $2.5 billion in the third quarter of 2024.
- Debt is expected to rise to 80% of GDP if the war continues through 2025.
Israel’s War Costs Climb, Threatening Growth and Public Services
Deep Look:
The financial toll of Israel’s ongoing war with Hamas and Hezbollah continues to mount, with the country facing difficult economic choices as military expenditures skyrocket. Since the conflict erupted following Hamas’s surprise attack on Israel on October 7, 2023, military spending has surged, growing from a pre-war rate of $1.8 billion per month to an estimated $4.7 billion by the end of last year. These numbers, reported by the Stockholm International Peace Research Institute, reflect the unprecedented scale of Israel’s military operations in both Gaza and Lebanon, where Hezbollah’s influence remains strong.
Israel’s total military spending for 2023 reached $27.5 billion, placing it among the top 15 global spenders, ahead of larger countries such as Canada and Spain. The military budget now accounts for 5.3% of the country’s gross domestic product (GDP), far above the 3.4% spent by the United States and 1.5% by Germany. By comparison, Ukraine, deeply involved in its war against Russia, spent an astonishing 37% of its GDP on defense, emphasizing how prolonged conflicts can reshape national budgets.
Impact on Growth and Labor Supply
The effects of the war on Israel’s economy extend far beyond military spending. The conflict has significantly slowed economic growth, as demonstrated by a 5.6% contraction in GDP in the months following Hamas’s October attack—the worst economic performance among the 38 nations that make up the Organization for Economic Cooperation and Development (OECD). While the economy managed a modest rebound of 4% in early 2024, growth stagnated to just 0.2% in the second quarter, signaling an uphill battle for sustained recovery.
The economic strain is compounded by a shrinking labor supply, as many Israelis have been called into military service or are avoiding conflict-prone areas. The government has also spent heavily to provide housing for those evacuated from dangerous regions near Gaza and the northern border with Lebanon, areas exposed to rocket fire from Hezbollah.
Long-Term Economic Uncertainty
Economists warn that Israel’s economic outlook depends heavily on the duration of the conflict. The 2006 war with Hezbollah, which lasted 34 days, was short enough for the economy to recover relatively quickly. This time, however, the war has dragged on for more than a year, with no clear end in sight. Moody’s, the credit rating agency, downgraded Israel’s rating to Baa1 in September 2024, reflecting concerns over the long-term financial consequences of the conflict.
Moody’s pointed out that the country faces higher borrowing costs as a result of the downgrade, which could push the government to cut public services or raise taxes. According to Karnit Flug, a former head of Israel’s central bank, the combination of rising debt and military spending could force difficult choices between defense and social programs.
Financial Resilience and Tech Sector Strength
Despite these challenges, Israel’s economy remains resilient in several key areas. The country boasts a highly diversified economy, with a particularly strong information-technology sector that supports tax revenues and defense spending. Unemployment remains low, and the TA-35 stock index has gained 10.5% this year. In the third quarter of 2024, Israeli tech companies raised $2.5 billion in capital, underscoring investor confidence in the country’s long-term economic stability, even in the midst of conflict.
Israel’s relatively modest debt level has also provided a buffer. The country’s debt-to-GDP ratio was at 60% when the war started, lower than many European economies, such as France (111%) and in line with Germany (63.5%). Though the war has pushed debt levels to 62%, the figure is still manageable by international standards. However, economists at the Aaron Institute for Economic Policy forecast that debt could rise to 80% of GDP if the conflict persists through 2025, further increasing financial pressure.
U.S. Military Aid and Financial Support
The U.S. has been a key supporter of Israel, both militarily and financially. Before the current conflict, annual U.S. military aid to Israel amounted to $3.8 billion under a 10-year agreement reached during President Barack Obama’s administration. Since the war began, however, U.S. military aid has surged, with at least $17.9 billion provided to support Israel’s operations, according to data from Brown University’s Costs of War project.
Beyond military aid, the U.S. has also offered financial backing in the past during times of crisis. For example, Congress approved $9 billion in credit guarantees in 2003 to help Israel weather the economic impact of the second intifada. Some of these guarantees remain unused and could be accessed to stabilize Israel’s finances should borrowing costs rise too high in the current conflict.
A Path Forward?
The Israeli government has established a commission led by former acting national security adviser Jacob Nagel to assess the country’s future defense budget and its impact on the broader economy. One option under consideration is a budget that would include tax increases and cuts to social services to pay for increased defense spending. According to economist Zvi Eckstein, such a budget could help Israel rebound from the war while maintaining a strong military presence in the region, particularly in Gaza, if needed.
The path ahead for Israel’s economy is fraught with uncertainty. Balancing the immediate demands of a costly war with the need for long-term economic stability will require difficult decisions on military funding, social spending, and taxation.
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