Today, the Associated Press quoted economic experts as saying that Israel is facing major economic challenges as a result of the war that has been going on for more than a year, which has led to increasing pressure on the state budget. Due to the high costs of the military operation on several fronts, including the Gaza Strip and Lebanon.
Experts added that Israel has begun to suffer from a significant decline in foreign investments, as investors are concerned about the security situation. With the rising costs of the war putting pressure on the government budget, Tel Aviv resorted to increasing taxes.
Experts warned that all of this would negatively affect economic growth and increase the burdens on the middle class.
In addition, the situation may prompt the government to reduce spending on social programs and public services to finance military operations, which may lead to repercussions on various sectors of society.
The agency stated that spending on the Israeli army increased significantly, and from about $1.8 billion per month before October 7, 2023, it became about $4.7 billion by the end of last year, according to the Stockholm International Peace Research Institute.
Israel spent $27.5 billion on the military last year, according to the institute, ranking 15th globally behind Poland, but ahead of Canada and Spain, all of which have larger populations. Military spending as a percentage of annual economic output amounted to 5.3%, compared to about 3.4% in the United States and 1.5% in Germany.
War and economic growth
In the three months following the Gaza war, Israel’s economic output contracted by 5.6%, the worst performance of any of the 38 member states of the Organization for Economic Co-operation and Development, a group of mostly wealthy countries.
In Israel, the war imposed many economic burdens. The call-up and extension of military service threatens to reduce the labor supply. Security concerns are hampering investment in new businesses, and flight disruptions have had a significant negative impact on tourism.
Meanwhile, the government is paying housing costs for thousands of people who have had to leave their homes in the south near the Gaza Strip and in the north near the Lebanese border.
The Aaron Institute for Economic Policy at Israel’s Reichman University expects public debt to reach 80% of GDP, assuming that the fighting does not intensify significantly and the possibility of reaching some kind of ceasefire or outcome by the end of next year.
Even then, defense spending would likely be higher, especially if Israel maintains a military presence in Gaza after the war.
Israeli Finance Minister Bezalel Smotrich expects the 2025 budget deficit to be around 4%, adding that Israel has a stable currency, high stock prices, a tight labor market, strong tax revenues, access to credit, and a recovery in the technology sector, but Moody’s questioned the numbers. Deficit, and expected a deficit of 6% next year.
America intensifies its aid
Before the war, US military aid to Israel amounted to about $3.8 billion annually under an agreement signed during the administration of President Barack Obama. This represented approximately 14% of Israeli military spending before the war.
Since the war in Gaza began, the United States has spent a record amount of at least $17.9 billion on military aid to Israel, according to a report by the Brown University Costs of War Project released on the first anniversary of the war on Gaza.
