As Israel’s military operations against Hamas and Hezbollah continue, the conflict’s financial burden is becoming increasingly evident. Beyond the tragic loss of life, the escalating costs of war are raising alarms about the long-term implications for Israel’s economy.
Military expenditures have surged dramatically since hostilities erupted, with monthly spending soaring from $1.8 billion to approximately $4.7 billion by the end of 2023, according to the Stockholm International Peace Research Institute. In 2023, Israel’s total military spending reached $27.5 billion, placing it 15th globally. In comparison, military spending as a share of GDP is notably higher than that of the U.S. and Germany, with Israel spending 5.3% of its annual economic output.
The war’s immediate impact is stark: following Hamas’s assault on October 7, 2023, Israel’s economic output contracted by 5.6%, the steepest decline among OECD countries. Although the economy rebounded slightly with a 4% growth rate earlier this year, the second quarter saw growth stall at just 0.2%.
The humanitarian crisis is equally dire in Gaza, where an overwhelming 90% of the population has been displaced, exacerbating existing economic challenges. The West Bank has also suffered significant economic setbacks, with many Palestinian laborers losing their jobs in Israel.
As the conflict drags on, concerns grow over the sustainability of military funding. With increased military service requirements and security fears deterring investment, the government is under pressure to allocate resources effectively. This has prompted discussions about the possibility of higher taxes and reduced social services to manage the escalating military budget.
Moody’s recent credit downgrade reflects these uncertainties, predicting rising borrowing costs that may lead to austerity measures. Although Israel’s economy remains robust, characterized by low unemployment and a thriving tech sector, the long-term outlook hinges on how the government balances military needs with social spending.
Looking ahead, the Israeli government is exploring tax adjustments and potential budget cuts to ensure economic stability post-conflict. As the war continues, the critical challenge will be to navigate these complex economic realities while addressing the pressing humanitarian needs on the ground.