Israel's Economic Strain Amid Rising Military Expenditures
Israel is currently grappling with significant economic pressure due to increased military spending. The Ministry of Finance has proposed a comprehensive reduction in various ministries' expenditures by 5%, totaling 3.5 billion shekels ($940.2 million), to manage the escalating costs of the ongoing war on the Gaza Strip, now in its ninth month. This financial strain is further compounded by threats from the northern front with Hezbollah, attacks from the Yemeni Houthi group, and threats from Iraqi factions.
Proposed Budgetary Measures
The Ministry's Budget Department has suggested several measures to reduce the expected fiscal deficit, which is projected to reach 6.2% of GDP in 2025 without amendments. The proposed actions include reducing the salaries of senior managers in the public sector, postponing the next batch of pay increases in the civil service, and reducing allocations to coalition parties by 2 to 4 billion shekels ($534.2 million to $1 billion). Additionally, the abolition of unnecessary ministries and a potential increase in the value-added tax rate to 19% are on the table, though the latter is considered a precautionary measure.
Impact on the Ground
The economic measures come amidst continued Israeli military operations. On Wednesday, several Israeli strikes targeted the west of Rafah and the center of Gaza, resulting in multiple casualties. The UN has raised concerns about the respect for the laws of war by the Israeli army, highlighting six 'emblematic' bombings that left at least 218 dead during the first two months of the war. The humanitarian situation in Gaza remains dire, with basic products becoming unaffordable for many due to insufficient quantities of international aid.
- The Ministry of Finance's calculations indicate that to achieve the target deficit of 3.8% of GDP, the deficit must be reduced by 2.4% of GDP, or 50 billion shekels ($13.43 billion). This includes additional defense spending worth 20 billion shekels ($5.4 billion).
- Israeli Finance Minister Bezalel Smotrich is expected to make a decision regarding the deficit target in the coming days after internal consultations and possibly with Prime Minister Benjamin Netanyahu.
- The yield on 10-year Israeli government bonds denominated in shekels recently exceeded 5% for the first time since 2011, reflecting significant economic concerns. Although the yield has since fallen to about 4.85%, the volatility indicates growing economic instability.
- The UN investigation into the six emblematic bombings during the first two months of the war in Gaza revealed that Israel allegedly used bombs with an explosive charge of up to one ton on inhabited buildings, a school, refugee camps, and a market. This has raised serious concerns about the adherence to the laws of war and the obligation to minimize damage to civilians.
