Economic Challenges Facing Israel Amid Ongoing Conflict
Israel is currently grappling with significant economic challenges as a result of the prolonged war, which has been ongoing for more than a year. According to a report from the Associated Press, economic experts warn that the conflict is exerting increasing pressure on the state budget, primarily due to the escalating costs of military operations in both the Gaza Strip and Lebanon.
The report highlights a notable decline in foreign investment, as investor confidence wanes amid escalating security concerns. This decline, coupled with rising military expenditures, has compelled the Israeli government to raise taxes. Experts caution that these developments could hinder economic growth and disproportionately affect the middle class. Furthermore, the government may be forced to cut spending on social programs and public services to accommodate the financial demands of military operations, potentially leading to broader societal repercussions.
Military spending has surged significantly, jumping from approximately $1.8 billion per month prior to October 2023 to about $4.7 billion by year-end, according to the Stockholm International Peace Research Institute. Last year, Israel's total military expenditure reached $27.5 billion, placing it 15th globally in military spending as a percentage of GDP at 5.3%. In contrast, the United States and Germany allocate significantly lower percentages of their GDP to military spending.
Economic Indicators and Future Projections
The war's impact on Israel's economy has been stark, with economic output contracting by 5.6% in the three months following the outbreak of hostilities, marking the worst performance among the 38 members of the Organization for Economic Cooperation and Development (OECD). The conflict has disrupted labor supply due to military call-ups, hindered new business investments, and severely affected tourism due to air travel disruptions.
Additionally, the Israeli government is incurring housing costs for thousands displaced from areas near the Gaza Strip and the Lebanese border. The Aaron Institute for Economic Policy projects that public debt could reach 80% of GDP if the conflict does not escalate further and a ceasefire is achieved by the end of next year. However, military spending is expected to remain high, especially if Israel continues a military presence in Gaza post-conflict.
Israeli Finance Minister Bezalel Smotrich has indicated that the budget deficit for 2025 may hover around 4%, citing the stability of the currency, high stock prices, a robust labor market, and strong tax revenues as positive factors. Yet, Moody's has expressed skepticism regarding these figures, forecasting a potential deficit of 6% next year.
In terms of U.S. military assistance, before the war, Israel received approximately $3.8 billion annually, accounting for about 14% of its prewar military expenditure. Since the onset of the conflict, U.S. military aid has surged to a record $17.9 billion, highlighting the intensifying support from America during this tumultuous period.
