Over the suffering and sorrow in human life, Israel’s war The fight against the Hamas and Hezbollah terrorist groups has been costly, and the painfully high financial cost is raising concerns about the long-term impact of the fighting on the country’s economy.
Military spending has increased, and development has stalled, especially in dangerous border areas that have been evacuated. Economists say the country may face a decline in investment and higher taxes as the war puts pressure on government budgets and makes it difficult to choose between social programs and the military.
Here is a look at the monetary costs Israel faced as a result of the conflict:
The Israeli government is spending much more per month on the military, according to the Stockholm International Peace Research Institute, which has increased from $1.8 billion at the end of last year to about $1.5 billion before Hamas started the fighting by attacking Israel on October 7, 2023. It has become 4.7 billion dollars.
According to the institute, the government spent $27.5 billion on the military last year, ranking 15th globally behind Poland but ahead of Canada and Spain, which have larger populations. Military spending as a percentage of annual economic output was 5.3%, compared to 3.4% for the United States and 1.5% for Germany. This pales in comparison to Ukraine, which spent 37% of its GDP and more than half of its entire government budget on fighting off Russia’s invasion.
In the three months following the Hamas attack, Israel’s economic output shrank 5.6%, the worst performance of any of the 38 countries in the Organization for Economic Co-operation and Development, a group of mostly wealthy nations.
The economy partially recovered with growth of 4% in the first half of this year but grew by only 0.2% in the second quarter.
The war has taken an even heavier toll on Gaza’s already broken economy, where 90% of the population has been displaced and much of the workforce unemployed. The economy of the West Bank has also been badly affected, where thousands of Palestinian workers lost their jobs in Israel after October 7 and Israeli military raids and checkpoints have hindered movement. The World Bank says the West Bank economy declined by 25% in the first quarter.
In Israel, the war has imposed many economic burdens. Call-ups and the extension of military service threaten to reduce the labor supply. Security concerns deter investment in new business, and disruptions to flights have kept many visitors away, leading to a decline in the tourism industry.
Meanwhile, the government is paying for housing for thousands of people who had to leave their homes in the south near the border with Gaza and in the north where they came under Hezbollah fire.
One of the biggest concerns is the open nature of the fighting, which has lasted for more than a year. Israel’s economy recovered rapidly after the 2006 war with Hezbollah in southern Lebanon. But that struggle lasted only 34 days.
Moody’s Ratings cited that view on September 27 when it lowered the Israeli government’s credit rating by two notches. According to Moody’s, despite moderate risk, the Baa1 rating is still considered investment grade.
Israel’s economy is collapsing hard. The country has a diverse, highly developed economy with a strong information-technology sector, which supports tax revenues and defense spending. Unemployment is low, and the TA-35 stock index is up 10.5% this year.
Even amid the fight, tech companies raised about $2.5 billion in capital during the third quarter, according to Zvi Eckstein, head of the Aaron Institute for Economic Policy at Reichmann University.
Israel entered the war “in the best economic position possible” with respect to government debt, which was a relatively modest 60% of GDP, Mr. Eckstein said. “We financed the war mainly through debt,” which has now increased to 62%, but is still in line with France’s 111% and Germany’s 63.5%.
The institute estimates that debt will reach 80% of GDP, assuming that the fighting will not escalate markedly and that some form of ceasefire or conclusion could be reached by the end of next year. Nevertheless, higher defense spending is likely, especially if Israel maintains a military presence in Gaza after the war.
Israeli Finance Minister Bezalel Smotrich’s 2025 budget projects a deficit of less than 4%, ensuring Israel’s debt burden remains stable. Mr. Smotrich said the country has a stable shekel currency, rising stock prices, a tight job market, strong tax revenues and access to credit, and a rebounding tech sector.
Moody’s has raised questions over the deficit figures, forecasting a 6% deficit next year.
“A credit downgrade will increase borrowing costs, which means Israelis are likely to face cuts in public services and higher taxes,” said Karnit Flug, the former head of Israel’s central bank and now vice president of research at the Israel Democracy Institute.
Before the war, U.S. military aid to Israel amounted to about $3.8 billion per year under an agreement signed during the administration of President Barack Obama. This amounts to about 14% of Israel’s pre-war military spending, most of which went to American defense companies.
Since the war began in Gaza and conflicts escalated across the Middle East, the United States has spent a record at least $17.9 billion on military aid to Israel, according to a report by Brown University’s War Costs Project. Anniversary of Hamas attack on Israel.
Beyond strictly military aid, the US has offered significant financial assistance to Israel in times of crisis. In 2003 Congress approved a $9 billion credit guarantee, allowing Israel to borrow at cheaper rates after damage to the economy during the so-called second intifada, or Palestinian uprising.
Some of those guarantees remain unused and could theoretically be used to stabilize government finances if Israel faced unaffordable borrowing costs.
The government has formed a commission under former acting national security adviser Jacob Nagel, who negotiated Israel’s most recent US aid package, to make recommendations on the size of the future defense budget and to assess how The question was how increased defense spending could affect the economy.
Economist Eckstein said a budget that included some tax increases and cuts in social spending would be needed to support the post-war recovery and potentially pay for higher ongoing defense costs.
published – October 22, 2024 03:05 PM IST