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03:34

13 APR 2024

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  • Ariana Sonsino

On the Brink? How Long Can Israel Afford This War?

Is Israel on the verge of financial peril? Evaluating the economic limits and consequences of Israel’s prolonged conflict.


Israel tanks over israeli flag

  • The current war costs Israel approximately $260 million per day.


  • Aside from direct military expenditures, Israel subsidizes the salaries of thousands of reservists, compensates war-affected businesses, and aids affected communities and displaced families.


  • Israel remains the largest overall recipient of US foreign aid since World War II, totaling approximately $130 billion.


  • The impact of the war on Israel’s economy resembles that of the COVID-19 pandemic.


  • Israel’s ability to sustain this war depends on a complex interplay of financial, geopolitical, and strategic factors.


 

What Are the Financial Burdens of War on Israeli Economics?


The current multi-front war, focusing primarily on Hamas in the Gaza Strip, has been marked by enduring tensions and sporadic escalations of violence. It is also the most expensive military operation in the country’s history. While the human cost is immeasurable, the financial burden of war looms large as another pressing concern. 


The numbers are staggering. According to Israeli Ministry of Finance estimates, the war exacts a daily cost of approximately $260 million. This ongoing expenditure covers offensive military operations, defensive measures such as the Iron Dome, and the arduous task of reconstruction. 


In addition, Latet, an Israeli humanitarian aid organization, paints a grim picture of the war’s socioeconomic repercussions. One-fifth of Israelis are suffering a decline in income due to the war, and a striking 45% of those surveyed express fears of impending economic hardship. Gilles Darmon and Eran Weintrob, directors of Latet, emphasize that the cost of the war and the lengthy process of reconstruction will likely increase social disparities and intensify poverty. 



The War’s Impact On the Israeli Workforce and Tourism


Beyond government spending on defense, Israel shoulders the financial responsibility of subsidizing the salaries of thousands of reservists. Over 300,000 reservists were called up to the army on October 7, and an estimated 365,000 showed up to serve. These salaries cost the country approximately NIS 600 million per day


These reservists constitute approximately 8% of the workforce, with many being employed in the thriving and lucrative high-tech sector. The strain on these businesses struggling to maintain their market share and revenue due to the loss of employees and decreased consumer demand during the war is palpable. Compensation costs for these businesses are estimated to have reached tens of billions of shekels.


Moreover, Construction projects, a vital driver of economic activity in Israel, have faced a serious setback. The majority of construction workers in Israel are Palestinians from the West Bank. In the aftermath of the October 7 attack, Israel suspended the work permits of nearly 100,000 Palestinian laborers, further exacerbating the economic downturn. 


Tourism, a significant revenue generator for Israel, has also been hit hard. Cities like Tel Aviv, Jerusalem, and Eilat, usually bustling with tourists, especially during the Christmas and New Year’s holiday seasons, have canceled events and seen empty streets and venues since the war began. “I estimate that the war in Israel will lead to a loss of at least 5 billion shekels in earnings from inbound travel,”  said Dr. Eran Ketter, head of the Tourism and Hospitality Management department at the Kinneret College. 


Major social events, such as weddings and other parties, have been canceled or were drastically reduced in attendance, resulting in a significant loss of income for associated businesses. Additionally, a majority of hotels in the country’s most popular tourist cities are now being used as shelters for those who were displaced from their homes. 



Where Does Israel’s War Funding Come From?


Since the establishment of the State of Israel, the US has played a pivotal role in supporting its military capabilities. In 2016, former president Barack Obama approved a substantial aid package of $38 billion from 2017 to 2028, with a significant portion allocated to defense. In 2020, $500 million (out of the $3.8 billion allotted that year) was used to fund the Iron Dome, Israel’s triad missile defense system.


Israel remains the largest overall recipient of US foreign aid since World War II, totaling approximately $130 billion. US military aid has consistently accounted for about 15% of the country’s defense budget.    


Following the October 7 attack, President Biden requested the passage of an additional $14.3 billion aid package for Israel’s military defense. The request, however, has been delayed, due to several issues in the US Congress - specifically, whether the package should be conditional on significant aid to Ukraine, as well as a dispute over funding for border control in the southern US. 


Support for Israel has significantly declined worldwide since the Gaza conflict began. This casts uncertainty over the prospects of future foreign aid. According to a poll by Morning Consult, net favorability towards Israel dropped globally by an average of 18.5 percentage points between September and December. Several countries, including China, South Africa, Brazil, and various Latin American nations, shifted from positive to negative views of Israel since the onset of the war. Still, the US maintains a net positive view of Israel, with a modest 2.2 percentage point drop since September. 



The Current State of Israel’s Economy


Since October 7, Israel has experienced a surge in government spending and borrowing and a sharp decline in tax revenue and credit ratings. According to the Washington Post, some economists have likened the impact on Israel’s economy to that caused by the COVID-19 pandemic. The Bank of Israel anticipates a significant drop in GDP compared to the previous year. 


In November 2023, Standard and Poor’s, a prominent credit ratings agency, anticipated an expansion of the budget deficit, projecting it to reach 3% of GDP in 2023 and more than double (to approximately 7%) in 2024. Israel’s fiscal deficit had already widened to 2.6% of GDP in October, up from 1.5% in the preceding month. Notably, in 2022, Israel recorded its first budget surplus in 35 years, amounting to 0.6% of GDP. 


In the wake of the current conflict, Israel has raised NIS 30 billion in debt, as per data from the Finance Ministry. Among this debt, NIS 6 billion was secured through dollar-denominated borrowing in international financial markets. 


In 2023, Israel reported a budget deficit of 4.2% of GDP as a result of the war. In the last month of 2023, the deficit was 33.8 billion shekels, compared to 18.5 billion shekels in 2022. 



Efforts to Relieve the Financial Shock of War


In 2022, Israel approved a two-year budget for 2023-2024. The war, however, significantly disrupted the plan, resulting in a reframing of the annual budget. 


In early December 2023, the Knesset approved adding 28.9 billion shekels to the national budget for war efforts, encompassing both military purposes in Gaza and on the Lebanese border, as well as displaced Israeli communities and injured soldiers. The proposal raised Israel’s annual budget to 636.6 billion shekels, which includes debt servicing costs.  


The decision stirred government controversy because the budget proposal included allocations for non-essential purposes, including allocations for the Settlements and National Projects Ministry, as well as for the ultra-Orthodox education system. 


In addition to the new budget proposal, the IDF has also been slowly releasing reservists to return to their families and jobs, in the hope of alleviating the strain on the economy. 



What Happens if the War Expands to a Second Front on Israel’s Northern Border as Hezbollah’s Attacks Persist? 


The escalating tensions and series of recent incidents across the Middle East have ignited concerns about the possibility of a wider regional conflict. Targeted killings of Hamas and Hezbollah leaders, a significant attack by Hezbollah on an Israeli Air Force command post, and international airstrikes on Houthi targets in Yemen have all raised alarms. “This is a moment of profound tension for the region,” said US Secretary of State Anthony Blinken at a press conference in Qatar earlier this month. “This is a conflict that could easily metastasize, causing even more insecurity and suffering.”


The prospect of a full-scale war between Israel and other fronts looms as a daunting scenario. Hezbollah, considered one of the world’s most heavily armed non-state entities, poses a formidable challenge to Israel. Charles Freilich, a former Israeli deputy national security advisor, suggests that the risk of a major escalation remains high and presents an unprecedented challenge for Israel and the region at large. According to the Calcalist, if the war continues as it has for another five to ten months, it could cost Israel a staggering $50 billion, amounting to 10% of the GDP. 



How Much Longer Can Israel Afford This War?


The length of time for which Israel can afford this ongoing conflict depends on several factors:


  1. Foreign aid: Securing substantial foreign aid, particularly from the US, is crucial. President Biden’s request for additional aid remains unsecured. As the war continues, international support wanes, and sustaining public support becomes more challenging.

  2. Broader needs: Rebuilding, supporting businesses, and investing in education all compete for budget allocation, making financial management pivotal.

  3. Expansion risk: The potential for the conflict to spread to other fronts looms large. This requires significantly more defense spending and strains financial resources.

  4. Debt management: Balancing immediate needs with long-term economic stability is crucial. Israel has already substantially increased its debt, thus necessitating prudent fiscal decisions. 

  5. Human toll and manpower challenges: Striking a delicate balance between enabling reservists to return to their families and jobs while acknowledging the growing number of fallen and injured soldiers as the conflict persists creates an increasingly complex endeavor. 


In essence, Israel’s ability to sustain this war hinges on a complex interplay of financial, geopolitical, and strategic factors. As the conflict continues, Israel faces a critical juncture where securing aid, managing perception, addressing societal needs, guarding against expansion, and handling debt will determine the nation’s future. 


Prime Minister Netanyahu has expressed unwavering commitment to the goals of the war, stating that Israel is prepared to pay “whatever economic price this war exacts on us.” The prolonged financial strain, however, raises questions about the sustainability of this resolve. As the conflict continues, Israel faces a challenging path going forward, both in terms of its economic stability and its quest for lasting peace in the region. 

 

Sources




Axios, What to know about U.S. aid to Israel, November 4, 2023










 

Ariana Sonsino

Ariana Sonsino


Ariana Sonsino, a Texas native, graduated from the University of Texas at Austin. Ariana now applies her diverse skills as the Marketing Manager at Awesome-Deloitte blending her background in both marketing and public relations. 

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