‘Long-term’ economic damage
The Bank of Israel estimated in May that costs arising from the war would total 250 billion shekels ($66 billion) through the end of next year, including military outlays and civilian expenses, such as on housing for thousands of Israelis forced to flee their homes in the north and south. That is equivalent to roughly 12% of Israel’s GDP.
Those costs look set to rise further as fiercer fighting with Iran and its proxies, including Hezbollah in Lebanon, adds to the government’s defense bill and delays the return of Israelis to their homes in the country’s north. Israel launched a ground incursion into southern Lebanon targeting Hezbollah on September 30.
Smotrich, the finance minister, is confident that Israel’s economy will bounce back once the war ends, but economists are concerned the damage will far outlast the conflict.
Israel's finance minister, Bezalel Smotrich, pictured in June 2024.
Menahem Kahana/AFP/Getty Images
Flug, the former Bank of Israel governor and now vice-president of research at the Israel Democracy Institute, says there is a risk the Israeli government cuts investment to free up resources for defense. “That will reduce the potential growth (of the economy) going forward,” she said.
Researchers at the Institute for National Security Studies are similarly downbeat.
Even a withdrawal from Gaza and calm on the border with Lebanon would leave Israel’s economy in a weaker position than before the war, they said in a
report in August. “Israel is expected to suffer long-term economic damage regardless of the outcome,” they wrote.
“The anticipated decline in growth rates in all scenarios compared to pre-war economic forecasts and the increase in defense expenditures could exacerbate the risk of a recession reminiscent of the lost decade following the Yom Kippur War.”
The 1973 war, also known as the Arab-Israeli war, launched by Egypt and Syria against Israel’s forces in the Sinai Peninsula and Golan Heights, ushered in a long period of economic stagnation in Israel, partly as the country massively ramped up defense spending.
Likewise, potential tax hikes and cuts to non-defense spending — some already mooted by Smotrich — to fund what many expect to become a permanently enlarged military, could hurt economic growth. Such measures, coupled with a weakened sense of security, could also spur an exodus of highly educated Israelis, notably tech entrepreneurs, Flug warned.
“It doesn’t have to be in very large numbers, because the tech sector is very dependent on a few thousand of the most innovative, creative and entrepreneurial individuals,” she said of a sector that accounts for a hefty 20% of Israel’s economic output.
