
The Limited Ability of the Israeli Economy to Endure Crises
The high financial costs and the significant economic burdens resulting from the war on Gaza did not prevent the Israeli government from prolonging and expanding the war to additional fronts. Despite these wars, the Israeli economy remained resilient without any serious problems hindering or obstructing government plans. However, there has been a decline in some central economic indicators, such as: a slowdown in economic growth, an increase in the government budget deficit, a rise in foreign debt, a decline in foreign investments, and, to some extent, a stagnation in the increase of Israeli exports.
It is true that American support for the Israeli economy over the last two years, estimated at 22 billion shekels since the beginning of the war on Gaza, is one of the factors explaining the resilience of the Israeli economy, but it is also essential to consider the Israeli economy's ability to cope with the circumstances of war and emergencies. The Israeli economy has been able to maintain the continuity of the economic cycle, the functioning of markets and production, and adapt to high economic costs despite the conditions of war.
The ability of the Israeli economy to handle the transformations in recent years did not come from nowhere; it has been the result of a cumulative good economic performance over the last two decades, along with successful experience in dealing with the Corona crisis in 2020. More importantly, it has resulted from shifts in the structure and composition of the Israeli economy in the last two decades, where it transitioned from a traditional economy to a modern economy reliant on high-tech industries and services, primarily based on global markets across all continents.
Nevertheless, the economic situation remains hostage to political and security conditions, as outlined in the quarterly report of the Bank of Israel published at the beginning of July. The report indicates that the continuation and expansion of the war on Gaza, along with its financial and economic costs, could lead to a deterioration in the economic situation, increased financial burdens, and a deepening of economic crises.
Economic Transformations Over Decades
The Israeli economy had achieved positive results in most economic indicators over the last two decades, until the onset of the war on Gaza, successfully navigating the economic damage from the Corona pandemic in 2020, which resulted in minimal economic harm that was quickly overcome in 2021 with a return to growth and expansion. The average economic growth rate from 2010 to 2019 was about 4.2%, while the unemployment rate during the same period stood at 3.8%, a very low rate indicating near-full employment. Furthermore, the labor force participation rate was around 64%, which is a very high level.
The state's treasury benefited from this growth due to an increase in tax revenues, contributing to a reduction in government financial deficit and foreign debt between 2010 and 2019. The good economic state enabled the Israeli government to cope with the economic and financial repercussions of the Corona crisis, particularly the need to mobilize large budgets to support the economy and compensate affected economic sectors.
The decline of the Corona crisis and the boom in economic activity led to a significant improvement in financial indicators in 2022. The government budget recorded a surplus of 0.6% of GDP in 2022, compared to a deficit of 4.4% in 2021. Public debt decreased to 60.7% of GDP, a level slightly above its pre-Corona crisis state. The share of public spending declined as general revenues increased. The rapid increase in tax revenues, alongside fast economic growth, was reflected by exceptional factors such as the influx of capital into the high-tech sector and heightened activity in the real estate market.
Beginning of Crises
It is impossible to separate the economic situation in Israel from the political situation. At the beginning of 2023, Israeli Minister of Justice Yariv Levin announced his comprehensive "judicial reform" plan, aimed at changing the face of the judiciary in Israel. This announcement led to a political crisis accompanied by widespread protests within Israeli society.
The start of protests and increasing political tension had economic repercussions. For instance, the business sector and major Israeli companies declared their support for the protest movement, culminating in an announcement of a general strike across all economic facilities. There were also growing fears of a decrease in foreign investments, the exit of several technology companies from Israel, along with threats to withdraw deposits from Israeli banks, declining shekel value, weakened stock market performance, and worries about a downgrade in Israel's credit rating.
Despite all these warnings and concerns, the actual economic damage resulting from the plan to restrict the judiciary was limited and did not escalate or expand. However, the events of October 7 changed the course of history in Israel, including the economic trajectory.
On the eve of the war on Gaza, economic indicators were generally good. Economic growth forecasts for 2023–2024 were around 3%, with low unemployment rates nearing 3.5% and expectations of moderate financial inflation at about 3.8%. Simultaneously, there was a decrease in the shekel's value against the dollar in 2023, and the basic bank interest rate rose to a record level of 4.75%. The government's budget deficit increased by 1.5% of GDP. Although these figures were slightly worse than those of 2022, they were overall moderate and did not indicate a serious economic crisis in Israel. Thus, the Israeli economy entered the war on Gaza with generally favorable economic conditions, which helped bolster its capacity to handle the economic impacts of war.
The Economic Effects of the War on Gaza
Since the onset of the events on October 7 and the beginning of the war on Gaza, followed by the opening of the Lebanon front, it has been clear that the economic and financial cost of this war will be high and costly for the Israeli economy. The Hamas attack on the border towns in the south caused significant destruction to infrastructure and housing, leading to the displacement of large numbers of residents from those towns, and necessitating the government to finance alternative housing and cover living costs. Economic activity in southern areas has almost entirely ceased for over a month. Subsequently, economic activity in northern towns came to a stop due to Hezbollah opening a support front, and a complete halt occurred when the support front shifted to a wide Israeli offensive on Lebanon in September 2024. This was the first time since 1973 that the Israeli army called up a massive reserve force, amounting to about 300,000 soldiers, incurring significant financial costs.
The government was forced to mobilize significant budgets to fund both the direct and indirect costs of the war, including increasing the government’s external debt and raising the public budget deficit. Moreover, the war of extermination against Gaza and Lebanon and subsequently Iran has led to a decline in Israel's international economic standing, which means a gradual downgrade of Israeli credit and higher bank interest rates on loans; additionally, foreign investment in the Israeli economy and Israeli exports declined, alongside rising financial inflation and interest rates.
The Economic Costs of the War
Estimates from the Bank of Israel and the Ministry of Finance regarding the financial cost since the onset of the war on Gaza, including the war on Lebanon and the initial cost of the war on Iran, may reach up to 320 billion shekels. The war has resulted in increases in the Ministry of Defense's budget, which amounted to about 60 billion shekels in 2023 (before the outbreak of the war). The Ministry of Defense's budget for 2024 reached about 99 billion shekels, and in 2025, the defense budget is approximately 109.8 billion shekels.
One of the most significant negative impacts of the war on Gaza is the decline in economic growth in Israel. According to data from the Central Bureau of Statistics, economic growth in 2023 was approximately 2%, and growth in 2024 is expected to drop to only 1%. The budget deficit in 2023 was about 4.2%, and in 2024 approximately 7%. It is anticipated that this will rise to 5% in 2025. The external debt as a percentage of GDP is expected to increase to around 70%, compared to 60% in recent years. To finance these costs, the Ministry of Finance has borrowed unprecedented amounts. Government debt rose from 1.04 trillion shekels at the end of 2022 to 1.32 trillion shekels in 2024.
Optimistic but Conditional Predictions
At the beginning of July, the research department of the Bank of Israel published its macroeconomic forecasts for the second half of 2025 and the year 2026. According to the report, GDP is expected to grow by 3.3% in 2025 and by 4.6% in 2026, indicating that the Israeli economy will gradually return to economic growth and emerge from the crisis of the Gaza war. The budget deficit is projected to be 4.9% and 4.2% of GDP in 2025 and 2026, respectively. Public debt is expected to reach 70% of GDP in 2025 and 71% in 2026.
These forecasts take into account initial estimates of costs related to the war on Iran, alongside additional expenses not previously budgeted for 2025 for the continuation of the war in Gaza. The research department estimates that the civil costs of the war on Iran, i.e., damage in Israeli towns and compensation for loss of income, will reach approximately 10 billion shekels, most of which will be paid from the property tax fund, and thus will not be recorded within the central government's deficit.
However, these somewhat positive predictions, according to the Bank of Israel report, are conditional on the security and political situation. The Bank of Israel emphasizes that the uncertainty surrounding the forecasts is high, but unlike previous estimates, this forecast includes potential risks in both directions – upward and downward. On one hand, according to the report's authors, the outcomes of the war on Iran reflect the possibility of reducing security risks to Israel, and it seems (as of the report's writing) that there is a chance to reach an agreement that would end the war in Gaza, potentially paving the way for a broader regional settlement. Achieving a settlement across various arenas could reduce levels of risk in the economy, alleviate supply constraints, and may contribute to increased demand and investments in the coming years.
On the other hand, uncertainty about the long-term effects of the war on Iran and the security situation carries risks that suggest that any security improvement may be temporary, and its positive effect on the economy will be limited. Regarding Gaza, if a ceasefire that leads to a permanent settlement is not reached, and fighting persists or escalates, the risk of continuing supply constraints will weaken the recovery of economic activity, keeping growth low and the budget deficit high. In this case, the government will continue to increase the defense budget, deal with war costs, and increase external debt and the government budget deficit.
This illustrates that while the Israeli economy has so far managed to cope with the state of war, its capacity remains limited, and cannot endure an open-ended war, especially since the other fronts are still not completely closed and remain ambiguous. Even the high-tech and modern technology sector, which primarily relies on global markets, cannot indefinitely shield the Israeli economy.

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