To maintain his hold on power, Benjamin Netanyahu is pursuing a brutal forever war against Palestinians. But the costs aren’t just in human lives: Israel’s economy may not be able to sustain this war.
Israeli prime minister Benjamin Netanyahu addresses the media at the Defence Ministry in Tel Aviv on November 12, 2019. (Gil Cohen-Magen / AFP via Getty Images)
Global media have cast a spotlight on Israel’s genocide in Gaza. Rightly so: the suffering of Gazans is unbearable. But in doing so, it has missed another crucial part of the story: the impact the war is having on the Israeli economy and Israelis themselves.
Four hundred thousand Israel Defense Forces (IDF) soldiers have served extended tours of duty in Gaza, the West Bank, and northern Israel. They have left families and jobs and, in many cases, lost their businesses. In addition, almost 250,000 Israelis have become refugees due to fighting with Hezbollah. This has had a massive impact on the Israeli economy. Economic growth and GDP have plummeted.
Forty-six thousand businesses have failed since October 7. That number will increase to sixty thousand by the end of 2024. This has a ripple effect throughout the economy. Bankruptcies hit the bottom line of the lenders who extended credit to the failed businesses. Vendors and suppliers also take a hit, while the lives of many small business owners have been reduced to shambles. They have sunk into debt and often are forced to rely on handouts from friends, family, and charities:
Many of those [IDF] fighters are close to a breaking point. Exhausted and in some cases demoralized, they are struggling to balance family and work with military service, while the economic toll from their absences mounts.
The Israeli Population Authority reported that in the past year, 575,000 more Israelis left the country than returned to it. The immigration rate has halved since October 7.
Activity in the construction sector, reliant on over two hundred thousand Palestinian workers who are now barred from entering Israel, has declined by 25 percent. This has led to the collapse of building contractors and developers.
The Palestinian economy has been decimated and driven residents into penury. The desperation they face will lead inevitably to bitter resentment and future violence. Tourism, once a powerhouse of the economy, has dried up. The agriculture sector (20 percent decline) is based mainly in the north and the south, regions hard-hit by hostilities. Trade has plummeted drastically at Israel’s southern port, Eilat, due to Houthi interruption of maritime traffic in the Red Sea.
People move past destroyed buildings along a street in Khan Yunis in the southern Gaza Strip on May 14, 2024. (AFP via Getty Images)
Twenty percent of Israelis are not working due to military deployment or relocation from homes in the north or south. The Bank of Israel projects the war will cost $67 billion between 2023 and 2025. That is, if the war ends by then. The government included an initial $8 billion supplemental expenditure for the first three months of the war. Later it injected another $15 billion to cover the added costs.
The Bank of Israel announced that the 2024 growth rate would be -2 percent, unprecedented in an Israeli economy used to sustained growth. Fitch has just downgraded the country’s credit rating, describing the economic outlook as “negative.” The Bank of Israel has raised the interest rate to 4.5 percent.
It has estimated that the overall costs of the war will be $56 billion between 2023 and 2025. Israel posted a 2023 budget deficit equal to 4 percent of its total GDP, eight times what it was the year before. The 2024 deficit will rise to 6 percent of total GDP.
The war in Gaza alone costs Israel nearly $300 million per day. The overall military budget for an entire year is around $23 billion. So the costs of fighting war on the northern and southern front have equaled the entire IDF annual budget. They equal 10 percent of the entire national budget.
National security experts expect a war in the north against Hezbollah, which Israel has provoked with its assassinations of high-level commanders. If that happens, the same exhausted, overtaxed reservists who have been fighting for ten months in Gaza would be expected to serve combat tours in Lebanon as well. Most militaries take the demands of rest and recuperation into account to preserve unit morale and effectiveness. These considerations have been abandoned by Israel due to the exigencies of multifront conflict.
In the past, Israel’s combat strategy dictated fighting short, decisive wars. It proved quite effective. But asymmetrical hostilities with insurgent militias capable of conducting extended conflicts (as we’ve seen in Gaza) will challenge combat readiness and effectiveness. A nation economically and militarily exhausted cannot achieve and maintain its national interest.
The budget crisis has impacted military preparedness in Gaza. Soldiers are running out of ammunition. Missiles and bombs are in short supply. The army, usually the first in line for national resources, is being forced to make do with less. Officers who have already served combat tours are refusing new call-ups because of the enormous strain it puts on their families and businesses.
Because the governing coalition depends on the support of far-right ministers with close ties to settler extremists, it has been forced to vastly increase the budgets for their respective ministries. These include the police minister Itamar Ben-Gvir, who secured a $2.4 billion increase for the two-year budget cycle. Bezalel Smotrich, both finance (responsible for producing the budget) and settlements minister, received a four-fold budget increase to $136 billion.
Israel Defense Forces with ammunition in Sderot, Israel. (Mostafa Alkharouf / Anadolu Agency via Getty Images)
At the same time, it has cut funding for social services, health, and education by 4 percent across the board. Teachers will be denied the $125 million salary increase the education ministry negotiated with them. Amid this crisis, patients are denied life-saving treatment and families are denied critical social support. It hurts the most vulnerable who are most in need of assistance.
Ben-Gvir, Smotrich, and other settler ministers champion the extermination of Palestinians in Gaza and their eradication from the West Bank. They are the ones who advocate a final solution to the “Palestine Problem.”
It is an indication of the depravity of Prime Minister Benjamin Netanyahu’s policies that he has become their willing captive. In order to maintain his hold on power, Netanyahu is willing to pursue a forever war, while also inflicting immense financial suffering on his own citizens.
Israel’s buckling economy will increase social unrest. Massive increases in funding for the ultra-Orthodox and settlements will sow sectarian division between secular (40 percent of the population) and religious Israelis. Wars in Gaza and Lebanon will destabilize the region and increase the likelihood of future wars, which will require massive increases in military spending. The current economic strain will increase hostility, already at a fever pitch, toward Netanyahu and his government and lead to their likely downfall in 2026 elections.
But the current government is quite stable, as long as the prime minister keeps his political allies happy with billions in funding. Barring any crisis, it may live to complete its term in office, despite massive discontent among the majority of the population. Israelis hate their government, while remaining powerless to topple it.