A flight information board displays canceled flights at the arrivals terminal at Ben Gurion Airport, the morning after a drone and missile attack from Iran, April 14, 2024, near Tel Aviv, Israel.Photo by Kobi Wolf/Bloomberg via Getty Images
Contributing Columnist Danny Bahar April 16, 2024
After an incredibly tense night last weekend filled with drones, cruise missiles, and ballistic missiles fired at Israel by the Islamic Republic of Iran, the world’s big question is: Will Israel retaliate? Thing.
An important aspect that Israeli policymakers should seriously consider when answering this question is whether the Israeli economy can tolerate the opening of a new military front. A serious look at the numbers shows that it’s probably a bad idea.
Already, the six-month war with Hamas in Gaza has put much pressure on Israel’s economy. It is estimated to cost nearly $60 billion, equivalent to more than 10% of Israel’s gross domestic product, and cost more than $6,000 per person. This is a very large amount, especially when Israel’s annual defense spending relative to her GDP before 2023 was about 5%, less than half of the current amount.
To cover this increase in spending, Israel, like other countries, will need to use a combination of tax increases, other cost cuts, and borrowing. For Israel, raising taxes now is not a great move, given that the economy shrank by 5% in the final quarter of 2023 due to a drop in consumption and investment caused by the war. This economic contraction has reduced the annual growth rate to 2% in 2023, significantly lower than 6.5% in 2022.
This economic contraction is not only reflected in the numbers, it is also felt on the streets of Israel. In the first few months after October 7, around 300,000 Israelis were called up to serve in the reserves, and many companies found themselves short of workers and unable to function properly. Additionally, 135,000 people have been forced to flee their homes in the Gaza Strip and along the northern border, meaning all business activity in these areas (nearly a third of the country) has come to a near complete halt. . The ban on Palestinian labor in Israel has also led to a significant slowdown in sectors such as agriculture and construction. All these factors add up to reduce production, which means that ordinary Israelis have less income and therefore less taxes.
To finance this war, Israel cut costs wherever possible, but largely chose to borrow money. The budget deficit rose to 5.6% of GDP, well above the previous target of 2.25% for a “normal” year. Coupled with months of confusion over pre-war judicial reforms, international credit agencies have already downgraded Israel’s credit ratings. A downgrade in Israel’s credit rating means borrowing from international financial markets will become more difficult and more costly to repay, putting further pressure on Israeli taxpayers in the coming years.
This comes as Israel, given its difficult economic circumstances, must decide how and when to respond to the Iranian regime’s unprecedented attack early Sunday morning. A former economic advisor to the Israel Defense Forces’ Chief of Staff estimated that intercepting an astonishing 99% of the drones and missiles launched by Iran over the weekend cost the country about $1.1 billion to $1.4 billion in just one night. . An escalation of the conflict with Iran could lead to more Iranian attacks of this type, forcing Israel (and its allies) to provide billions more in funding.
Under the scenario of a multi-pronged war involving Iran, a very generous and widely expected $14 billion military aid package to Israel from the United States (which I have argued is important for Israel this time) That would hardly be enough. The incredible success of missile defense systems that the world saw last weekend is a good example of both the United States and Israel investing more in these defense technologies over the long term, but the United States is unlikely to do so in the short term. . With increasing pressure to condition Israel and even cut aid, it will be extremely difficult for Congress to pass the current package, much less consider expanding it.
Israeli policymakers should think wisely about this and consider all angles, including economic aspects, when calculating retaliatory responses. Part of Israel’s military advantage is due to massive investments in technology to deal with the types of threats seen this weekend, which comes directly from a healthy and growing economy. As long as the conflict with Hamas in the Gaza Strip continues, Israel’s economy, despite its remarkable resilience, will take time to recover.
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