As the Israel-Hamas and Hezbollah conflict continues to unfold, it is clear that the economic repercussions are far-reaching. Military spending has seen a significant increase, creating a dent in the country’s economy. With nearly a year of conflict under its belt, Israel is facing economic uncertainty and potential long-term effects of heightened military expenditure.
Surge in Military Expenditure
Following the attack by Hamas on Israel in October 2023, the Israeli government’s military spending has seen a meteoric rise. As reported by the Stockholm International Peace Research Institute, the military expenditure rose from $1.8 billion per month pre-conflict to a staggering $4.7 billion by the end of last year. In fact, the government spent a total of $27.5 billion on the military in the past year, pushing Israel to the 15th place globally, ahead of even Canada and Spain, both nations with larger populations.
Stunted Growth and Depleted Labor Supply
The economic aftermath of the conflict is not just limited to military spending. In the three months succeeding the initial Hamas attack, Israel’s economic output shrank by 5.6%, marking the worst performance among the 38 countries in the Organization for Economic Cooperation and Development. Even though the economy showed signs of rebounding with a growth of 4% in the initial part of this year, the second quarter saw a measly growth of just 0.2%.
Furthermore, the ongoing conflict has also severely impacted the labor supply. Security concerns have deterred investment in new businesses, and flight disruptions have led to a significant decrease in tourism. The government is also bearing the cost of housing for thousands of people who had to evacuate their homes due to the conflict.
A Strong Economy Amidst Conflict
Despite the ongoing conflict, Israel’s economy remains resilient. The country boasts of a highly developed and diversified economy, a robust information-technology sector, low unemployment rates, and a strong stock index. The country’s debt stood at a modest 60% of GDP at the onset of the war, which, according to Zvi Eckstein, head of the Aaron Institute for Economic Policy at Reichman University, is contained compared to other nations.
Increased U.S. Military Aid
As the conflict escalates, the United States has significantly increased its military aid to Israel. Prior to the war, American military aid was around $3.8 billion per year. However, since the onset of the war, the U.S. has spent a record of at least $17.9 billion on military aid to Israel, according to a report for Brown University’s Costs of War project.
The Road Ahead
With the future of the conflict still uncertain, Israel is looking for ways to balance its defense budget and assess how increased defense spending could affect the economy. A commission has been convened under former acting national security adviser Jacob Nagel, who negotiated Israel’s most recent U.S. aid package, to offer recommendations.
Despite the ongoing turmoil, Israel’s economy continues to show resilience. The war’s open-ended nature, however, poses concerns about the long-term economic impact, raising questions about the balance between military spending and social programs.
