War is expensive. In addition to the destruction and personal tragedies, it requires huge resources to purchase weapons and equipment. It also costs labor, which Israel – and its economy – are already feeling.
Since the attack on Israel by the militant Islamist group Hamas on October 7, 2023, the Israeli military has been waging an intense war in the Gaza Strip. This was followed by Israeli airstrikes on Lebanon in response to rocket and drone attacks launched by Hezbollah from Lebanon. Last week, Israel launched strikes deep inside Iran with the aim of disabling its nuclear capabilities.
As a result, the Israeli economy is under severe pressure. Many members of the reserve forces have been called up for military service and have had to temporarily leave their jobs. At the same time, work permits for many Palestinians have been revoked, and crossing the border is becoming increasingly difficult for them.
This makes it increasingly difficult to fill jobs. In April, the country's unemployment rate was three percent, down significantly from 4,8 percent in 2021.
A lot of money goes to the military.
At the same time, military spending has increased sharply. According to a report by the Stockholm International Peace Research Institute (SIPRI) in April 2024, Israeli military spending increased by 65 percent to around 40,4 billion euros. This brought military spending to 8,8 percent of gross domestic product – the highest in the world after Ukraine.
The planned state budget for 2025 foresees total state spending of 756 billion Israeli shekels (about 187 billion euros), a 21 percent increase over the previous year. It will be the largest annual budget in Israeli history. It includes about 33,5 billion euros for defense, according to The Times of Israel.
Itai Ater, an economics professor at Tel Aviv University, says the war is currently "very expensive" and there is "great uncertainty about the near and distant future." "Military costs, both offensive and defensive, are extremely high. This will certainly affect the budget, the deficit, GDP and Israel's debt," Ater told DW.
The costs are indeed high. Over the past 20 months, many Israelis have spent hundreds of days in reserve units. Others have had to leave their homes along the border, which has drastically disrupted their lives. Social services are also under pressure.
Many have been out of work since last Friday's attacks, including those in industry, commerce, technology and education, Ater said. Regular commercial flights to and from Israel are currently suspended. Air carriers have grounded their planes, and airspace over much of the Middle East has been closed.
Taxes must be increased.
To ease the financial burden, the Israeli government has increased taxes. The value-added tax (VAT) on most goods and services rose from 17 to 18 percent at the beginning of the year. Health contributions deducted from employees' salaries, as well as national insurance contributions, have also been increased.
The Israeli economy has suffered over the past year and a half, but has proven "surprisingly resilient," says Benjamin Bental, a retired economics professor at the University of Haifa.
While tourism, industrial production, construction and agriculture suffered losses, sectors such as high technology, defense and food trade remained stable. In 2024, the Israeli economy generated revenues of more than 470 billion euros, surpassing the previous year's result.
Bental points to the continued success of the high-tech sector and the stability of the labor market, which is “the most tense it has ever been.” Threats of Hezbollah or Iran attacking key energy and internet infrastructure have not materialized, so business activity is largely unimpeded.
Technological superpower
It is no coincidence that Israel is considered a technological powerhouse. The sector employs 12 percent of the total workforce and contributes about 25 percent of all income taxes thanks to high wages in the sector, according to US investment bank Jefferies. Technology products and services account for 64 percent of Israeli exports and about 20 percent of GDP.
But according to an April report by the Israel Innovation Agency, the number of employees in the sector has stagnated since 2022. In 2024, the number of domestic high-tech workers decreased for the first time in a decade, while the number of those moving abroad for long periods increased.
Currently, these companies still employ about 390.000 people inside Israel and an additional 440.000 outside the country. There are also concerns that increased taxes could force such companies and their employees to leave Israel.
What will happen tomorrow?
The biggest unknown right now is the feeling of great uncertainty about the future in Israel and the region. This is affecting workers, employers and investors. "Yet, if you look at the stock market and the exchange rate, it seems that investors are optimistic - they probably expect the war to end soon, the removal of the Iranian nuclear threat and the recovery of the economy," says Ater.
For investors, the short-term risks have increased, but the real impact depends on how long the military conflicts last and how they end. "An alternative scenario, in which we enter a long-term, exhausting war with Iran, is also possible," Ater said. "In that case, the Israeli economy is unlikely to prosper."
Looking ahead, Ater believes that the general security situation, and the Israeli-Palestinian conflict in particular, remain among the country's biggest long-term economic challenges. In addition to these tensions, he warns of internal social divisions and restrictive judicial reform and its impact on democratic institutions.
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