Although the cost to Gaza is clearly devastating, it has not yet begun to be calculated. About half of the buildings and two-thirds of the homes in the Strip were damaged or destroyed, 1.8 million people were displaced and more than 21,000 people were killed, according to the Gaza Ministry of Health.
The Israeli economy has also been damaged – and it is Israel, not Hamas, that will decide when the shooting stops. Some economists compare the shock to the Israeli economy to the coronavirus pandemic in 2020. Others say it could be worse.
Since October 7, when Hamas and allied fighters stormed out of Gaza to kill about 1,200 people in Israel and take 240 more hostage, government spending and borrowing have risen, tax revenues have fallen, and credit ratings look set to take a hit.
GDP will decline – from growth expectations of 3% in 2023 to 1% in 2024, according to the Bank of Israel. Some economists expect deflation.
The impact on Israel's high-tech sector – the engine of the economy – is worrying.
Many IDF reservists work in the technology sector. Every day they struggle in Gaza, employers struggle to continue investing in research and development and maintain their market share.
Some reservists called up to fight in Gaza will return home “to their families and their jobs,” at least temporarily, Admiral Daniel Hagari, an Israeli military spokesman, said on Sunday.
“This will allow significant relief to the economy,” he said at a press conference.
Now, decision-makers and opinion leaders are wondering: How will the cost of the war affect its duration? When will the government decide to declare victory, stop the financial bleeding, and resume economic development efforts?
What is the cost of war?
During the long wars in Iraq and Afghanistan, American leaders introduced Americans to the concept of blood and treasure.
Israel is spending huge sums of money on deploying an average of more than 220,000 reserve soldiers in the battle during the past three months and supporting their salaries.
Many of these reserves are high-tech workers in the areas of the Internet, agriculture, finance, navigation, artificial intelligence, pharmaceuticals and climate solutions. The technology sector in Israel depends on foreign investment. But that was waning even before the war, partly because of concern about the instability that investors believe Prime Minister Benjamin Netanyahu's right-wing government has brought to Israel — despite Intel's recent announcement that it is pressing ahead with a $25 billion chip factory. In southern Israel, it is the largest investment in the country ever by a company.
Not only does Israel need to pay for reserve forces, bombs and bullets, but it also supports two hundred thousand evacuees from Israeli villages along the Gaza border and the northern border with Lebanon, which Hezbollah bombs daily.
Many of these evacuees are being housed and fed in hotels in the north and south – at government expense.
Tourism has stopped. The beaches of Tel Aviv and the Old City of Jerusalem are empty of foreigners. Christmas celebrations were canceled in Bethlehem in the occupied West Bank.
Construction work, which usually relies on Palestinian labor from the West Bank, has stopped. Since Israel launched its offensive to eliminate Hamas, it has suspended work permits for more than 100,000 Palestinians.
Exports declined across the board. Israeli gas fields in the Mediterranean were closed early in the war but are now partially operational.
What is the cost of the war on Israel so far?
Economists interviewed by The Washington Post estimate that the war cost the government about $18 billion — or $220 million per day.
Zvi Eckstein, former deputy governor of the Bank of Israel and an economist at Reichman University, recently ran the numbers with colleagues and reported that the impact on the government budget — including a decline in tax revenues — for the fourth quarter of 2023 amounted to $19 billion and is likely to reach $20. One billion dollars in the first quarter of 2024.
This is on the assumption that the war will not spread to Lebanon.
What would happen if a broader war broke out with Hezbollah?
What will the total cost be?
A war that lasts another five to 10 months could cost Israel up to $50 billion, according to the financial newspaper Calcalist. This is equivalent to 10% of the country's GDP.
The war may end sooner or not. The Biden administration expects that Israel will shift in the new year from intense bombing and fierce street fighting to more targeted attacks. But Netanyahu warned that the war “is not close to being over.”
“The war will continue for several more months,” he said on Saturday.
How are these costs measured?
Yaron Zulekha, a professor at Ono Academic College and a former economist at the Israeli Ministry of Finance, says it is important to understand the ripple effects of the war.
There is the cost of waging war, the sharp decline in economic activity and the resulting decline in revenues. Deficit spending results in borrowing costs, which will affect the budget long after the fighting ends.
What do ordinary Israelis think?
A poll conducted by the charitable group Latet showed that 45% of Israelis admit to worrying that the war will bring them economic hardship.
Economists told the newspaper that the Hamas attacks were a disaster, as they eroded the confidence of citizens, companies and investors in the government and the army. This trust will take time to regain.
How does this Gaza war compare to past conflicts?
Economists speak of the modern Israeli economy as remarkably resilient. The country fought regional wars on its territory in 1967 and 1973; The wars in Lebanon and along its northern borders in 1982 and 2006; A 50-day battle in Gaza in 2014; And two intifadas in the occupied West Bank, which witnessed continuous fighting between Palestinians and Israeli soldiers.
“In the second intifada, a large part of the damage was caused by misguided economic management,” Zulekha said. “There was massive government wasteful spending and a simultaneous tax increase.
“The main difference between then and today is that at that time, government debt was 100% of GDP, not 60% as it is today. Our current situation is much better.”
What is the cost to workers?
Reserve duties, displacement, and the indirect effects of the war have left up to 20% of Israeli workers unemployed.
“The Israeli economy experienced a shock wave similar to the peak of the Covid-19 pandemic,” said Michel Dan Harel, managing director of Manpower Israel, the country’s largest recruitment agency. “Large parts of the economy have ground to a halt for about two weeks. People were in shock. Every day reveals the scale of the crisis, and discussions about normal life, such as work or earning a living, have become almost illegitimate.
Dan Harrell said the impact of the reservist deployments was particularly dramatic “Individuals are being called back without knowing when they will return to work. …And no one expected people to be recruited for three months or more.”
Is the economy resilient enough to withstand war?
“For the past 25 years, Israel has been climbing the mountain with weights on its legs,” says Erel Margalit, a high-tech entrepreneur and venture capitalist.
He was talking about wars and uprisings – and recent challenges. Margalit, a former member of the Israeli parliament, said the Netanyahu government's pre-war attempt to limit the judiciary's power – which sparked massive protests that lasted for months – hurt international investment.
He added, “The war constitutes an additional blow.” He is pushing for a Franklin Roosevelt-style New Deal to create innovation, education, and new businesses in the North and South hit hardest after the war ended.
How important is US aid to the Israeli economy?
The United States provides Israel with military support worth $3.8 billion annually. The two countries share defense technology to give Israel a strategic advantage over its opponents. The United States also sells hundreds of millions of dollars to Israel in bombs, rockets, and shells.
The White House is pushing an additional funding bill that includes $14 billion in aid to Israel in early 2024. The bill has stalled in Congress as Republicans and Democrats debate funding for the US border.
Itay Ater, an economist at Tel Aviv University and a senior fellow at the Israel Democracy Institute, called the US funding “crucial.”
“We are talking about about NIS 50 billion [$13.8 billion]He said. He added: “If war spending reaches about 150 to 200 billion shekels, it will constitute a quarter of the war costs. This is a very large amount and also provides the American government with the option to put diplomatic pressure on us, which is a good thing considering our government.”
“If we had to finance it ourselves, it would be a bigger problem,” Zulekha added. Second, simply receiving aid signals to financial markets that we have economic support, which reassures markets.
“We need to send a big thank you to President Biden for this assistance,” he said.
