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How the costs of Israel’s war against Hamas in Gaza are rising

JERUSALEM — It may seem obscene to assess the growing financial cost of Israel’s war in Gaza as bombs continue to fall on the besieged enclave, while hundreds of Palestinians on average die every day – alongside a number smaller, but historic, number of Israelis. soldiers.

And yet the economics behind this weeks-long attack have powerful implications for Israel, the Palestinians and the Middle East.

The cost to Gaza, while clearly devastating, has not yet begun to be calculated. About half of the buildings and two-thirds of the homes in the Gaza Strip were damaged or destroyed, 1.8 million people were displaced and more than 21,000 people died, according to the Gaza Health Ministry.

Israel’s economy has also been damaged – and it is Israel, more than Hamas, that will decide when the shooting stops. Some economists compare the shock to the Israeli economy to the 2020 coronavirus pandemic. Others say it could be worse.

Since October 7, when Hamas and its allied fighters left Gaza to kill about 1,200 people in Israel and take another 240 hostages, government spending and borrowing have soared, tax revenues have plummeted, and ratings have credit could suffer.

And gross domestic product will fall – from growth forecasts of 3% in 2023 to 1% in 2024, according to the Bank of Israel. Some economists predict a contraction.

The impact on Israel’s high-tech sector – the engine of the economy – is sobering.

Many Israel Defense Forces reservists work in the technology sector. Every day they fight in Gaza, their employers struggle to continue investing in research and development and maintain their market share.

Policy makers and opinion leaders are now asking: what influence will the cost of the war have on its duration? When will the government decide to declare victory, put an end to the budgetary hemorrhage and resume its efforts to grow the economy?

What was the cost of the war?

During the long wars in Iraq and Afghanistan, U.S. leaders familiarized Americans with the concept of blood and treasure.

Israel spends considerable sums deploying more than 220,000 reservists on average into combat over the past three months and subsidizing their salaries.

Many of these reservists are high-tech workers in cybersecurity, agriculture, finance, navigation, artificial intelligence, pharmaceuticals and climate solutions. Israel’s technology sector depends on foreign investment. But that was already declining before the war, in part because of concern over the instability that investors believed Prime Minister Benjamin Netanyahu’s right-wing government had brought to Israel – despite Intel’s recent announcement that it was moving forward with a $25 billion chip factory. in southern Israel, the largest investment ever made by a company in Israel.

Israel must pay for reservists, bombs and bullets, but it also supports 200,000 evacuees from Israeli villages along the border with Gaza and the northern border with Lebanon, which Hezbollah bombs daily.

Many of these evacuees are housed and fed in hotels in the north and south – at government expense.

Tourism has stagnated. Tel Aviv’s beaches and Jerusalem’s Old City are devoid of foreigners. Christmas celebrations in Bethlehem, in the occupied West Bank, have been canceled this year.

Construction, which usually relies on Palestinian labor from the West Bank, has all but stopped. Since Israel launched its offensive to eradicate Hamas, it has suspended the work permits of more than 100,000 Palestinians.

Exports are down everywhere. Production from Israeli gas fields in the Mediterranean Sea was shut down at the start of the war but is now partially operational.

What has the war cost Israel so far?

Economists interviewed by The Washington Post estimate that the war cost the government about $18 billion, or $220 million a day.

Zvi Eckstein, former deputy governor of the Bank of Israel and economist at Reichman University, recently analyzed the numbers with colleagues and reported that the impact on the government budget – including reduced tax revenue – for the Q4 2023 was $19 billion and would likely be $20 billion in Q1 2024.

This assumes that the war does not extend to Lebanon.

What would happen if a wider war broke out with Hezbollah?

What will the total cost be?

A war that lasts another five to ten months could cost Israel up to $50 billion, according to the financial newspaper Calcalist. This would be equivalent to 10 percent of the country’s GDP.

The war might end sooner – or not. The Biden administration expects Israel to shift in the new year from high-intensity bombing and fierce street fighting to more targeted attacks. But Netanyahu warned last week that the war “is not close to being over.”

“It will be a long battle,” he told the Israelis.

How are these costs measured?

Yaron Zelekha, a professor at Ono Academic College and former economist at the Israeli Finance Ministry, says it is important to understand the repercussions of the war.

There is the cost of war, the sharp decline in economic activity and the resulting decline in income. Deficit spending generates borrowing costs, which will weigh on budgeting long after the shooting ends.

What do ordinary Israelis think?

Forty-five percent of Israelis admit they fear the war will bring them economic hardship, according to a poll by the charity Latet.

The Hamas attacks were a catastrophe, eroding citizen, business and investor confidence in the government and military, economists told the Post. It will take time to regain this trust.

How does this war in Gaza 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, wars in Lebanon and along its northern border in 1982 and 2006, a 50-day battle in Gaza in 2014, and two intifadas in the occupied West Bank, which saw sustained fighting between Palestinians and Israeli soldiers.

“During the second Intifada, a significant part of the damage was caused by misguided economic management,” Zelekha said. “There has been excessive government spending and a simultaneous increase in taxes.

“The main difference between then and now is that back then public debt was 100% of GDP, not 60% as it is today. Our current situation is much better.

What is the cost to workers?

Reserve duty, displacement and the repercussions of the war have left up to 20 percent of Israeli workers unemployed.

“The Israeli economy has experienced a shock wave comparable to the peak of the covid-19 pandemic,” said Michal Dan-Harel, general director of Manpower Israel, the country’s largest employment agency. “Significant parts of the economy were shut down for almost two weeks. People were in shock. Every day revealed the extent of the crisis and discussions about normality, such as work or livelihood, became almost illegitimate.”

The impact of reservist deployments has been particularly dramatic, Dan-Harel said, because “Individuals are called without knowing when they will return to work. … Nobody anticipated that people would be enlisted for a period of three months or more.

Is the economy resilient enough to withstand war?

“For the past 25 years, Israel has climbed the mountain with weights on its legs,” said Erel Margalit, a high-tech entrepreneur and venture capitalist.

He spoke of wars and intifadas – and more recent challenges. The Netanyahu government’s pre-war attempt to limit the power of the judiciary – which sparked massive protests that lasted for months – hurt international investment, said Margalit, a former member of the Israeli parliament.

“War is an additional blow,” he said. He advocated for an FDR-style New Deal, aimed at establishing innovation, education, and new businesses in the hard-hit North and South after the war’s end.

How important is American aid to the Israeli economy?

The United States provides Israel with $3.8 billion in military support each year. Countries share defense technology to give Israel a strategic advantage over its adversaries. The United States also sells hundreds of millions of dollars in bombs, missiles and shells to Israel.

The White House is proposing a supplemental funding bill that would include $14 billion in aid to Israel in early 2024. The bill is stalled in Congress as Republicans and Democrats debate funding for the U.S. border.

Itai Ater, an economist at Tel Aviv University and senior fellow at the Israel Democracy Institute, called the U.S. funding “crucial.”

“We are talking about 50 billion shekels ($13.8 billion),” he said. “If war spending reached between 150 billion and 200 billion shekels, that would represent a quarter of the war costs. This is an extremely large amount of money that also gives the US government the opportunity to put diplomatic pressure on us, which is a good thing given our government.”

Zelekha added: “If we had to finance this ourselves, it would pose an even bigger problem. Second, the very fact of receiving aid signals to financial markets that we have economic support, which reassures the markets.”

“We must say a big thank you to President Biden for this assistance,” he said.

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