Israel’s economy in peril as military spending soars

As Israel’s military spending soars amidst its deadly war in Gaza,  analysts warn it risks harming its own economy and worsening existing structural problems – likely to deter foreign investment and cause inflation to sour.

The country is already dealing with weak governance and internal divisions. Now, its focus on a bigger military budget could shake up the government’s financial stability, according to the National News and agencies on April 7.

Last year, Israel’s parliament, the Knesset, spent around 19.6 billion US dollars on its total budget – with a massive $15.4 billion for defence alone – and just $4.2 billion allocated for civilian needs.

This amounts to just over a fifth for civic services.

In March, the Knesset passed a new budget that has doubled military spending. The government also agreed to add an approximate $2.8 billion to the military budget, every year for the next eight years.

Bank of Israel governor, Amir Yaron, cautioned that the sustained military campaign could result in higher inflation and a devaluation of Israel’s currency, the Shekel.

“Additional defence expenditure will require an increase in the government’s revenue sources or a blow to civilian expenditures in Israel, which in any case are very low by international comparison”, said Israel’s central bank in an annual report.

Although the Israeli economy is strong by international standards, it faces issues like a low labour workforce. The rapidly increasing Ultra-Orthodox community is a source of pressure on the government as only 55 percent of Orthodox males work. The employment rate for female Palestinian Citizens of Israel is also low.

This, paired with increasing poverty and population growth signify key weaknesses in the Israeli economy.

The conflict in Gaza has created financial uncertainty for Israel, decreasing consumer spending, industrial output, and foreign investment. The tourism sector has also taken a heavy hit.

“Unanimous opinions and actions by international rating agencies point to the growing impact of the war on most aspects of economic activity and public finances, as well as its continuing impact in the foreseeable future,” said economist Nassib Ghobril.

International companies are also struggling to maintain profits over backlash and an international boycott for their perceived support of Israel. Fast-food chain McDonald’s has recently been forced to buy back its Israeli franchises, while Starbucks has laid off a significant amount of their Middle East workforce, over reduced profits.

READ: McDonald’s forced to buy back Israeli franchises amidst boycott

Amidst the financial losses, Gaza remains a severe and – man-made – humanitarian catastrophe.

Most of the strip has been reduced to rubble, suffering an estimated $18.5 billion in damage.

US President Joe Biden recently came down hard on Prime Minister Netanyahu, warning that US policy would change if Israel continued to disregard Gaza’s crisis.

“the strikes on humanitarian workers and the overall humanitarian situation are unacceptable,” said the White House in an official statement.

Biden’s dramatic shift in rhetoric came after an Israeli strike killed seven international aid workers.

READ: Biden and Netanyahu expected to discuss aid worker killings

Thousands in Israel have staged anti-government protests, urging PM Netanyahu to resign for failing to secure a ceasefire and the return of the Israeli hostages.

But the war appears unlikely to stop anytime soon.

Despite widespread international criticism of Israel’s impending attack on Rafah, Gaza and a recent UN ceasefire demand, Israel’s PM has asserted to continue the conflict until Hamas is completely eradicated.

Meanwhile, the Israeli government has primarily relied on loans to fuel the devastating war, subsequently worsening the country’s debt-to-GDP ratio.

The war resulted in a 6.6 percent plummet in government revenue – but government spending increased by 12 Percent.

This imbalance between revenue and spending has pushed Israel’s debt-to-GDP ratio up by 1.4 percent – significantly higher than the ideal ratio.

“An assessment by markets that Israel is moving towards an increasing debt route in the medium and long term could lead to an additional increase in yields, devaluation and inflationary pressures”, said Israeli bank governor Yaron.

In short, if Israel continues its war, it will increase its long-term debt.

This would deter foreign investors and markets, leading to higher interest rates Israel would be forced to pay.

The National / Agencies