Report: Israel’s ongoing conflict in Gaza and its involvement in new tensions across the Middle East is incurring significant financial burdens.
A year into its conflict in Gaza, Israel’s economy is experiencing its sharpest decline in years, with military expenditures and government borrowing surging dramatically. As the conflict risks expanding into other areas, the question arises: can Israel sustain this financial strain, and where will the funding originate? Gregg Carlstrom, a Middle East correspondent for The Economist, joined The Business on RTÉ Radio 1 to analyze the financial repercussions of the conflict. (This piece includes excerpts from the discussion, edited for brevity and clarity; you can listen to the full conversation above).
How much has Israel spent to date?
“The Israeli central bank estimates that expenditures over the past year amount to approximately $60 billion. About half of that is directly related to defense spending, while another $30 billion is allocated to civilian costs. This includes expenses for relocating tens of thousands of individuals from the northern border and supporting them for over a year. There are direct damages from destroyed buildings, wildfires that needed to be addressed, and various other financial burdens, leading to more than 10% of GDP being consumed in just one year.”
Where is this money coming from?
“It primarily stems from increased borrowing. The deficit exceeds 8% for this fiscal year, which is nearly three times higher than projected prior to October 7th. While Israel’s debt levels remain manageable at about 62% of GDP, the trend is rising. It is anticipated that debt will surpass 70% of GDP in the upcoming fiscal year. This escalating situation has led to multiple downgrades of Israel’s credit rating by both Moody’s and S&P over the past year.”
From RTÉ Radio 1’s News at One, RTÉ Deputy Foreign Editor Edmund Heaphy reports on Israel commemorating the first anniversary of the October 7th Hamas attacks.
How much financial support is America providing?
“In addition to the $3 billion in annual military aid that the U.S. provides, a one-time $14 billion aid package was approved by Congress earlier this year. This allocation covers nearly half of the increased defense expenses. However, many economists predict that Israel may experience economic conditions similar to those following the Yom Kippur War in 1973, characterized by extended periods of high inflation and stagnant growth. The previously robust Israeli economy may face significant challenges in the coming years.”
Is the Iron Dome protection shield costing a lot of money?
“There exists a considerable disparity between the costs incurred by attackers and the expenses involved in defending against those attacks. For instance, certain projectiles—especially the rudimentary rockets employed by Hamas or used by Hezbollah in Lebanon—only cost a few thousand dollars to produce, yet defending against them can run into tens of thousands of dollars. The costs escalate further for advanced interceptors like the Arrow system, which is used to intercept Iranian ballistic missiles.”
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From France 24, an explanation of how Israel’s Iron Dome anti-missile shield operates.
Are there labor shortages due to the war and reservists being mobilized?
“The labor market is exceedingly tight due to the frequent call-ups of reservists. Some reservists were able to return to their jobs after the initial months of the conflict when troop numbers in Gaza lessened. However, many have been summoned for reserve duty multiple times since, disrupting their ability to maintain steady employment. This has placed immense pressure on companies as they contend with the constant influx and withdrawal of workers into military service.
“Currently, there is an escalating ground invasion into Lebanon, with at least two divisions of reservists already activated, and potentially more to come. The unemployment rate stands at a mere 2.7%, an exceptionally low figure that partially reflects the scarcity of available workers, as many are being repeatedly mobilized for reserve duty.”
What kind of economic impact will a war have on Iran?
“Iran’s oil-exporting infrastructure poses a significant concern, especially regarding its ability to export oil. Currently, it is only able to sell a fraction of the volume it could under different circumstances, compounded by sanctions and underinvestment in its oil infrastructure over the years. Although it sells its oil at a discount compared to global market prices, this remains one of its limited sources of hard currency.
There is a substantial disparity between what it costs an attacker and the expenses of defending against that attack.
“If strikes were to disrupt its oil facilities, this would likely have ripple effects on the global economy. Groups in Iran and various Iranian-backed factions across the region have threatened to target oil infrastructure in Saudi Arabia, the UAE, and other Gulf nations. This context explains the sharp rise in Brent Crude prices—around 5%—following President Joe Biden’s comments regarding potential strikes on Iran’s oil export operations.
“When comparing the current price of Brent to its value a year ago, it remains around $5 to $6 per barrel cheaper than before October 7th, prior to the onset of this regional conflict. Had someone predicted a year ago that oil prices would decrease in the wake of a regional war, many would have deemed such a notion implausible.
“Part of the price dynamics reflects macroeconomic trends related to demand in both the West and China, alongside concerns over China’s economic health. Additionally, ongoing efforts by nations like Saudi Arabia and the UAE to enhance their relations with Iran and avoid being drawn into this escalating regional conflict likely contribute to the current situation, as they have their own worries about potential attacks on their oil infrastructure.”
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