• Thu. May 23rd, 2024

How the costs of Israel’s war on Hamas in Gaza are mounting


Dec 31, 2023


JERUSALEM — It might seem obscene to assess the mounting financial cost of Israel’s war in Gaza while the bombs are still falling on the besieged enclave, when hundreds of Palestinians, on average, are dying each day, alongside smaller, but historic, numbers of Israeli soldiers.

And yet, the economics behind the weeks-long assault have powerful implications for Israel, the West Bank, and across the Middle East.

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

The Israeli economy has been clobbered, too — and it’s Israel more than Hamas that will decide when the shooting stops. The impact so far compares to the worst of the covid pandemic, economists say, and could surpass those losses if it continues.

Since Oct. 7, when Hamas and allied fighters streamed out of Gaza to kill around 1,200 people in Israel and take 240 more hostage, government spending and borrowing have soared, tax revenue has plummeted and credit ratings might take a hit.

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

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

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

Policymakers and opinion leaders are now asking: How will the cost of the war influence its duration? When will the government decide to declare victory, stop the fiscal hemorrhaging and resume efforts to grow the economy?

What has been the cost of war?

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

Israel is spending treasure deploying more than 220,000 reservists into battle and subsidizing their salaries.

Many of these reservists are high-tech workers in cyber, agriculture, finance, navigation, AI, pharmaceuticals and climate solutions. Israel’s tech sector relies on foreign investment. But that was diminishing even before the war, in part out of concern for the instability investors believed Prime Minister Benjamin Netanyahu’s right-wing prewar government brought to Israel — notwithstanding Intel’s recent announcement that it was going ahead with a $25 billion chip factory in southern Israel, the largest investment ever by a company in Israel.

Not only does Israel need to pay for the reservists, the bombs and bullets, but it’s also supporting 200,000 evacuees who have been displaced from Israeli villages along the Gaza border and the northern border with Lebanon, which Hezbollah is bombarding daily.

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

Tourism has flatlined. The Tel Aviv beaches and the Old City in Jerusalem are bereft of foreigners. Christmas celebrations in Bethlehem in the occupied West Bank this year were canceled.

Construction, which ordinarily relies on Palestinian labor from the West Bank, has ground to a near-halt. Since Israel launched its assault to eradicate Hamas, it has suspended the work permits of more than 100,000 Palestinians.

Exports are down across the board. Production from Israel’s gas fields in the Mediterranean Sea was shut down early in the war but is now partially operating.

What has the war cost Israel so far?

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

Zvi Eckstein, a former deputy governor of the Bank of Israel and professor emeritus at Tel Aviv University, recently ran the numbers with colleagues and reported that the impact on the government budget — including decreased tax revenue — for the fourth quarter of 2023 was $19 billion and would likely be $20 billion in the first quarter of 2024.

That assumes the war does not expand to Lebanon.

What happens if a wider war breaks out with Hezbollah?

What’s the total cost going to be?

A war that lasts five to 10 more months could cost Israel as much as $50 billion, according to the financial newspaper the Calcalist. That would equal 10 percent of the country’s GDP.

But the war could go longer. The Biden administration expects Israel to pivot in the new year from high-intensity bombardment and fierce street combat to more targeted assaults. Netanyahu warned last week that the war “isn’t close to finished.”

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

How are the these costs measured?

Ono Academic College professor Yaron Zelekha, a former economist at the Israeli Ministry of Finance, says it’s important to understand the war’s ripple effects.

There’s the cost of waging the war, the steep decline in economic activity and a resulting drop in revenue. Deficit spending produces borrowing costs, which will weigh on budgeting long after the shooting stops.

What do ordinary Israelis think?

Forty-five percent of Israelis acknowledge worrying that the war will bring them economic hardship, polling by the charity group Latet shows.

The Hamas attacks were a catastrophe, eroding the trust of citizens, businesses, and investors in the government and in the military, economists told The Post. That trust will be difficult to win back.

How does this Gaza war compare with past conflicts?

Economists speak of the modern Israeli economy as remarkably resilient. The country has 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.

“In the second intifada, a significant part of the damage was caused by misguided economic management,” said Zelekha. “There was significant government overspending and a simultaneous tax increase.

“The main difference between then and today is that back then, the government debt reached 100 percent of GDP, not 60 percent as it is today. Our current situation is much better.”

What’s the cost to workers?

Reserve duty, displacement and knock-on effects of the war have idled as many as 20 percent of Israeli workers.

“Israel’s economy experienced a shock wave comparable to the peak of the covid-19 pandemic,” said Michal Dan-Harel, the managing director of Manpower Israel, the country’s largest employment agency. “Significant portions of the economy came to a shutdown for nearly two weeks. People were in shock. Each day revealed the magnitude of the crisis, and discussions about normalcy, such as work or earning a living, became almost illegitimate.”

The impact of reservist deployments has been especially dramatic, Dan-Harel said, because “the individuals are called up without knowing when they will return to work. … No one anticipated that people would be enlisted for a period of three months or more.”

Is the economy resilient enough to weather the war?

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

He was talking about the wars and intifadas — and more recent challenges. The Netanyahu government’s attempt before the war to limit the power of the judiciary — which sparked massive, months-long protests, hurt international investment, said Margalit, a former member of the Knesset.

“The war is an additional blow,” he said. He’s pushing for a FDR-style New Deal after the war ends to establish innovation, education and new businesses in the hard-hit north and south after the war ends.

How important is U.S. aid for the Israeli economy?

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

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

Zelekha called the U.S. support “essential.” “The military aid costs a significant amount of money,” he said. “If we had to fund that ourselves, it would pose an even greater problem. Secondly, the very fact of receiving aid signals to financial markets that we have economic backing, which reassures the markets.

“We need to send a big thank you to President Biden for this assistance.”


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