Here’s the thing about wars and money: they don’t mix well. But Israel’s been juggling both for over a year now, and the results are… complicated.
We’re talking about the most expensive conflict in Israeli history. $95 billion burned through in just over a year. That’s 18% of the entire economy, gone. Yet somehow, parts of Israel’s economy are actually thriving. Other parts? Complete disaster.
The tech bros are celebrating record profits while tour guides are selling their cars. Construction workers disappeared overnight, but cybersecurity companies can’t hire fast enough. It’s like watching two different countries operate side by side.
Tourism crashed 68% to a measly $2.2 billion in 2024. Construction? Running at 15% capacity because, well, try building apartments when your workforce just vanished. Agriculture in the affected areas basically stopped existing. 80% production loss in some regions.
But then there’s tech. $12 billion in funding last year. That’s 28% more than before the war started. Cybersecurity alone pulled in $3.8 billion, a 90% jump. Turns out, when the world’s watching rockets fly, they suddenly want Israeli security tech.
When numbers don’t tell the whole story
The fourth quarter of 2023 was brutal. GDP dropped 20.7%. Worst since COVID. But here’s where it gets weird: by the end of 2024, Israel actually managed 1% growth. Not exactly a victory parade, but considering the circumstances? Not terrible.
Let’s talk about tourism first because it’s the most obvious casualty. Remember when Tel Aviv was the hot destination? When influencers were posting beach pics from Jaffa? Yeah, those days are over. Monthly visitors dropped from 300,000 to 52,800 in December 2023. Hotels that used to host tourists are now housing 120,000 evacuees from border towns. The entire industry lost NIS 18.7 billion. Only 885,000 visitors showed up in 2024 versus 3 million the year before.
Construction might be worse off than tourism. This sector is operating at 15% capacity. Fifteen percent. The workforce basically evaporated overnight when 85,000 Palestinian workers couldn’t cross borders anymore. Foreign workers left too. Housing projects stopped mid-construction. About 750 construction companies just closed shop, which is 10% more than usual years.
Agriculture in war zones? Forget about it. The Gaza envelope and northern kibbutzim lost 80% of their production. These places that used to export vegetables to Europe are now importing from Turkey. Twenty thousand agricultural workers gone, including most of the experienced hands who knew how to actually grow things.
But then you look at tech, and it’s like a different universe. While everyone else is struggling, tech companies raised $12 billion in 2024. That’s 28% more than 2023. Cybersecurity companies especially are having their moment, pulling in $3.8 billion, which is almost double what they got before. Apparently, when missiles are flying, everyone wants Israeli defense tech.
The job market is weird right now. Despite calling up 360,000 reservists, unemployment is still low at 2.6%. Though it did hit 9.6% in October 2023 when you count all the people temporarily away from work. Here’s the kicker: there are actually more job openings now than before the war. 137,000 vacancies versus 125,000 in 2023. It’s not that people don’t want to work. There just aren’t enough people to fill the jobs.
Money got more expensive too. The shekel dropped about 5% against the dollar, bouncing around between 3.49 and 3.78 per dollar. Inflation hit 3.6% by April and stayed high, partly because the government jacked up VAT from 17% to 18% to help pay for all this.
Who’s paying for all this?
Short answer: mostly America. And it’s not even close.
The U.S. has thrown $22.76 billion at Israel since October 7. That breaks down to $17.9 billion in direct military aid plus another $4.86 billion for American operations in the region. This is on top of the usual $3.8 billion annual package that was already locked in through 2028.
We are dealing with 50,000 tons of weapons. This includes 10,000+ artillery shells, bunker-buster bombs, and precision-guided missiles. Additionally, $4 billion is allocated specifically for Iron Dome and David’s Sling systems. Over 100 separate military transfers, most of them too small to even trigger Congressional review.
Germany chipped in too, sort of. They exported €326.5 million worth of arms in 2023, which was ten times more than 2022. But then they got cold feet and cut approvals to just €14.5 million in 2024. The UK provided over £100 million in regional aid and helped defend against Iran’s missile attack in April.
But here’s what’s really keeping the lights on: Israel raised NIS 278 billion through bond sales in 2024. Most of it domestic bonds, some international. They did a record $8 billion international bond sale in March. Since October 7, total war financing hit NIS 360 billion.
The defense budget exploded from last year’s level to NIS 118 billion in 2024. That’s 87% higher and represents 8.4% of GDP compared to 5.2% before. Next year could be even higher, maybe NIS 150 billion.
To pay for all this, they raised taxes. VAT went up to 18%. Income tax brackets got consolidated. Corporate taxes on bank profits increased. Every government ministry took 3% cuts across the board. They froze benefits, minimum wage increases, public sector wages. Everything that could be squeezed, got squeezed.
The budget deficit tells the real story. It went from 4.1% of GDP in 2023 to 6.9% in 2024, hitting 8.5% at one point. Debt jumped from 61% to about 70% of GDP. That got the attention of credit rating agencies. Moody’s, S&P, and Fitch all downgraded Israel at least twice. Moody’s was especially harsh, dropping Israel two notches in September.
Can this actually last?
Israel went into this war with some serious financial cushions. $204.7 billion in foreign exchange reserves, which ranks 17th globally. Debt was manageable at 60% of GDP. They were actually running a current account surplus of 3.7%. Not bad fundamentals for a country about to spend itself into a hole.
But the rating agencies aren’t convinced this can go on forever. S&P has Israel at A, Moody’s at Baa1, Fitch at A. All with negative outlooks. Moody’s was particularly dramatic. It dropped Israel two notches from A2 to Baa1 in September. The change cited the war’s length and political uncertainties.
The international institutions are split. IMF thinks Israel can grow 3.2% in 2025 and 3.6% in 2026. Bank of Israel is more optimistic at 3.5% and 4% respectively. OECD is the most bullish, predicting 3.4% and 5.5%, but only if the fighting stops soon. World Bank basically says Israel has strong fundamentals and can absorb these costs because they started from a good position.
Here’s what makes this different from previous wars: duration. The 2006 Lebanon War lasted 34 days. Gaza in 2008-2009 was 22 days. 2014 was 50 days. All of them hurt, but the economy bounced back quickly. This one’s been going for over 15 months with no end in sight. This is the biggest military mobilization since 1973. It includes 300,000 reservists. It is also the first mass evacuation of 150,000 civilians from border areas.
Some analysts are getting nervous. The Institute for National Security Studies warns about long-term damage regardless of how this ends. They’re talking about potential GDP per capita decline like the lost decade after the Yom Kippur War. If this escalates to high-intensity operations in Lebanon, we could see 15% budget deficits and 10% GDP contractions.
The key question is whether Israel can keep its competitive edge in high-value sectors while permanently spending 1.5% more of GDP on defense annually. History suggests they usually figure it out, but this scale is testing those assumptions.
Meanwhile, Gaza burns and global trade detours
While Israel juggles tech booms and tourism busts, the regional picture is catastrophic. Gaza’s economy shrank 86% in the first quarter of 2024. The West Bank dropped 25%. Combined, Palestinian territories faced a 35% decline, which is the worst contraction anyone’s recorded there.
Over 500,000 jobs disappeared. Unemployment hit 80% in Gaza, 32% in the West Bank. Everyone in Gaza now lives in poverty. West Bank poverty doubled from 12% to 28%. Reconstruction estimates are already at $18.5 billion, and the fighting isn’t even over.
Egypt lost $6 billion from the Suez Canal as ships started avoiding the Red Sea. Though an $8 billion IMF deal helped cushion that blow. Jordan saw tourism drop 6.6%, which matters when your debt is already 110% of GDP. Lebanon’s looking at a 9.2% GDP decline with tourism collapsing and infrastructure getting hit.
But here’s what’s interesting: the global economy has mostly shrugged this off. Oil prices actually fell during the conflict, trading around $75 compared to $84 when it started. Markets figured out pretty quickly that this wasn’t going to mess with actual oil supplies.
The Red Sea shipping mess is real though. 70% fewer ships going through the Bab-el-Mandeb strait. 80% of container vessels now take the long way around Africa. This route adds 10-14 days and $900,000 in extra fuel costs per trip. Container rates from Asia to Europe jumped 256%. But even this hasn’t crashed global trade, just made it more expensive.
Suez Canal traffic dropped 50% compared to 2023, with 42% fewer transits than peak levels. This effectively cut global shipping capacity by 3% overall and 12% for containers. Insurance for Red Sea routes jumped from 0.07% to 2% of ship value. Airlines saw 11% more cargo demand as companies looked for alternatives.
JPMorgan estimates the Red Sea mess could add 0.7 percentage points to global core goods inflation. If freight rates stay high through end-2025, consumer prices could increase 0.6%. Small island nations are particularly vulnerable, potentially seeing 0.9% price increases.
Recovery prospects vary wildly. Palestinian territories are looking at development setbacks of 11-16 years according to the UN. Gaza reconstruction alone needs $18.5 billion. Regional recovery could range from quick tourism rebounds if things calm down. It could lead to sustained uncertainty deterring investment if the fighting drags on. It may result in complete economic collapse if this escalates and triggers oil supply disruptions and refugee crises.
The bottom line
So can Israel’s economy handle this war? The honest answer is: it depends on how long this goes on.
Right now, they’re managing. Tech is booming, Uncle Sam is writing checks, and the fundamentals were solid going in. $95 billion is a lot of money. However, with $204 billion in reserves and a diversified economy, it doesn’t mean it’s game over.
But the cracks are showing. Tourism and construction are disasters. The budget deficit hit 6.9% of GDP. Debt jumped to 70%. Credit agencies are nervous. If this turns into a multi-year slog or escalates into a regional war, those cracks could become chasms.
The real test isn’t whether Israel can afford this war. It’s whether they can afford the defense spending that comes after. Permanently higher military budgets of 1.5% of GDP annually. That’s the new normal, win or lose.
Israel’s pulled through worse before. But this is different. Longer, more expensive, with less room for error. The economy hasn’t collapsed, but it’s definitely limping. And in a region where tomorrow’s crisis is always just around the corner, that might have to be good enough.
What do you think? Can any economy sustain war spending at this scale indefinitely? Or are we watching the slow-motion breakdown of Israel’s economic model?
