Project leader: Yaakov Katz
Just as economic trends were beginning to converge into a normal state, after recovering from the Covid pandemic and the economic consequences of the attempted judicial reform, Israel’s economy was hit by the shock of October 7. This event necessitated a reassessment of future security risks, along with revised budgetary estimates for the coming years. According to current estimates, an increase of about 1% of GDP in defense spending will be required in the coming years on an ongoing basis, which will be accompanied by the need to raise taxes or cancel tax exemptions. So far, cuts have been made in the areas of civil spending, including education, health and allocations to the Arab community in the 2023 budget. A special tax was also imposed on bank profits. The tense budgetary situation is expected to continue at least until 2026, depending on the length of the war and the arrangements made once it ends.
The outbreak of the war involved multiple battle fronts, which created a situation without precedent in previous military conflicts. The immediate economic impact was a significant jump in defense and civilian assistance spending in 2024, resulting in a substantial increase in the budget deficit and an expected jump in government debt of about 7% of GDP. It should be noted that this development could have been more severe without the special American military aid approved by the U.S. Congress in April, amounting to some 14 billion dollars. This aid has made a significant contribution to increasing the budgetary credibility of the Israeli government, against the backdrop of downgrades by the three largest credit rating agencies: Moody’s, S&P, and Fitch.
Future budget planning requires implementing wise policy in budgetary spending and signaling to the public that the government aims to return the economy to a path of growth. This will include, among other things, rehabilitation of the south and the north, which have been directly damaged as a result of the war. Prominent among the necessary measures are the need to expand investment in infrastructure and alternative energy sources, along with preparations for absorbing the renewed wave of immigration as a result of the war’s consequences abroad – foremost, the renewed interest in Aliyah among French Jews. It is also advisable for the future outline to be supported by taking advantage of new opportunities in the international arena, including the possibility of upgrading the international coalitions forged during the war – for example, the potential for a peace agreement with Saudi Arabia.
An area in which the contribution of world Jewry is directly reflected is the transfer payments to Israeli institutions (including hospitals, universities, etc.). This field, which had been relatively static in the first decade of the 2000s at a level of about 1% of GDP, rose significantly over the last decade, and in 2023 reached 3% of GDP. Given the need to finance the substantial expense of rehabilitation in the south and north, and to support the potential wave of immigration spurred by rising antisemitism across the globe, it is hoped that this recent trend will accelerate in 2024 and the coming years.
The international economic situation, heralding a projected recovery in Europe after the initial shock of the Russia-Ukraine War, along with the central banks in the West taking control of inflation, may provide a favorable backdrop for more positive economic developments in 2025. The return of inflation to close to the target levels of the central banks supports the possibility of lowering interest rates and easing the financial difficulties of firms that ran into trouble. The U.S. Federal Reserve System and the European Central Bank, as well as the Bank of Israel, have announced future interest rate cuts that may begin toward the end of this year. This policy change is expected to help reduce unemployment in these countries. In Israel, the broad unemployment rate increased mainly as a result of the impact of October 7 and its aftermath on the employment of evacuees, as well as on the tourism industry, which continues to be adversely affected due to the ongoing war. In light of these events, the defense establishment has begun sending draft notices to the ultra-Orthodox, a development that is meant to ease the burden on the reservists and lead to significant budgetary savings.
As a result of the above analysis, the Material Resources Gauge was moved in a negative direction this year.
Trends and Recommendations
The military confrontation after October 7 illustrated that Israel needs to act within the framework of the multi-national coalition that grew stronger during the war. It is important to leverage the benefits of coordinated activity to comprehensively address future military threats. The need to increase the defense budget will diminish to the extent that Israel operates in combined forces with Western countries, which have in effect assumed some of the military defense needs against the Iranian threat. If possible, it is desirable that this process be accompanied by the signing of new peace agreements. Taking advantage of opportunities on the international level will make it possible to divert budgets to the civilian sector, which is expected to be in a difficult situation due to the surge in defense spending and interest payments on te defisit; the latter will increase significantly in light of the jump in government debt.
At this time, it is essential to clearly call for internal unity in Israel. This will lead to building a social infrastructure with many advantages. The unity that was rediscovered during the war should constitute a lever for positive processes, which will also benefit the economy.
The unity of the Jewish people and solidarity with the residents of the south and the north will be critically important in the foreseeable period. Government budgets, which were allocated for financial assistance to residents during the war, will later be directed toward rehabilitation efforts, while rebuilding physical capital in the affected areas. Initiating projects to strengthen civil society, including stepped up mental health services and programs to strengthen informal organizations, including youth movements, will contribute to restoring hope for future development.
The resurgence of antisemitism worldwide, particularly its expressions in leading universities in the United States and Europe, reminds us that there is no substitute for strengthening Israeli institutions and developing life there. Israel must design a renewed plan to absorb Jews from around the world who decide to make Aliyah. Jews outside Israel can contribute significantly by strengthening Israel’s ties with various countries, and by improving hasbara (public messaging) in their country. Donations supporting Israeli institutions and the reconstruction plans for the damaged areas are also expected to play a positive role. It is highly advisable to implement initiatives for cooperation between Israel and Diaspora Jewry.