Israel’s War-Driven Economy: Resilience Tested by Rising Debt and Defense Spending

Israel’s economy has outperformed many forecasts since the October 7, 2023 war, with headline GDP figures remaining relatively stable. Economists stress that this resilience masks weaker purchasing power and deteriorating macro-indicators, especially for households outside the high-tech sector.

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The conflict has spurred a multi-front defense posture codified in the classified “Doctrine and Policy Guidelines for 2025-2026.” The plan authorizes an open-ended procurement list, with a broad interpretation costing roughly 800 billion shekels (? $271 billion). A negotiated compromise settled on a $94.5 billion, ten-year defense budget, while the Finance Ministry seeks to limit additional war-related outlays.

Israel risks fiscal crisis as war costs, defense demands soar, analysis says

Key voices include economists Dr. Tomer Fadlon (Tel Aviv University/INSS) and Prof. Itai Ater (Tel Aviv University), Prime Minister Benjamin Netanyahu, Finance Minister Bezalel Smotrich, Defense Ministry officials, Bank of Israel Governor Amir Yaron, Prof. Zvi Eckstein (Aaron Institute), and former IDF Chief of Staff Gabi Ashkenazi.

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• High-tech exports: ? 57 % of total exports; high-tech employment: 15-16 % of labor market.

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• Defense plan: $94.5 billion over ten years (? 350 billion shekels).

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• Projected debt-to-GDP ratio: 83 % by 2035, contingent on a swift war end.

Israel risks fiscal crisis as war costs, defense demands soar, analysis says

• National debt and credit rating have declined; GDP per capita remains stagnant.

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• Approximately 100,000 Israelis left in 2023-2024, many being physicians, engineers, and academics.

Israel risks fiscal crisis as war costs, defense demands soar, analysis says

• Stock market gains reflect large firms; bankruptcies among smaller businesses have risen sharply.

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Fadlon and Ater acknowledge the economy’s unexpected strength but warn that purchasing power has eroded and macro indicators are weak. Governor Yaron has publicly warned that Israel is on a rising debt trajectory. The Finance Ministry insists the Defense Ministry must operate within the agreed 111 billion-shekel budget, while Defense officials argue that reserve-duty assumptions are unrealistic and that political leadership bears ultimate responsibility. Netanyahu’s approval of the procurement list is described as a “yes to every demand” in internal documents.

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Finance officials criticize the Defense Ministry’s request for an extra 30 billion shekels in 2026, labeling it fiscally untenable. Economists highlight a growing brain drain and the disparity between high-tech stability and mounting bankruptcies in smaller firms. The stock market’s upward trend is said to conceal these underlying weaknesses.

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Sources cite defense cost estimates ranging from $84.8 billion to $152.6 billion, and a broad-scope figure of 800 billion shekels. Debt-to-GDP projections rely on the contested assumption that the war will end soon. Precise data on small-firm closures and the exact composition of the emigrant workforce remain unavailable.

Israel risks fiscal crisis as war costs, defense demands soar, analysis says

Sustained fiscal pressure threatens long-term growth, amplifies income inequality, and risks depleting Israel’s most valuable asset—human capital. Elevated debt limits fiscal flexibility for both defense and social investment, potentially reshaping the nation’s economic trajectory.

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Analysts call for accelerated investment in education, infrastructure, and transportation to offset structural strains. Upcoming budget negotiations will likely address the defense-Finance dispute, while policies aimed at retaining skilled professionals are expected to gain prominence.

Israel risks fiscal crisis as war costs, defense demands soar, analysis says

• “It’s been stronger than expected given the circumstances,” — Dr. Tomer Fadlon, Economist

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• “When you look at purchasing power, the situation is not as good,” — Dr. Tomer Fadlon

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• “Many macro indicators don’t look good,” — Prof. Itai Ater, Economist

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• “Israel’s greatest asset is its human capital,” — Dr. Tomer Fadlon

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• “defense spending must be based on an agreed reference scenario. The disputes between the Finance Ministry and the defense establishment undermine already low trust following October 7.” — Prof. Zvi Eckstein, Economic Policy Expert

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• “there is no alignment between objectives and resources.” — Gabi Ashkenazi, Former IDF Chief of Staff

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