Khaberni - Two years after the continuous wars that began on October 7, 2023, the Israeli economy is facing an unprecedented financial test. While Israel entered the first war on Gaza with a relatively strong economic base, current data indicate that ongoing military spending and widening fiscal deficits are gradually approaching the limits of the economy's endurance capability. An analysis by "Al-Arabi Al-Jadeed" newspaper of Israeli budget data, reports from the Bank of Israel, and the Central Statistics Bureau shows that the economy, which initially acted as a lever for the war effort, is gradually transforming into a pressure factor that may restrict the government's ability to prolong the war.
On the eve of the Gaza war in 2023, Israel's economic indicators were relatively positive. Growth forecasts were around 3%, with unemployment rates close to 3.5%, and moderate inflation at around 3.8%. The government's fiscal deficit was about 1.5% of the gross domestic product, while public debt stabilized at about 60% of the output. These data initially provided the Israeli economy with the ability to absorb the economic shock of the war. However, as the war expanded to multiple fronts including Lebanon and Iran, the economic cost of the war inflated rapidly. Estimates indicate that the total cost of the recent wars could reach 350 billion shekels (about 97 billion dollars), leading to rising public debt and a widening deficit in the government's budget.
With the current war on Iran and Hezbollah, a central question emerges: Does the Israeli economy still provide strong support for the war effort, or has it begun to turn into a burden that may limit Israel's ability to continue the war?
The army is swallowing the budget
The security budget in Israel during the two years of war has seen the largest financial shift in decades, with an unprecedented acceleration in military spending. Before the outbreak of the war in 2023, the Ministry of Security's budget was about 60 billion shekels (about 16.7 billion dollars), but it jumped to about 99 billion shekels (about 27.5 billion dollars) in 2024, and then increased to about 109.8 billion shekels (about 30.5 billion dollars) in 2025. In the 2026 budget proposal, the government suggests raising it again to about 130 billion shekels (about 36 billion dollars), reflecting a clear upward trend in military spending with the ongoing conflict. According to these figures, the security budget represented about 7% of GDP in 2024, nearly double its level before the war, while the 2025 budget is the largest in Israel's history; at about 6.5% of GDP.
According to an analysis by "Al-Arabi Al-Jadeed" of public financial data, this inflation in military expenditure has become one of the most significant sources of pressure on the Israeli economy at this stage. The data clarify that financing this significant increase in spending alongside the civilian war costs arising from damages, evacuation of residents, and compensation for financial losses was primarily achieved through increased borrowing from the markets, and expanding the government's budget deficit, along with reducing allocations for several civil ministries. Practically, this means that the cost of the war is no longer confined to direct military spending but has extended to affect the overall financial balances of the state and reshaped government spending priorities.
The fiscal deficit is inflating
Official data show that the fiscal deficit of the Israeli government has widened noticeably since the outbreak of the war, directly reflecting the rise in military expenses and the slowdown in economic activity related revenues. While pre-war estimates indicated a deficit not exceeding 1.3% of GDP in 2023, the actual deficit rose to about 4.2% that year, reflecting the financial pressures imposed by war costs on the general budget. As military operations continue, the deficit jumped to about 7% of GDP in 2024, before it relatively declined to about 5.9% in 2025. The government aimed to reduce the deficit to about 4.5% in the 2026 budget, but the ongoing war and expanding expenses make achieving this target more difficult.
Meanwhile, public debt is heading towards an increase, potentially exceeding 70% of GDP if the war continues for an extended period. The economic pressures are not limited to public finance alone, as predictions indicate a potential rise in inflation after it fell to about 3% in the early months of this year, driven by rising oil prices, maritime transport costs, and disruptions in global supply chains. These developments might prompt the Bank of Israel to delay the interest rate reduction path it started at the beginning of the year, amid concerns about the return of inflation pressures and increasing risks to financial stability.
Financial crises despite improvement in indicators
Data from the Central Statistics Bureau and the Bank of Israel indicate that the Israeli economy has relatively improved in a number of macroeconomic indicators since the beginning of this year, despite the ongoing war. The real gross domestic product in 2025 increased by 3.1%, compared to a growth of 1.0% in 2024, reflecting a partial economic recovery after the shock caused by the first year of the war. The data also show that per capita GDP growth slightly exceeded the average expectations of the Organisation for Economic Co-operation and Development, which estimated Israel's growth rate at about 1.3% for 2025. However, this improvement in some economic indicators was not reflected to the same extent in the government's financial indicators.
According to official data, the government's budget deficit reached about 110 billion shekels (29.7 billion dollars) in 2025, equivalent to about 4.3% of GDP. At the same time, public debt continued its upward trend to reach about 69% of GDP, indicating ongoing pressures on public finance despite improved economic growth. Expectations indicated that improvement in economic activity in consumption, investment, and growth areas might contribute during advanced stages of the year to improving the public financial situation, by increasing tax revenues and gradually reducing the fiscal deficit. However, the ongoing war and its expanding geographical scope place these expectations before difficult trials, especially with rising military expenditure and increasing burdens associated with compensating for economic damages.
