The State of Israel is looking at a dire fiscal situation due to the Iron Swords War in Gaza. The Research Department of the Bank of Israel estimates that the war with Hamas could end up costing Israel’s economy more than $50 billion – or 10% of GDP – when all factors are taken into consideration.
On Monday the Bank announced its decision to leave the interest rate unchanged at 4.75%. But this announcement also came with some grim news.
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The Bank of Israel Research Department lowered its growth forecast, and in its estimation, GDP will grow by just 2 percent in each of 2023 and 2024. The forecast, it said, features an especially high level of uncertainty, and includes the assessment that government expenditures due to the war will total about NIS 160 billion ($44 billion). The debt-to-GDP ratio is expected to be 63 percent in 2023, and 66 percent in 2024. The government of Israel is expected to spend almost 200 billion Shekels – more than $50 billion – on was related expenses.
These expenses include reimbursement of lost wages for all of the citizens called up to perform military reserved duty, unemployment benefits for people who have been temporarily laid off because of the war, as well as compensations offered to business owners who have lost income.
Then there are all of the thousands of evacuees – people who were forced to leave their homes in the areas near Gaza and Lebanon. The government is paying for these people to live in hotels and other areas for an extended period.
There is also the matter of rebuilding all of the communities ear Gaza that were devastated during the October 7 terrorist attack.
Governor of the Bank of Israel Amir Yaron explained that many of these fiscal ramifications of the war are expected to be seen in the medium term as well and that it is important that the government “directs its policy with this view. “
“Alongside the need to provide a budgetary response to needs created by the war,” Yaron said, “in emergency times as well there is considerable importance to maintaining a responsible fiscal framework. The markets look at the economy not just from a short-term perspective, but also from the medium and long term. Therefore, it is important that the government cut new expenditures of a prolonged nature. The expenditures on the fighting and the replenishing of the army’s stocks will end, and the civilian expenditures will wind down gradually with the recovery of the economy and the end of the massive rehabilitation of the communities that were destroyed. However, at the same time, it is likely that government expenditures will increase due to a permanent increase in security expenditures, and an increase in interest payments due to the public debt level increasing and becoming more expensive. “
Yaron went on to make suggestions as to what is needed at this time saying, that “the continuation of routine as much as possible on the home front, against the background of the war on the front, is very essential to the economy.”
