Bank of Israel head estimates war in Gaza will cost Israel $67 billion

The ongoing war in Gaza with the terrorist organization Hamas is expected to become the financially most expensive war in the history of the modern State of Israel.

Bank of Israel Governor Amir Yaron announced on Thursday that the Gaza war is estimated to cost a whopping $67 billion in military and civilian costs during the period between 2023 and 2025. By comparison, Israel’s annual Gross Domestic Product (GDP) in 2023 amounted to more than $500 billion, with its typical annual defense budget amounting to over $20 billion.

Yaron assessed that the total accumulated cost of the war would be “significant” and warned it would place a serious burden on the national budget.

“The government needs to make sure that it makes the right balances and budget adjustments in light of growing permanent security expenses,” the bank chief said.

Approximately 50% of the expected incurred costs of the war – about $32 billion – are earmarked for various defense needs until 2025. An additional $10 billion will be used for civilian spending, which includes funding for accommodations of tens of thousands of Israelis who were forced to leave their homes in southern and northern Israel amid the war. In addition, the Bank of Israel estimates about $9 billion in tax revenue losses and $6 billion to cover direct war damages.

Yaron anticipates that Israel's defense expenditures will increase further, impacting Israel's economy.

“This is certainly a budgetary burden. In addition, the future defense budget is expected to grow on a permanent basis, with macroeconomic impact,” he said.

“The committee should examine these processes from an overall multi-year perspective, with an ongoing requirement for the defense system to increase efficiency,” Yaron added.

Looking into the future, he emphasized that a strong military defense and a solid economy were closely intertwined.

“A prosperous economy requires security, and security requires a prosperous economy. Therefore, the war should not bring with it a blank check for permanent defense expenditures, and proper balances have to be found,” Yaron noted.

Israel, internationally known as the Start-Up Nation for its high-tech-driven innovation and economy, has shown resilience despite constant geopolitical instability and conflicts along its borders. However, the ongoing war against Hamas is different from previous conflicts in terms of its duration, financial impact, loss of life, psychological effects, and the resulting divisions within the government.

The Israeli economy reportedly shrunk by almost 20% on an annual basis during the last quarter of 2023, according to data released by Israel’s Central Bureau of Statistics (CBS).

However, Yonie Fanning, chief strategist at the Israel Mizrahi-Tefahot Bank estimated at the time that the Israeli economy would experience a partial recovery in the first quarter of 2024.

“We will see this reflected significantly in the update of the local GDP figures, next month, as more data comes on,” Fanning assessed.

In early February, around 60% of multinational companies based in Israel expressed confidence in the country’s tech sector despite the ongoing war, according to a poll conducted by Ernst & Young.

“Looking ahead to 2024, despite the challenging period, part of our essential role, is to be optimistic as some of us impact what will happen in the future, and I allow myself to be optimistic despite the difficulties and despite what we are going through and experience,” Prof. Yossi Matias, CEO of the Google Research and Development Center in Israel noted.