Israel's war in Gaza and a more limited conflict with Hezbollah on its northern border with Lebanon have hurt Israel's economy.
In the final quarter of 2023, Israel's gross domestic product (GDP), a measure of the country's economic health, shrank by nearly 20%. Consumption fell by 27% and investment by 70%.
It is important to note that these are annualized numbers compared to the same period last year. The 5.2% decline in GDP from the third quarter was significant, but unless the war with Hezbollah escalates, it is likely to be a temporary decline.
With the outbreak of war, approximately 18% of Israel's workforce was thrown into disarray. In October, 250,000 civilians were evacuated or evacuated from border areas. Meanwhile, about 4% of the workforce (approximately 300,000 people) was drafted into reserves as Israel mobilized for military attacks.
Over the next few years, Israel will lose an estimated 255 billion shekels (£56.6 billion) due to lower economic activity and increased costs. However, the national debt is projected to rise from 60% to 67% of GDP by 2025, as well as plans to raise annual military spending from 4% to 6% or 7% of GDP by the end of the decade. It is manageable.
Israel entered the war with a relatively low national debt and foreign exchange reserves equal to about 40% of its annual GDP. The population is young and still growing, and data shows that Israel has exceeded current military spending levels before. Between 1967 and 1972, military spending averaged 20.3% of GDP, rose to 28.7% between 1973 and 1975, and stabilized at 20.8% between 1976 and 1985.
The years between the 1973 Yom Kippur War and the First Lebanon War (1982-85) are often referred to as the “lost years” for the Israeli economy. Prior to this period, GDP per capita growth in his 12 years averaged 4.8%. Over the next 12 years, that percentage dropped to just 0.8%. Inflation gradually rose and in 1984 he reached 445%.
The question is therefore not whether Israel will be able to weather the current storm, but whether it will be burdened by increased military spending in order to restart economic growth and ensure that public debt is returned to a sustainable trajectory. The question is whether it will be offset by budget cuts in other regions.
So far, Israeli Prime Minister Benjamin Netanyahu and other members of his coalition have resisted advice from economists to reprioritize government spending. They did so out of fear that their votes would upset the small but influential constituency that kept them in power.
Prime Minister Benjamin Netanyahu speaks at a meeting in Berlin, Germany, March 2023. photocosmos1/Shutterstock
political opportunism
Prime Minister Netanyahu has shown that he understands the market economy well. As finance minister from 2003 to 2005, Prime Minister Netanyahu implemented sweeping reforms, including lowering tax rates, privatizing state-owned enterprises, and raising the national pension age. He also used his term to cut the country's bloated welfare system and introduce job training requirements.
However, since Prime Minister Netanyahu's second term began in 2009 (his first term was from 1996 to 1999), many of these reforms, particularly cuts to the benefit system, have been scaled back or abolished. The benefit scheme disproportionately benefits the ultra-Orthodox Haredi community, which forms part of Prime Minister Netanyahu's ruling coalition.
Prime Minister Netanyahu was re-elected prime minister in November 2022. Although he supports limiting the role of the state, his new government included a record 34 different ministries. This was to satisfy the desire for patronage and ministerial salaries among various coalition partners and factions within the Likud party.
To ensure the continued support of ultra-Orthodox political parties, he also promised unprecedented levels of funding for religious schools and seminaries. In seminaries, adult men spend their lives studying religious texts at public expense and are exempt from military service. Despite the need to increase war funding and increase the number of young people in uniform, Prime Minister Netanyahu and Finance Minister Bezalel Smotrich have resisted nearly all proposals to cut these budget items.
Here's a case study where political opportunism easily trumps ideology. We know what Prime Minister Netanyahu believes and what he understands about good economic policy, and we separate that from what Prime Minister Netanyahu is going to do to stay in office. be able to.
Will he choose to cover some of the costs that war imposes on the budget by eliminating wasteful spending on wasteful ministries? Or will it introduce policies to grow the economy by increasing labor force participation among the ultra-Orthodox community? The immediate plan is to borrow more.
Ultra-Orthodox men protest demanding the release of a religious young man jailed for refusing military service in 2017. David Cohen 156/Shutterstock
strong civil society
We may also overestimate the role politicians and governments play in ensuring a country's success. Since its founding in 1948, Israel's proportional representation electoral system has produced weak and unstable coalition governments.
Historically, the Likud party has strongly supported the independence of the country's judiciary. However, after the last election, Netanyahu's government introduced a new law that, among other things, gives the Knesset (parliament) the power to override Supreme Court decisions with a simple majority vote.
Had these changes been implemented, they would have exacerbated the worst qualities of this country's dysfunctional (unwritten) constitution. People will not invest money in countries where court decisions can be overturned by politicians and where property rights are not secure.
But despite the weakness of its government institutions, Israel has absorbed millions of impoverished refugees from every corner of the globe over its 75-year history, fought back when attacked, and defeated its much larger neighbor. have been defeated. It has accomplished this while transforming itself from an impoverished backwater to a developed economy and a center of high-tech innovation.
During the first nine months of 2023, hundreds of thousands of Israelis took to the streets to defend the rule of law and the independence of the country's judiciary. Many of these people flooded into reserve forces to protect the border on October 7th. Some acted without direction from the government, organizing relief efforts for survivors and displaced people while ministers wandered or disappeared from view.
Countries with strong civil societies and highly engaged citizens survive and even thrive, not because of, but in spite of, their political leaders.
