Gaza the most expensive war in Israel’s history

When Israel vastly ramped up defense spending in the 1970s to address security risks exposed in the 1973 Yom Kippur War, the economic side effects were devastating. Economists are now worried about a repeat.

The ongoing war in Gaza is the most expensive in the country’s history: The central bank has estimated the total cost of the conflict will run to 250 billion shekels or US$67.4 billion through 2025.

Defense spending before the war was at an all-time low of 4.5% of GDP. It’s set to double this year to 9%, according to Manuel Trajtenberg, a professor emeritus in the economics department of Tel Aviv University.

“The decisive test will be the government’s ability to lower the defense-spending-to-GDP ratio back to reasonable levels within several years,” he says. “Otherwise, we may slide back into another lost decade.”

Working in Israel’s favor is that its starting point was strong. Over the past 15 years, the nation’s per-capita GDP has risen above that of Britain, France and Japan.

But costs are apparent. When Hamas attacked and some 300,000 reservists rushed into uniform, Israel’s powerhouse tech industry suddenly found itself short of labor, while businesses in and around the Tel Aviv area lost some of their best customers.

With Prime Minister Benjamin Netanyahu having committed billions of shekels for spending demanded by his ultra-Orthodox coalition partners, many economists worry of a “spiral of collapse” — where Israel’s better-educated, high-earning citizens choose to emigrate rather than shoulder the fiscal burden of supporting large Orthodox families.

Scores of economists conveyed that message recently to the government, in a letter calling for an end to public support for schools that don’t train students for the modern labor market and requiring ultra-Orthodox to be drafted.

Israel already underinvests in areas such as education and health compared with developed economies. If policymakers look to free up funds for military upgrades by paring back those priorities, along with transportation and welfare, it’s the economy that may pay the price.