Israel's War Costs Soar, With Long-Term Economic Impact

The direct government expenses for the war through the end of 2025 are estimated at 231 billion shekels, including 166 billion for defense, 27 billion for damages, and 38 billion for various civilian costs. This figure is partial, excluding tens of billions more expected in 2026. Tax authority figures show 38.6 billion shekels have already been paid in compensation. The war is also projected to cause a loss of approximately 40 billion shekels in tax revenues by the end of 2025. Furthermore, the Bank of Israel estimates the loss in economic output due to the war at 177 billion shekels by the end of 2025.

Bank of Israel calculations in April 2026 place the total war cost at 405 billion shekels. This sum is substantial enough to fund major infrastructure projects like the Gush Dan metro, Jerusalem's light rail, and extensive power grid upgrades, desalination plants, road extensions, and new railways, with funds remaining for hospital construction and relocating Haifa's oil refineries. Alternatively, this amount could have provided each Israeli family with over 130,000 shekels.

Looking ahead, annual defense spending is expected to increase by at least 40 billion shekels compared to pre-war levels. Interest payments on the increased national debt, estimated at 200 billion shekels, could add another 20 billion shekels annually for 8 to 14 years. Additionally, reconstruction and compensation costs for the north and south will amount to several billion shekels per year for the next decade or two.

These ongoing annual costs of 65-70 billion shekels will necessitate either higher taxes or reduced public services for the current generation, or increased taxes for future generations. Even drastic austerity measures, such as eliminating coalition funds and cutting child benefits, would only yield about 15 billion shekels. Further cuts to middle-class tax breaks and municipal property tax discounts would add another 12 billion shekels, still leaving a significant shortfall that could impact social welfare, education, and healthcare.

The long-term economic consequences may include slower growth in the health and education sectors, potentially affecting the medicine basket and teacher salaries. The government might also opt to increase the deficit, a risky strategy that requires international market confidence. These new annual expenses come after significant tax hikes and budget cuts already implemented, with the one percent VAT increase alone costing families an estimated 1,000 shekels annually. The article concludes that while there are differing views on how to address these challenges, such as expanding the workforce or reducing the welfare state, effective public service and responsible leadership are crucial for navigating the post-war economic landscape.