News, analysis, and background on the ongoing conflict.
More on this topic
No one can say with complete confidence what the long-term effects of the Gaza war and its auxiliary conflicts in the West Bank and on the border with Lebanon will be for Israel. But even today, it is safe to assume that the war marks the end of a 20-year era of peace (by Israeli standards) and prosperity (by anyone’s standards) and the return to the more militarized state and society Israel was for the first half-century of its existence.
No one can say with complete confidence what the long-term effects of the Gaza war and its auxiliary conflicts in the West Bank and on the border with Lebanon will be for Israel. But even today, it is safe to assume that the war marks the end of a 20-year era of peace (by Israeli standards) and prosperity (by anyone’s standards) and the return to the more militarized state and society Israel was for the first half-century of its existence.
For outsiders, whose image of Israel is largely formed when its periodic conflicts with Hamas, Hezbollah, and Iran reach the headlines, the idea that the country may become more militarized seems improbable. Over the past two decades, it has fought no less than five wars and has been engaged in an extended shadow war with Iran. Its defense budget as a percentage of GDP is among the highest in the world. Some 69 percent of young men and 56 percent of young women (not counting the ultra-Orthodox and Israeli Arabs, who are exempt) are drafted into the military every year. The streets and shopping malls are filled with uniformed soldiers, and large numbers of civilians carry automatic weapons.
But before Oct. 7, Israelis had basically put behind them the idea that they were in a state of perpetual war, one that their parents and grandparents had taken for granted. The wars that Israel did fight were short. They did little or no damage to the economy or infrastructure, and casualties were small, thanks in large part to the Iron Dome anti-missile system. The Palestinian issue remained unresolved, but it was becoming increasingly irrelevant. There were no major pushes to restart negotiations; instead, there was talk of “shrinking the conflict” by improving the lives of Palestinians under Israeli rule without giving them a state.
None of this was entirely illusory. The 2020 Abraham Accords normalized Israel’s ties with the United Arab Emirates and other Arab countries. Before Oct. 7, Saudi Arabia seemed to be edging toward a similar deal. Israel was welcomed into regional economic initiatives, like the I2U2 Group of India, Israel, the UAE, and the United States; the East Mediterranean Gas Forum comprising Cyprus, Egypt, France, Greece, Israel, Italy, Jordan, and Palestine; and the India-Middle East-Europe Economic Corridor, unveiled just weeks before Oct. 7. Talk in Israel and the Gulf about a new Middle East—less focused on conflict and more on economic development—did not seem implausible.
This all had a direct impact on the Israeli military. Defense spending fell steadily from 15.6 percent of GDP in 1991, on the eve of the Oslo Accords, to 4.5 percent in 2022—still high by global standards. Defense not only became less of a burden on the wallets of Israelis but also on their time: The aggregate number of days reservists spent in the military fell from 10 million in 1985 to 4 million by 2000 and just 2 million in 2018, according to the Jerusalem Institute for Strategy and Security. The percentage of non-ultra-Orthodox young people who got an exemption from conscription was edging higher. Support for a mandatory draft—a core article of Israel’s social contract—fell below 50 percent for in 2021, according to polling by the Israel Democracy Institute, a significant change in Israeli attitudes. The Israel Defense Forces (IDF) increasingly relied on technology and the air force rather than tanks and infantry for deterrence.
The reduced military burden and the growing sense that Israel was safe and secure and would easily bounce back from periodic wars gave an enormous boost to the economy. Indeed, one reason the defense burden fell so much was because the economy was growing much faster than the increase in military spending. The 30 years before Oct. 7 were the years of “Start-up Nation.” Israel adopted the Silicon Valley startup model with remarkable gusto, creating a global high-tech juggernaut. The sector created huge numbers of well-paid jobs, drew in billions of dollars of foreign investment, and created an unprecedented trade surplus. The wealth percolated across Israeli society and enabled the government to cut taxes to a level slightly below the average for OECD countries.
The Israel of the coming years, if not longer, will look very different. To cover the cost of the Gaza war, defense spending is due to climb by close to 80 percent this year (when you include American aid), or about 70 billion shekels. That number remains subject to debate, but even the usually parsimonious Finance Ministry accepts it will have to grow by at least 20 billion shekels a year. To pay for this, the government has chosen to cut other spending and increase this year’s budget deficit to 6.6 percent of GDP. That level is unsustainable, so if military spending remains at an elevated level over the next few years, Israel will eventually have to reverse a long-term trend of reducing taxes.
The sharp rise in military spending seems inevitable, even if the conflict with Hamas winds down or moves to lower-intensity warfare over the next few weeks. The Hamas attack of Oct. 7 taught the IDF that technology has its limits (Hamas easily overcame the defenses along the Gaza border) and that nothing can replace boots on the ground. Conscription is due to be extended to a full three years from the current two years and eight months, and reservists will be called up much more often. Many of the reservists who have been sent home from Gaza in recent weeks have been told they will be called back in again soon.
The war itself has taught Israeli decision-makers another important lesson, namely that future conflicts threaten to be lengthy and eat up ammunition at a prodigious rate. Without the U.S. airlift, Israel would not have had the ordinance to sustain the Gaza offensive because it lacks the domestic manufacturing capacity. Israel will now have to forswear to some degree its focus on defense electronics and cyberwarfare to produce more bombs and other low-tech ammunition and spend more money on bigger inventories of weaponry. Prime Minister Benjamin Netanyahu has said the cabinet will be asked to approve a decision to greatly expand Israel’s military industries.
These changes will inevitably reverberate through the economy. Higher taxes will naturally deter business development and growth and, ultimately, economic growth. Israel has for many years enjoyed an unusually strong credit rating thanks to its sound government finances, but a less safe and secure national security environment will raise the bar for global investors to put money into Israel. Early in the Israel-Hamas war, S&P, Moody’s, and Fitch downgraded Israel’s outlook to negative.
A tenser security environment has profound implications for Israel’s start-up sector, which raises half or more of its capital from overseas and relies heavily on an overwhelmingly young and male workforce that will now be doing more military service. Engineers and entrepreneurs can easily decamp abroad if they find conditions in Israel increasingly unfavorable. Security concerns may even take a toll on Israeli businesses’ famous resiliency—the ability to cope with terror and missile attacks and fulfill customer orders. That resiliency was based at least in part on the prevailing confidence that Israel was well-defended and moving slowly but surely to a more peaceful era and regional acceptance. Now, more and more Israelis see their country moving in the opposite direction.
The last time Israel suffered such a cataclysmic shock to its military self-confidence was in the 1973 Arab-Israeli War. That spurred a sharp rise in defense spending and a decade or more that historians often refer to as Israel’s “lost years” economically. The 2023 shock has not been anywhere near as great, and the impact will be smaller. The economy is many times larger; unlike 1973, the world economy does not appear to be heading into a recession that would make Israel’s recovery efforts harder; and Israel has its energy and defense industries to fall back on. The defense industry is set for growth both due to rising domestic and global demand (the latter in the wake of the Ukraine war), while Israel’s natural gas industry is expecting buoyant demand from Egypt and Europe. A new round of exploration licenses awarded shortly after the Gaza war started could lead to expanded production.
Still, a return to the older, more militarized Israel will not be easy. The war has spurred a surge of patriotism and a greater willingness on the part of the young not only to serve in the military but volunteer for combat duty. But this new zeitgeist might not last. Netanyahu remains a deeply polarizing figure, and the country is still sharply divided over issues that were contentious well before Oct. 7, including the government’s controversial judicial reform program. Some members of the younger generation who grew up in an era of increasing material comfort will surely chafe at the prospect of higher taxes and more obligations to the state. The smartest and most successful among them will have the option to immigrate. Which means that a brain drain could be one more setback Israel endures as a result of the war.
The End of Prosperity in Israel
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31.01.2024
News, analysis, and background on the ongoing conflict.
More on this topic
No one can say with complete confidence what the long-term effects of the Gaza war and its auxiliary conflicts in the West Bank and on the border with Lebanon will be for Israel. But even today, it is safe to assume that the war marks the end of a 20-year era of peace (by Israeli standards) and prosperity (by anyone’s standards) and the return to the more militarized state and society Israel was for the first half-century of its existence.
No one can say with complete confidence what the long-term effects of the Gaza war and its auxiliary conflicts in the West Bank and on the border with Lebanon will be for Israel. But even today, it is safe to assume that the war marks the end of a 20-year era of peace (by Israeli standards) and prosperity (by anyone’s standards) and the return to the more militarized state and society Israel was for the first half-century of its existence.
For outsiders, whose image of Israel is largely formed when its periodic conflicts with Hamas, Hezbollah, and Iran reach the headlines, the idea that the country may become more militarized seems improbable. Over the past two decades, it has fought no less than five wars and has been engaged in an extended shadow war with Iran. Its defense budget as a percentage of GDP is among the highest in the world. Some 69 percent of young men and 56 percent of young women (not counting the ultra-Orthodox and Israeli Arabs, who are exempt) are drafted into the military every year. The streets and shopping malls are filled with uniformed soldiers, and large numbers of civilians carry automatic weapons.
But before Oct. 7, Israelis had basically put behind them the idea that they were in a state of perpetual war, one that their parents and grandparents had taken for granted. The wars that Israel did fight were short. They did little or no damage to the economy or infrastructure, and casualties were small, thanks in large part to the Iron Dome anti-missile system. The Palestinian issue remained unresolved, but it was becoming increasingly irrelevant. There were no major pushes to restart negotiations; instead, there was talk of “shrinking the conflict” by improving the lives of Palestinians under Israeli rule without giving them a state.
None of this was entirely illusory. The 2020 Abraham Accords normalized Israel’s ties with the United Arab Emirates........
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