Since the Hamas attacks on 7 October, Israel’s spending has surged, with a doubling of the defence budget and a doubling of the overall budget deficit to 4.2% of GDP in 2023 from a 0.6% surplus in 2022.
In December, Israel’s parliament approved a special war budget for 2023 of nearly NIS 30bn ($8bn) to fund the war and compensate those impacted by the Hamas attacks.
The defence budget ballooned to $27bn, roughly 6% of GDP (compared to the pre-war 3.5%), reflecting the twin challenge of Hamas to the southwest and Hezbollah to the north.
Yet in Israel, the political mantra is currently: spare no expense. Indeed, since 7 October, Benjamin Netanyahu’s government has been on a spending spree.
Finance ministry officials now hint at potential tax hikes and budget cuts to pay for it all; the deficit has risen from an annual 3.4% in November.
In December alone, it was NIS 33.8bn ($9bn), compared to NIS 18.5bn in December 2022. War-related spending cost NIS 17.2bn, while tax revenue decreased by 8.4%.
Budgets hastily revised
This week, ministers voted on a revised 2024 budget involving tens of billions of shekels in supplementary funds. This will likely increase the budget deficit to around 6% of GDP this year, up from a target of 2.25%.
On 10 January, Bank of Israel (BOI) Governor Amir Yaron urged fiscal discipline by proposing to offset extra spending with reductions in non-essential areas and selective tax increases.
He estimated the cost of the Gaza war, excluding loss of income, at NIS 210bn ($56bn) for both military spending and financial compensation to residents near the Gaza and Lebanese borders affected by cross-border rocket fire.
Read more: A Hezbollah-Israel war has never been closer