In late September, as "Israel's" almost year-long genocide in Gaza spread and its credit rating was reduced once more, Israeli Finance Minister, Bezalel Smotrich, claimed that, while under stress, the economy remained robust.

"Israel's economy bears the burden of the longest and most expensive war in the country's history," Smotrich said on September 28.

Karnit Flug, a former governor of "Israel’s" central bank, told CNN that a more intense war will "take a heavier toll on economic activity and growth."

The war has drastically deteriorated the situation in Gaza, driving it into an economic and humanitarian disaster long ago, while the West Bank is "undergoing a rapid and alarming economic decline," according to a UN study released last month.

The Lebanese economy, meanwhile, might shrink by much to 5% this year as a result of cross-border strikes between the Lebanese Resistance - Hezbollah - and "Israel", according to BMI, a market research organization owned by Fitch Solutions.

According to a worst-case scenario developed by Tel Aviv University's Institute for National Security Studies, "Israel's" economy might contract much worse.

Prior to the war on Gaza, the International Monetary Fund predicted the GDP of "Israel" would increase by 3.4% this year in contrast to the current predictions of 1% to 1.9%.

In addition, "Israel's" central bank cannot decrease interest rates to revive the economy since inflation is growing, fueled by rising salaries and ballooning government expenditure to support the war.

Long-term damage

The Bank of Israel estimated in May that war costs could total $66 billion, including military outlays and civilian expenses, such as housing for thousands of Israeli settlers evacuated from the north. This is roughly 12% of "Israel's" GDP.

While Smotrich claimed that the economy will bounce back, economists are concerned the damage will far outlast the war.

Flug, the former Bank of Israel governor, says there is a risk the Israeli government will cut investment to free up resources for war, reducing the growth moving forward.

Researchers at the Institute for National Security Studies say a potential full withdrawal from Gaza and Lebanon would have "Israel" in a weaker position than before October 7, 2023.

“Israel is expected to suffer long-term economic damage regardless of the outcome,” they wrote.

High-income taxpayers leaving the occupation en masse would also make things worse. The occupation government has postponed releasing a budget for next year due to competing demands that make it difficult to balance the accounts.

The battle has doubled "Israel's" budget deficit — the gap between government expenditure and income, primarily from taxes — to 8% of GDP, up from 4% before the war.

Government borrowing has increased and become more costly, as investors seek greater returns on Israeli bonds and other assets. Multiple downgrades to "Israel's" credit ratings by Fitch, Moody's, and S&P are expected to hike the country's borrowing costs even higher.

In late August, the Institute for National Security Studies estimated that just one month of "high-intensity warfare" in Lebanon against Hezbollah combined with "intensive attacks" in the opposite direction that damage Israeli infrastructure could cause "Israel's" budget deficit to rise to 15% and its GDP to contract by up to 10% this year.

The Israeli government faces a growing fiscal crisis, unable to rely on stable tax revenues as many businesses collapse amid the ongoing war. Coface BDi estimates that 60,000 Israeli firms will shut down this year, significantly higher than the average of 40,000.

Avi Hasson, CEO of Startup Nation Central, warned that the Israeli tech sector will not sustain the blows and the government's “destructive” economic policies. The war has led many tech companies to register overseas despite local tax incentives, exacerbating an existing trend.

Other sectors like agriculture and construction are also suffering, struggling with labor shortages and rising prices. Tourism has seen a sharp decline, resulting in an estimated loss of 18.7 billion shekels ($4.9 billion) in revenue since the war began.