'Israel' risks another 'lost decade' amid military spending surge
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The war on Gaza is the most expensive in the occupation's history, with the central bank estimating a total expenditure of 250 billion shekels ($67.4 billion) by 2025.
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An Israeli tank deploys near a sunflower field just outside the Gaza Strip. (AFP)
When Operation Al-Aqsa Flood was launched on October 7, the Israeli security establishment, which believed the Palestinian Resistance would not dare to attack them, was forced to rely on the US for weapons and munitions, Bloomberg reported.
Israeli leaders interpreted it as a message that the country needed to significantly improve military preparedness and investment after being faced with their abysmal failure.
Following the October War in 1973, "Israel" spent years readjusting the balance between military security and growth.
Economists consider what happened then as a cautionary story. The demand that "Israel" should never again be caught off guard resulted in a massive increase in defense spending, which averaged over 29% of GDP between 1973 and 1975. The adverse effects were catastrophic. The government deficit increased to 150% of GDP, resulting in 500% annual inflation. The period, dubbed in economic circles as "the lost decade," concluded in the 1980s.
According to Bloomberg, the parallels between the occupation then and now are evident.
The war on Gaza is the most expensive in the occupation's history with the central bank estimating a total expenditure of 250 billion shekels ($67.4 billion) by 2025.
“The costs of the war, by 2025, will reach NIS 250 billion (approximately $67.4 billion),” said central bank head Amir Yaron at an economic conference on Thursday.
“There is no doubt that more expenses will be needed, since the economy needs security and security needs the economy. However, it is important to emphasize – you cannot give an open check on the issue of security spending, you must find the right balance between things,” Yaron added.
“The defense and civilian costs amount to hundreds of billions of shekels – it is a heavy burden … The country's risk premium increased while the excess devaluation of the shekel continued, with devaluation of course leading to price increases.”
The fourth quarter of 2023 had a 21.7% annualized reduction in economic activity. Before the onslaught in Gaza, defense spending had reached an all-time low of 4.5% of GDP.
It is expected to treble to 9% this year, according to Manuel Trajtenberg, an emeritus professor at Tel Aviv University's economics department. Data provided by the Stockholm International Peace Research Institute show that the ratio is 3.4% in the United States and 1.5% in Germany. "The decisive test will be the government's ability to lower the defense-spending-to-GDP ratio back to reasonable levels within several years," according to him.
"Otherwise, we may slide back into another lost decade."
Israeli economy shrouded with uncertainty, hanging by a thread
Earlier, the Bank of Israel assessed that there are "several risks of potential acceleration in inflation," most of which are directly linked to the Israeli war on Gaza.
This includes possible geopolitical developments and their effects on economic activity, a depreciation in the shekel, continued supply constraints on activity in the construction and air travel industries, fiscal developments, and global oil prices.
Moreover, government spending economic easing policies are pushing inflation to the top of the Israeli regime's 1% to 3% target range after a two-month acceleration.
According to Bloomberg, the Israeli shekel's historical volatility (HV), which measures how much-traded prices move away from a central or moving average price, only trails the Chilean peso, Russian ruble, and South African rand. The Shekel's HV currently stands at 10%, the agency added.
Moreover, "Israel's" wartime bill has amounted to $16 billion, swelling its budget deficit over the past 12 months to 7% of the gross domestic product (GDP) for that period, as of April.
In the meantime, the Governor of the Central Bank continues to call on the government to adopt a responsible fiscal policy, amid substantial defense spending.
In this context, the Bank of Israel said that it expects the total annual deficit "to continue to climb in the coming months and to converge back to an environment similar to the current one toward the end of 2024."
However, the statement did say that notable deviations in security expenditures will undercut its expectations.
