The Institute for National Security Studies (INSS) in "Israel" revealed in a recent research paper that "Israel" now stands at a crossroads regarding the ongoing war on Gaza and confrontations with the Axis of Resistance, detailing that "every decision about the future will undoubtedly have significant economic consequences, especially considering that the projected budget deficit for 2024 is expected to exceed the forecast underlying the current state budget significantly."

The paper explores the economic impacts of three scenarios: continuing the war on Gaza, escalating tensions on the northern front, or securing an agreement that includes a captive release deal.

Continuing the war on Gaza

The INSS report predicts that In light of the current situation, the Israeli economy is expected to record only 1% GDP growth in 2024. 

With "Israel’s" risk premium at 1.75%, continuing the war could worsen it due to rising security costs, increasing the deficit and debt-to-GDP ratio. This may lead to economic instability. That said, the INSS explains that continuing the current situation could worsen the risk premium due to rising security costs, increasing the deficit and debt-to-GDP ratio.

"Israel" may be perceived as economically unstable, reducing the appeal of its risk assets. For 2025, low growth is expected at around 1%, with ongoing high budget deficits to fund security, potentially raising the debt-to-GDP ratio to 75% and negatively impacting "Israel’s" credit rating.

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Escalations in the North

The paper emphasizes the uncertainty surrounding how the next stage in confrontations will play out. However, even a scenario involving a month of intense confrontations in the north against Hezbollah alone—accompanied by unprecedented attacks on "Israel's" settlements—presents an extraordinary and highly challenging situation, it added.

In the scenario of an escalation in significant infrastructure damage, the Israeli economy could contract by up to 10% of GDP in 2024, the paper detailed.

The INSS report projects that the deficit could surge to approximately 15% to finance the war and meet essential needs, such as food, water supplies, transportation, and shelter. The contraction in GDP, combined with massive government spending, would lead to a debt-to-GDP ratio ranging between 80% and 85%.

The risk premium is expected to rise to 2.5% within a month of war, making fundraising more challenging, according to the paper.

Long-term economic consequences of Northern front

Any increase in the risk premium leads to a significant rise in interest payments on Israeli public debt, the paper stated, adding that a permanent one-percentage-point increase in the interest rate on public debt would result in an additional annual cost of over 10 billion shekels.

The INSS report highlights that bringing the debt-to-GDP ratio back to the recommended 60% level could take over a decade. It notes that the last time "Israel’s" debt-to-GDP ratio exceeded 80% was during the Second Intifada, peaking at 93% in 2003. Despite years of rapid economic growth, it wasn’t until 2017 that the ratio was finally reduced to 60%, underscoring the long-term challenges in managing such fiscal pressures.

Ceasefire agreement 

It is crucial to consider the severe conditions that could result from a northern war, the paper states, adding that the most significant risk lies in the potential for a drawn-out war on multiple fronts, where both sides "lack the incentive to reach a ceasefire".

The strategic benefits of such a war remain uncertain, especially when weighed against the extensive damage it could cause. Economically, this scenario is highly undesirable, making alternative exit strategies far more favorable.