Israel’s economy has weathered several storms in the past few years. The coronavirus pandemic shut down much of the economy, making tourism nonexistent and leaving stores and the education system shuttered, with multiple industries scrambling to figure out how to continue working safely.
The contentious judicial reform, which many saw as an assault on Israel’s democratic institutions that would leave the country an autocracy, with others viewing it as a necessary check on judicial overreach, also posed significant challenges to the economy.
Hi-tech leaders highlighted that investors might lose trust in the country if a significant change was made to the system of governance, especially if this was done without widespread public consensus.
The threats of downgrades to Israel’s credit rating, an accelerated brain drain in which doctors and tech professionals emigrated, and the departure of multinational companies all caused by fears about Israel’s status as a democracy hung over the country.
Then, the war slammed into the economy, shutting down factories and industrial areas, sending a significant proportion of the population into reserve duty, and leaving tens of thousands living as evacuees and in need of large amounts of support.
Economic challenges in Israel
These were only some of the economic challenges faced by the country in the wake of the war, leaving the government forced to rewrite the 2024 budget multiple times, expand the debt ceiling, and see the credit rating dropped by all major rating agencies.
Now, after ceasefires and a months-long lull in the fighting in the North and Gaza, Israel has returned to fighting in
Gaza, beginning with airstrikes and expanding to ground operations.
The government’s moves to fire Shin Ben (Israel Security Agency) head Ronen Bar and Attorney-General Gali
Baharav-Miara have been seen as a swift reignition of the judicial overhaul. This has already been met with a significant uptick in protests, with thousands gathering in Jerusalem every day for almost a week.
Both of these would be a challenge to the economy on their own – together, they make for a real economic storm to weather. This is even more serious when considering that the country’s economy will enter this storm from a place of significant disadvantage.
Israel’s credit rating is lower; its workforce is stretched thin and exhausted by a year and a half of reserve duty; many small businesses have closed; thousands have experienced temporary or extended job loss; and tens of thousands need extensive support from the government. Further, the cost of living has spiked – especially as the government has enacted tax measures to contend with the economic fallout of the war.
Organizations on the ground report more and more middle-class citizens struggling to make it through the month and anticipate that these numbers will only grow.
The increased debt ceiling and lowered credit ratings have increased the interest the country must pay on its debt.
Even in a “normal” year, these payments are extremely significant. In 2022, these payments cost more than the nation’s entire primary and secondary school systems combined.
Now, given the debt on which the country is paying and the interest on which it must pay to expand, this cost could explode.
Additionally, global sentiment about Israel has been damaged by the war, which may well impact collaborations and investment in the country in the future.
Israel is steering straight for the next economic storm in a ship still violently battered by the last one, and it is taking on water fast.
The government is set to approve a budget overnight Monday, with the part of the budget for calculating the spending limit up 20.6%, primarily due to increased defense spending. The debt ceiling will stand at 4.7% – higher than the proposal of 4.4%.
It is a budget that has been widely criticized for failing to put national interests above sectoral, political interests.
The economy grew by just 0.9% in 2024 and is projected to grow around 4% in 2025, but this kind of growth could be quashed by a return to war and judicial reform.
The economy is not endlessly resilient; its workforce cannot continue to be productive while making up the majority of the IDF forces currently serving.
A renewed war and contentious political changes will place significant strain on an already straining system, and if the damage is significant, the economy will not be able to bounce back quickly or easily.