Alwaght- As Tel Aviv approaches the second anniversary of Hamas's Operation Al-Aqsa Storm and the invasion of Gaza, Netanyahu government continues to pour money into the bottomless pit of war. This conflict is now reshaping the entire structure of the Israeli economy, transforming it from one driven by innovation and technology into a war-based economy.
The war costs have pushed the predicted budget deficit to over 6 percent of GDP, while public debt has soared due to massive borrowing to finance the military campaign.
Over the past two years, the government has borrowed 190 billion shekel (around $50 billion) to keep its war machine running and cover the deficit.
According to Moody's rating company report, Israel's debt-to-GDP ratio has now climbed to 75 percent, a sharp increase from the previously forecast 70 percent. Meanwhile, the budget deficit is projected to hit 8.1 percent of GDP, the highest level since the 2008 global financial crisis.
Despite the government's struggle to curb the budget deficit, through tax hikes and approving the $11 billion "war bill", which will include increasing VAT to 18 percent, passing additional customs fees, and cutting ministries budgets, these actions have only hit the buying power of the consumers and pushed up the inflation pressures and pushed down the domestic demand, something expected to put a heavy burden on the small and middle businesses.
Faced with this reality, the government was forced to send a draft budget for the coming year to the Knesset with a larger deficit than last year.
In recent days, the Knesset finally approved raising the 2025 fiscal year's deficit ceiling to 5.2 percent of GDP, up from the previous 4.9 percent.
This move was driven by the need for an additional 31 billion shekels ($9.35 billion) in funding for military expenditures, reported Reuters.
Military costs, a heavy burden on the Israeli economy
A report by Israeli newspaper Calcalist reveals that of the 31 billion shekels, a direct 29 billion shekels ($8.75 billion) is earmarked for the security sector. Meanwhile, funding for public welfare programs continues to be set under an austerity policy.
The newspaper further reports that this surge in military spending will trigger an across-the-board 3.35 percent budget cut for all government ministries starting next year. The dire economic straits have forced Netanyahu's hand, leading him to cut funding for religious schools—a move he knows risks alienating his religious base and key political allies. The 2025 budget slashes 481 million shekels ($145 million) previously allocated for teachers of these religious institutions.
According to Reuters, the measure passed with 55 legislators in favor and 50 against, despite significant coalition infighting. Calcalist noted a split among the religious parties: the United Torah Judaism party declared its opposition, while the Shas party supported the bill, arguing the funds are destined for "critical needs like purchasing ammunition and paying reservists."
Contractionary monetary policy under the shadow of war
Meanwhile, the central bank has kept the interest rate 4.5 percent after 14 back-to-back sessions. It stressed that despite the inflation fall to 2.9 percent in August from the 3.1 percent in July, it is not in a hurry to ease its monetary policies.
The report adds that the economy shrank by 4 percent in the second quarter of 2025 compared to the previous year, underscoring the persistent drag of the ongoing war.
Of the twelve analysts surveyed by Reuters, nine had expected interest rates to remain unchanged, while three had forecast a 25 basis point cut. However, the prevailing economic uncertainty ultimately led the central bank to postpone any policy change.
Meanwhile, Yedioth Ahronoth reports that a downgrade of Israel's sovereign credit rating by the global agency Moody's now appears imminent. According to the report, economic experts within the government are warning that the massive defense spending and concerns over the state's ability to control its public budget are the primary reasons.
The crisis carries profound financial risks. A team of senior analysts from Moody's visited Israel last week, meeting with government representatives and economists. Sources present in these meetings stated that the agency's representatives expressed serious concerns about the level of post-war defense spending, warning that the budget deficit could spiral out of control, leading to a massive accumulation of major debt.
One senior official who met with the Moody's team was blunt, telling the newspaper, "If Israel's credit rating isn't downgraded within the next two weeks, it would be a miracle."
As the report notes, if expectations of a Moody's downgrade prove correct, the consequences would extend far beyond immediate market losses, significantly damaging Israel's financial standing on the international stage.
Boycotting Israel: Export sector affected by Tel Aviv's international isolation
In addition to soaring war expenditures, another issue putting strains on the regime's economy is the popular boycott campaigns against Israeli goods, which have led to a decrease in the Israeli exports.
Israeli industrialists say that trade relations, even with countries long considered among its closest allies, are deteriorating unprecedentedly. As a result, Israeli factories have seen a sharp decline in business deals, with companies and marketing chains outside the regime halting imports of Israeli products.
It is said that even companies that continue to trade with the Israeli demand that business meetings be held completely in secret, insisting that no images or minutes from these meetings be published.
In this regard, Ronen Tomer, the head of the regime's Manufacturers Association, recently revealed a shocking incident in an interview that occurred during a visit by an economic delegation from the regime to a country he described as "very friendly." During this visit, participants received a message via WhatsApp just a few hours later, asking them to delete the meeting's photos and refrain from disclosing the meeting with representatives of Israeli companies.
"We were astonished. In the past, we were warmly welcomed there and signed excellent contracts, but now the situation has fundamentally changed," Tomer.
Israeli exporters and importers confirm that an unprecedented wave of cancellations of existing contracts or refusals to renew them has been observed in recent weeks. In some cases, companies and marketing chains in various countries have announced the cessation of imports of Israeli products, indicating a direct reaction to global anger and international pressure against the continuation of the Gaza war.
The newspaper notes that some requests to renew contracts for the export of Israeli goods have been rejected, while companies in Europe and the US have reported a sudden halt in dealings with manufacturers of this regime.
According to Israeli economic officials, the situation has worsened especially since the regime announced its plan to fully occupy Gaza and videos of the bombing of buildings and mosques and civilian casualties circulated online.
The newspaper quoted an industrialist as writing: "We can no longer face these images. We are condemned to complete isolation. We feel hated throughout the world."
Yedioth Ahronoth has published the initial results of a survey conducted by the Israeli Manufacturers Association on September 17-18, polling 132 top industrialists. The findings reveal a critical situation for Israeli companies, outlining a stark picture of commercial isolation: According to the survey:
- Nearly half of all exporters reported canceled or non-renewed contracts, with a striking 71 percent of these cancellations attributed to political reasons related to the war.
- The EU was at the forefront, with a massive 84 percent of manufacturers reporting canceled contracts by member states.
- The backlash was global, with approximately 38 percent of exporters facing cancellations from other European countries and 31 percent from the US.
- A full 76 percent confirmed the war has damaged their exports, and 21 percent of those stated the damage exceeded 40 percent of their total export volume.
- Over half (54 percent) indicated that potential new clients are refusing to cooperate with Israel.
- Around 49 percent faced severe logistical and organizational problems, including shipping issues and significant delays in customs and ports.
- Even imports were affected, with 22 percent of Israeli importers facing canceled orders from foreign suppliers.
The newspaper warned that the crisis extends far beyond direct commercial losses, carrying broader consequences that threaten the stability of the Israeli economy at its entirety. The combination of declining exports, international isolation, rocketing military costs, and a widening budget deficit poses a severe threat to global confidence in the regime's economy and risks crippling its ability to attract investment.
Amid this scenario, observers believe the Israeli regime faces a dual challenge: domestically, managing an economy buckling under the pressure of war, and externally, confronting its growing isolation from the very markets and countries that have long been a lifeline for its exports.
War a factor for structural change in Israeli economy
While the Israeli economy is well known for its absorption of shocks historically due to its reliance on high-tech, strong financial infrastructure, and full foreign support especially from the US, prolonged war and its expansion to fronts like Lebanon and Iran and also crises like frequent recall of the reservists, home unrest, and departure of Palestinians from the Israeli labor market have complicated the outlook of the economic crisis.
The equation is no longer just about the war's direct cost to the budget or economic growth. It now encompasses structural impacts on the production fabric, a gradual erosion of confidence among both local and foreign investors, and rising internal social tensions, which are in turn constricting the government's room to maneuver.
The war's cost, estimated between $60 and $120 billion by mid-2025, includes not only direct defense spending but also devastating losses in vital sectors like tourism, construction, and agriculture. It further accounts for plummeting tax revenues caused by the closure of tens of thousands of small and medium-sized businesses. Compounding this, a massive 34 percent to 43 percent drop in passenger traffic compared to the previous year signals the collapse of the tourism sector, once a primary source of crucial foreign currency.
The government injected 107 billion shekel (about $29 billion) into the military budget in 2025, a 65-percent increase compared to the period before war. It also approved a plan for nearly 20 billion shekel annual increase in military spending for the next decade. This is indicative of full integration of the war economy into the government's financial structure at the cost of civilian sectors, something showing that war costs will not be a passing issue, rather, it will become a long-term structural burden on the Israelis.
