Nearly Three Years of War Leave Israel Facing Mounting Economic Pressures

Israel’s next cabinet is set to inherit an economy under significant fiscal pressure after nearly three years of war, with estimated war-related costs reaching NIS 350 billion, or about $114 billion, between 2023 and 2026. According to figures cited by The Jerusalem Post from the Bank of Israel, roughly half of the costs have been financed through borrowing. Public debt rose from 60.5 percent of GDP at the beginning of 2023 to 68.5 percent by the end of 2025, while the budget deficit reached 4.7 percent.

Military spending has also increased sharply, rising from around 4.5 percent of GDP before the war to approximately 8 percent in 2025 and potentially remaining near 6 percent in 2026. The Bank of Israel projects a 2026 deficit of 4.9 percent of GDP and debt of around 69 percent. Economists cited by Calcalist warn that an additional NIS 25 billion in military expenditure could push the deficit to 5.5 percent, leaving the next government with limited fiscal flexibility.

Economists have warned that sustained higher military expenditure could place growing pressure on civilian priorities, including education, universities, research and public health, while increasing future debt-servicing costs. Potential responses include maintaining higher taxes, reducing other government spending or relying on additional borrowing. Beyond the immediate fiscal strain, economists have also identified longer-term structural challenges involving education, workforce skills and productivity, suggesting that the economic consequences of prolonged military expenditure could extend well beyond the direct costs of the war.