The “welfare state” is blown away by Israel’s war on Gaza Netanyahu wants more money for the army, settlements, and religious schools

London -  The British magazine “The Economist” published a report entitled “Can Israel Afford the Costs of Waging War?” In it, she said that as its war in Gaza continues , costs are mounting.

The report stated that Israeli occupation Prime Minister Benjamin Netanyahu hopes, in the next few weeks, to obtain final Knesset approval for the emergency war budget, which includes more money for settlers in the West Bank, as well as for religious schools, where teenagers study the Torah instead of science. As part of an attempt to unite his divided political coalition.

The report emphasized that the proposed budget constitutes a stunning break with the past. Daily welfare spending (which has long been generous in Israel, given its socialist foundations) is set to be cut in order to fund the army. The military budget will nearly double from 2023 to 2024. Israel's unwritten social contract, which for more than seventy years promised a generous welfare state and a fearsome army, is now under threat.

The proposed budget represents a stunning break with the past, as day-to-day spending on social care is set to be cut in order to fund the army

The report noted that despite the ongoing discussions about a ceasefire, Netanyahu was clear that any pause would be temporary. Even if the ceasefire is extended or he leaves office, there is widespread political support for a stronger army. Meanwhile, the war proved more costly than expected.

He stated that between October and last December, the Israeli economy contracted by one-fifth at an annual rate, compared to the previous three months; That is, more than double the contraction expected by the central bank. In the same period, more than 750,000 people, or one-sixth of the workforce, were unemployed, many of them evacuees or reservists. He pointed out that last month, the rating agency Moody's lowered the country's credit rating for the first time ever.

The report stressed that all of this raises the question of how much Israel can bear the costs of waging war?

According to the report, the main problem facing the Hebrew state is financial. On the eve of the Hamas attack on October 7, Israel's debt-to-GDP ratio was 60 percent, well below the average in the OECD group of mostly rich countries. But in the last quarter of last year, the armed forces spent NIS 30 billion ($8 billion), an amount equivalent to 2 percent of GDP, in addition to their usual spending. The report emphasized that it is not only the larger budget of the armed forces that causes tension; The government must also spend on accommodation for evacuees, furlough schemes and support for reservists.

According to the report, Israeli policymakers believe that the debt ratio of 66 percent will be manageable. Netanyahu's budget targets an annual fiscal deficit of 6.6 percent of GDP, which is enough to produce a debt ratio of about 75 percent.

In the fourth quarter of last year, the armed forces spent NIS 30 billion ($8 billion), an amount equivalent to 2 percent of GDP, in addition to their usual spending.

In comparison, for America or Japan, such borrowing would be very easy. But in Israel there is always the possibility that there will be more conflict in the near future. If the country's technology industry is damaged, perhaps in a war involving other regional powers, up to a quarter of the country's income tax would be at risk. The last time Israel entered a battle of this size, during the October War in 1973, its debt ratio exceeded 100 percent, leading to a financial crisis. As the central bank printed money, the banking sector collapsed and inflation rose to 450 percent by 1985. The report emphasized that in order to keep government bondholders happy, the Israeli government needed room to maneuver.

The report continues, “Many are now concerned that Netanyahu’s budget is too generous. Although governments may borrow in times of crisis to keep things going, it is wise to do so modestly. Given Israel's desire to increase military spending, military spending will not decline to pre-war levels any time soon. As a result, the government needs a plan to stabilize debt while spending remains high.”

The report stated that Israeli tax revenues in 2022 amounted to the equivalent of 33 percent of GDP, slightly less than the OECD average of 34 percent. However, Netanyahu's budget includes only modest increases. Next year, the value-added tax will rise by one percentage point to 18 percent; The health income tax will rise by 0.15 percentage points.

According to the report, policymakers are concerned that increasing corporate taxes would push the technology sector, which is highly mobile and already struggling to find workers, to flee the country. Imposing stricter taxes on households would stagnate consumption and make life more difficult for those already suffering because of the war.

He points out that in the suburbs of occupied Jerusalem, secular professional families are suffering, whose members have been called up to the army and have witnessed a decline in income from companies. Many in Arab neighborhoods - hardest hit by Netanyahu's budget - reported that they were no longer welcome at work. However, a few miles away, ultra-Orthodox Jewish families, exempt from military service and relying on handouts that Netanyahu wants to make more generous, barely have to tighten their belts.

The report notes that the impact on industries is similarly uneven. The technology sector in Israel is recovering. Some companies even believe they can profit by taking advantage of a new round of military contracts. Many of them have moved their operations abroad, reducing the impact of losing staff due to the war in Gaza. Chen Bitan, from Cyberark, one of the largest cybersecurity companies in Israel, is quoted as saying: “Our productivity has actually improved. We told our employees that the economy will win the war.”

The report notes that although domestic technology investment has declined, it has fallen by almost the same amount as in Europe, suggesting that war is not to blame.

Most sectors of the economy are in trouble. The construction sector is at a standstill. Farms lost more than half of their workforce. Companies operating in the tourism sector are suffering

But the report confirms that the rest of the economy is in trouble. The construction sector is at a standstill. Farms lost more than half of their workforce. Companies operating in the tourism sector are suffering. In January, 77 percent fewer tourists visited occupied Jerusalem than last year.

The report stressed that recovery may be slow, especially since the war has exacerbated long-term problems. The first is the economy's dependence on low-wage Palestinian workers. The West Bank may import as many goods from Israel as it did before the war, but its 200,000 or so workers - equivalent to 5 percent of Israel's workforce - cannot go out. Their permits were canceled after October 7, 2023, and the Israeli government refuses to allow them to return. Farms, factories and construction sites lack workers. However, industrialists are of two minds. One of them says: “We need the Palestinians, but we cannot depend on them.”

He notes that “the labor market in Israel is already narrow, and bringing in foreign workers is slow and expensive, and the country’s workforce is less than half the size of its total population.” He points out that half of the men in Israel's ultra-Orthodox Jewish community, the fastest growing group in the country, refuse to work for religious reasons. Those who do are often woefully uneducated, having attended religious schools. Arabs within the Green Line, the community with the second highest fertility rate, also get poor test results. In January, the new rules extended the length of military service from 32 to 36 months for non-Orthodox men, leading to a drain on the workforce.

According to the report, if debt continues to rise while the economy suffers, things will become difficult. But a repeat of what happened after the 1973 war is unlikely.

He emphasizes that Israeli society realizes that its security depends on the stability of the economy, and tends to isolate irresponsible politicians. According to him, the markets believe that a default is unlikely. Although borrowing is now more expensive for the government, it is far less than the exorbitant prices paid by irresponsible leaders elsewhere. Credit default swap rates, an indicator of market confidence in the government, rose from 0.5 percent to 1.4 percent after October 7, 2023, but have since stabilized and remain below levels seen a decade ago.

According to the report, the markets seem to have the same amount of confidence that Israel will not unleash inflation in order to reduce debt payments. The annual inflation rate, which reached 3 percent, is lower than its counterpart in the United States, and investors expect it to decline to 0.4 percent by the end of the year. Since the 1973 war, Israel has had an inflation-targeting central bank, one that tends toward hawkish decisions. He pointed out that after October 7, 2023, the bank spent $30 billion in foreign reserves to support the shekel (and it has another $170 billion if the currency needs more support). But the shekel has barely moved since then.

The report stresses that, even if a financial crisis is unlikely, this does not mean that pain will be avoided. This will come in a different form: through further spending cuts required to ensure stability. The funds that hold Netanyahu's coalition together will be protected as long as he remains prime minister. Instead, as the war budget indicates, Israel's welfare state will take the hit. Although the country has one of the lowest unemployment rates in the OECD, it is the fifth-largest spender on unemployment benefits. Only the governments of Norway and Iceland spend more of their GDP on education.

He points out that the Ministry of Social Welfare, which also takes care of evacuees and returning hostages, will have to take an 8 percent budget cut, which is much higher than most other civilian ministries face. The ministry has been criticized for its weak support for 135,000 Israelis evacuated from the north and south of the country. She did little other than pay hotel bills. Now officials are said to be pressuring families to return. He stresses that if Israel remains under Netanyahu's mismanagement, other ministries will face similar treatment. However, even if he steps down, Israel will have to make difficult choices between the two pillars of its social contract: its armed forces and the welfare state.