Can Israel keep paying for its war with Iran? Defence experts say it goes at $725 million a day and...

The escalating conflict in Israel has placed immense strain on its economy, with the Gaza war costing over $67.5 billion by the end of 2024 and daily military operations against Iran now costing $725 million; the Ministry of Defence's budget has nearly doubled in two years, expected to reach $31 billion in 2025, consuming nearly 7% of Israel's GDP. Mass reservist call-ups are impacting civilian productivity, and the country's missile interceptor supply is dwindling, raising concerns about long-term sustainability and potentially sidelining public services as social spending takes a back seat to military priorities.

Analysis

Israel's economy is under severe duress from escalating military expenditures, with the Gaza war costs exceeding 250 billion shekels (over $67.5 billion) by the end of 2024, compounded by the new front against Iran costing an estimated 5.5 billion shekels ($1.45 billion) in its initial 48 hours and now approximately 2.75 billion shekels ($725 million) daily for direct military operations. This surge has nearly doubled the Ministry of Defence’s budget in two years, projected to reach 118 billion shekels ($31 billion) in 2025, or nearly 7% of GDP, a level second only to Ukraine globally. The economic strain extends beyond direct military costs, with over 300,000 reservists activated during the Gaza war significantly impacting civilian productivity, costing an estimated 100 million shekels ($27 million) daily in wages and logistics, plus an additional 100 million shekels daily in lost business output. Civilian life is also bearing a financial burden, evidenced by 2.4 billion shekels disbursed by the Tax Authority’s Compensation Fund for property damage between January and May 2025, contributing to rising public debt despite not being formally included in the fiscal deficit. The private sector is also under pressure, with business federations urging governmental relief to prevent closures. Internationally, the conflict has raised concerns over global energy supply disruptions, with approximately one-third of seaborne oil passing through the Strait of Hormuz, and Brent crude has already climbed to $74.60 per barrel. Israel's fiscal position is precarious, with a deficit ceiling of 4.9% of GDP under pressure, emergency reserves nearly depleted, and the 2025 GDP growth forecast revised down from 4.3% to 3.6%. Long-term defense commitments, such as the Nagel Committee's proposed additional 275 billion shekels ($74 billion) over the next decade, and reports of dwindling missile interceptor stockpiles—potentially lasting only another 10-12 days without U.S. resupply—highlight concerns about the sustainability of the current military posture and the potential for a structural economic shift where social spending is permanently deprioritized.

Key Decisions for Investors

• Investors should exercise heightened caution regarding Israeli sovereign debt, equities, and the shekel, given the substantial fiscal burden from escalating war costs, increasing public debt, and a deteriorating economic growth outlook.
• Monitor geopolitical developments closely, particularly regarding Iran and potential disruptions to the Strait of Hormuz, which could lead to significant oil price volatility, and consider hedging strategies for energy market exposure.
• Assess companies with significant operational footprints or supply chain dependencies in Israel for potential adverse impacts stemming from reduced productivity, logistical challenges, and the broader economic downturn.
• Prepare for increased global market volatility, as the conflict has already caused jitters in indices like the S&P 500 and commodity markets like WTI crude, and further escalation could exacerbate these trends.