Report: Israel's ongoing war in Gaza and involvement in new conflicts in the Middle East is coming at a major financial cost
A year into its war in Gaza, Israel's economy is facing its steepest decline in years with both military spending and government borrowing skyrocketing. If the conflict broadens into other regions, can Israel afford to keep going - and where is the money coming from? Gregg Carlstrom is Middle East correspondent with The Economist and he joined The Business on RTÉ Radio 1 to discuss the financial impact of the conflict. (This piece includes excerpts from the conversation which have been edited for length and clarity - you can hear the discussion in full above).
How much has Israel spent to date?
"The Israeli central bank has put the expenditure over the past year at roughly $60 billion. About half of that is direct defence spending, but then there's also another $30 billion split amongst civilian costs. For example, the cost of relocating tens of thousands of people from the northern border and housing them for the past year. There are direct damages, buildings that have been destroyed, wildfires that have had to be put out and various other expenses, so more than 10% of GDP in just one year."
Where is this money coming from?
"It's increased borrowing really. The deficit is more than 8% for this fiscal year, that is about 3 times higher than it was projected to be before October 7th. Compared to a lot of other developed countries, debt levels are still manageable. They're about 62% of GDP, but the trend is obviously increasing, and there's an expectation that it will cross 70% of GDP in the next fiscal year. That's one of the reasons why we've seen both Moody's and S&P downgrade Israel's credit rating over the past year repeatedly."
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From RTÉ Radio 1's News at One, RTÉ Deputy Foreign Editor Edmund Heaphy on Israel marking the first anniversary of the October 7th attack by Hamas
How much financial support is America providing?
"On top of the $3 billion a year in annual military aid that the Americans provide, there was a one-off $14 billion package of aid, which was approved by Congress earlier this year. That takes care of close to half of those increased defense expenditures. But with the broader economy, many economists believe they're heading for a situation not unlike the one after the Yom Kippur War in 1973, where there was a prolonged period of high inflation and stubbornly low growth. The vibrant Israeli economy may not be so vibrant in the years to come."
Is the Iron Dome protection shield costing a lot of money?
"There's a huge mismatch between what it costs an attacker and what it costs to defend against that attack. Some of these projectiles, especially if you're talking about the very crude rockets that are used by Hamas or some of which are used by Hezbollah in Lebanon, cost only a few thousand dollars to produce, but they cost tens of thousands of dollars to defend against. That cost goes up significantly for the longer range, more advanced interceptors like the Arrow interceptors, which they used to fend off that barrage of Iranian ballistic missiles."
From France 24, how Israel's Iron Dome anti-missile shield works
Are there a labour shortage due to the war and reservists getting called up for duty?
"The labour market is incredibly tight right now because of the frequent call-ups. Some reservists were able to go back to work after the first few months of the war when the number of Israeli troops in Gaza began to dwindle. But many of them have been called up for reserve duty once or twice more since then, and so they haven't been able to stay at work. They've gone back for a few months, and then they've been called up for further duty. And that's putting a big strain on firms that are watching their workers constantly cycle in and out of the military.
"Now, you have this growing ground invasion of Lebanon, and at least two divisions of reservists have been called up already and there's a possibility that more will be. Unemployment is 2.7% and it's an incredibly low figure, but that partly reflects the fact that there just aren't that many workers around because so many people are being pulled in for repeated bouts of reserve duty."
What kind of economic impact will a war have on Iran?
"The oil exporting infrastructure and what Iran is able to export would be a huge concern for them. It's a fraction of what it would be able to export if it weren't under sanctions and if it had had better investment in its oil infrastructure over a period of years. It does sell that oil at a discount compared to global market prices, but that is one of its only sources of hard currency.
There's a huge mismatch between what it costs an attacker and what it costs to defend against that attack
"If this was to be cut off by strikes on its oil facilities, it would also probably have knock-on effects for the world economy. You've had groups both in Iran and other Iranian backed groups across the region that have threatened to attack oil infrastructure in Saudi Arabia, UAE and other countries in the Gulf. That's why when US president Joe Biden spoke the other night about the possibility of strikes on Iran's oil export facilities, the price of Brent Crude jumped by about 5% in the hours after he was speaking.
"If you look at the price of Brent now compared to the price a year ago, it's still $5 or $6 a barrel cheaper than it was before October 7th, before this regional war started. If you had told anyone a year ago that oil prices would be falling amid a regional war, they would've thought you were crazy.
"Part of that I think reflects macro trends with demand in the West and demand in China and concerns about China's economic growth. But I think part of it also reflects the work that countries like Saudi Arabia and the UAE have been doing to try and improve their relations with Iran over the past years and to try and stay out of this growing regional conflict. In part, this is because they are worried about the possibility that their oil infrastructure could become a target."
