Israel plans to borrow $60 billion and raise taxes to finance the Gaza war

Part of the Israeli occupation forces in the Gaza Strip (Israeli press)

Israel plans to borrow $60 billion this year, freeze government employment, and increase taxes after its military spending nearly doubled as a result of its war on the Gaza Strip, according to what the British Financial Times quoted the Accountant General in the Israeli Ministry of Finance, Eli Rotenberg, as saying.

The newspaper pointed out that Israel's war on the Gaza Strip - which has entered its fifth month - left huge losses in its economy, which shrank by about 20% on an annual basis in the last quarter of 2023.

Budget scenario

According to the newspaper, the economic impact came after Israel mobilized a record number of troops, amounting to 300,000 reserve soldiers, along with about 200,000 regular soldiers, and tens of thousands of settlers were displaced from the north near the border with Lebanon and from the south near the border with the Gaza Strip, and consumer spending declined. About 150,000 Palestinian workers were also prevented from entering Israel from the occupied West Bank.

The newspaper quoted Rotenberg as saying that the main factor in restoring the health of the Israeli economy is the demobilization of reserve soldiers, and that about a fifth of those who were called up are those who are still fighting (that is, about 60 thousand), expecting the number to decline to between 30 and 40 thousand by the end of March. Next, especially since the intensity of the battles was “declining,” he said.

Rotenberg pointed out that this scenario is what the Israeli budget was based on.

Security presence

However, the government threatens to expand its attack in Gaza to Rafah, the southern city where more than a million people displaced from their homes in the Gaza Strip have taken refuge, despite international warnings that an attack on such a densely populated area would be devastating, according to the newspaper.

The Israeli attack led to the death of about 30,000 Palestinians, most of them children and women, and destroyed vast areas of the Gaza Strip and forced more than 85% of the population of 2.2 million people to leave their homes.

Despite the demobilization of thousands of reserve soldiers, Israel said it expects to maintain a security presence in the Strip for the foreseeable future, as Prime Minister Benjamin Netanyahu's office last Friday issued a post-war plan for Gaza that stipulates that Israel will maintain a large security barrier inside the Strip.

There are also fears that the almost daily clashes between Lebanese Hezbollah and the occupation forces across the border will escalate into a comprehensive conflict, according to the newspaper.

In light of these developments, the government plans to increase defense spending this year by NIS 55 billion ($15.13 billion), an 85% increase over the pre-war defense budget.

The Ministry of Finance said that this will increase defense spending to about 20% of the 2024 budget, up from 13.5% before the war. The draft 2024 budget is being reviewed by committees in the Knesset, and it is expected to be approved next month.

Proactive steps

The newspaper quoted Rotenberg as saying, “We believe that there will be an increase in defense spending in Israel in the coming years, and that is why we have taken financial steps now.”

He added that a committee of experts from outside the government had been formed to provide advice on future defense spending.

Israel's revenues for 2023 were less than expected by 12 billion shekels ($3.3 billion), while the government increased spending by about 26 billion shekels ($7.15 billion) due to the war, and this included an additional amount of 4.7 billion dollars for defense, as the Ministry of Finance allowed the government By working outside the budget immediately after the Al-Aqsa flood operation on October 7th.

For balance

To achieve balance after increasing spending, the ministry plans to increase the value-added tax from 17 to 18% in 2025, while this year and next it will increase taxes such as those imposed on smoking and banking services, freeze government appointments, and postpone wage increases for public jobs.

This month, Moody's lowered Israel's sovereign rating from "A1" to "A2" due to concerns about the war on Gaza, its indefinite duration and its broader impact on the economy. It also lowered Israel's debt outlook to negative due to the risk of the war expanding to the country's northern front.

Last month, the governor of Israel's central bank urged the government to quickly rein in spending, warning that the government's "credibility" in the market depended on making budget adjustments, including spending cuts and revenue increases.

The Israeli government expects a budget deficit of 6.6% of GDP this year, and growth is likely to decline to 1.6% this year from 2% in 2023.

After the outbreak of the war, Israel borrowed about 81 billion shekels ($22.3 billion), which raised the debt-to-GDP ratio to about 62%, its highest level in about 8 years.

The ministry expects this percentage to rise by another 5 or 6 percentage points this year, as it looks to tap into local and international markets to raise about 250 billion shekels ($68.8 billion), yet it expects debt to GDP to remain less than 70%.

Rotenberg - who met with investors in New York and London - said that most of the debt will be raised locally, but added that the ministry is looking "with interest" at borrowing in dollars, adding that "everything is on the table."

Source: British press