A report this week on the Ynet news site cited an army source who said the 10-second bombing run that killed Hezbollah leader Hassan Nasrallah last month cost 25 million shekels ($6.6 million), and that a second one that a few days later killed Hashem Safieddine, his likely successor, cost another 20 million.
From a purely economic point of view, the costs Nasrallah imposed on Israel – the lives lost, the destruction, the lost economic output and mental anguish – cannot be earned back by killing him. If there is any payback on the 25 million shekels the air force spent eliminating him, it will come if it hastens an end to the war and helps to bring Israel years of peace, stability and security in the future.
The reality, of course, is that no one looks at war from a purely economic perspective. It is safe to assume that nearly all Israelis would consider the money budgeted for the Hezbollah leader's demise well spent whatever the return on the investment turns out to be. Nasrallah was a sworn enemy, and in war, the desire for revenge or summary justice trumps any kind of financial calculation.
And, there we have in a nutshell the dilemma Israel faces as the war that began on October 7, 2023 passes the one-year mark. There is a very big economic dimension to armed conflict (and in the case of the current war, the longest and most expensive Israel has ever fought, an enormous one. But it gets lost in the day-to-day discussion of battlefield gains and losses and the powerful psychological elements involved.
Prime Minister Benjamin Netanyahu's mantra of "total victory" and his desire to frame the fight as a "war of revival" play to the desire for revenge and triumph. The trauma of October 7 makes his job easy. As much as this may be a war to restore Israel's deterrence, it is at least as much about revenge and justice. But it shouldn't be just that.
When Israel can declare victory and end the fighting is ultimately a military question. It is safe to say that the end will not come as an Instagram image of "total victory," with the enemy leaders surrendering in a formal ceremony and their fighters laying down their arms. Victory will come when Israel's political and military leaders feel enough has been done to remove the threats that the country faces for the foreseeable future.
In the case of Gaza, many in the army have reportedly said it should have already happened this summer, that there was little to gain by continuing to fight. In Lebanon, the IDF is talking about a ground incursion lasting several more weeks until Hezbollah's military infrastructure has been destroyed. Vis-à-vis Iran, it's an open book.
The economic case for ending the war can't be taken in isolation, but the point at which costs began outweighing the benefits probably ended a while ago.
Direct war costs have, according to the Finance Ministry, had reached close to 105 billion shekels as of September 30, and they have ballooned since then with the assault on Lebanon and the heavier fighting in Gaza. Tens of thousands of reservists have been called up and ammunition is being expended at an immense rate.
Ynet quoted a Finance Ministry official as saying daily costs have jumped from 400 million shekels a day to more than 500 million. To get an idea of the cost to Israeli society from that kind of expenditure, note that the cost of building Israel's newest hospital, the 300-bed Assuta Ashdod completed in 2017, cost about 1 billion shekels, or about two days of warfare.
A daily dose of rockets
The government's budget deficit is growing quickly and by almost all accounts will exceed the already high level targeted for the year of 6.6 percent of gross domestic product. It's not clear where the funds will come from to cover the added costs. Israel's credit rating has been downgraded and foreign investors have been reducing their exposure to Israeli debt.
Those are the direct costs – but the cost to the economy is many times greater. As the war grinds on, the economy isn't adjusting to the situation but is losing vigor. After a brief rebound in the first quarter of 2024, growth decelerated to an annualized 0.3 percent in the second quarter, according to the Central Bureau of Statistics' latest estimate. The economy is actually smaller than it was at the start of the war.
The full-fledged war with Hezbollah that began a month ago, with its daily dose of rockets over much of the country, is going to impact the economy in the second half of the year much more severely than the war with Hamas did in the first half.
The idea that the economy will quickly bounce back after the war as it has in the past becomes less and less likely as the fighting drags on.
The high-tech sector, the pre-war engine of the economy, is struggling. Startups have recently been raising more capital than they did in the first months of the war, but the companies raising the big money are headquartered abroad, industry tracker Rise Israel says. The number of active investors is down about 30 percent. Tech employment has stagnated.
Across the entire economy, investment in machinery and equipment was down in the first half the year, the statistics show. Chevron, the operating partner of Israel's Leviathan gas field, announced two weeks ago it was suspending work on a $429 million project to expand output due to the "security situation." It was just after the second Iranian missile barrage.
The endless war and constant rocket attacks can't help but give businesses second thoughts about putting money into new plants and equipment.
The war's weight on the economy won't end when the rockets stop. It will take years to repay the costs of the fighting, and the Middle East will remain a more dangerous place for Israel in the years to come, meaning Israel will continue to carry a heavy defense burden.
Before October 7, Israel was spending so much on defense that in 2022 it had the world's 15th-largest military budget, outstripping countries many times its size in terms of population and economy.
In 2024 and in the years ahead the burden will grow. The Nagel committee, which is examining Israel's future defense needs, reportedly believes the tab will reach as much as an extra 300 billion shekels over the next decade.
That spells higher taxes, less money for schools, hospitals and roads, and longer stints of army service.
The economic situation is unlikely to be as gruesome as it was in the years after the 1973 Yom Kippur War. The defense burden back then was immeasurably higher and the economy much smaller. But the fact is that quasi-peace Israel enjoyed over the last two decades is history.
Normally, it would be the finance minister that plays the role of Cassandra in times of war, warning the generals when spending red lines are being crossed and making it clear to the rest of the cabinet the damage the war is doing to the economy.
But Bezalel Smotrich, the current finance minister, has been doing nothing of the sort. On the one hand, he assures everyone that, just wait, everything will be fine once the war is over; on the other, he keeps talking about continuing the assault on Gaza and occupation and opening new fronts. About the cost of all this, Smotrich seems to be counting on miracles and God's good graces.