Israel's multi-front war and Prime Minister Benjamin Netanyahu's ambition to transform the country into a "super-Sparta" are driving up the defense budget and sparking fears of cutbacks in education and healthcare. The total cost of the regional conflicts that began with Hamas's attack on October 7, 2023, reached 405 billion shekels ($138 billion) as of late April, according to Bank of Israel Governor Amir Yaron.
Economic Impact
"That's a huge figure, more than 17 percent of GDP," Yaron said at an economic conference in Herzliya. He cautioned that Israel's deteriorating reputation over its war in Gaza could harm trade, foreign investment, and the overall economy. The military campaign against Iran, which began with US-Israeli strikes on February 28, added 35 billion shekels ($12 billion) in costs until a ceasefire on April 8, per the finance ministry.
Following the 2026 budget adoption in late March, the defense ministry's budget more than doubled since October 2023. To fund the war, the government borrowed heavily on international markets in 2024 and 2025, pushing public debt to over 69 percent of GDP, up from 60 percent before the war. Taxes and social security contributions have also increased.
Trauma Economy
Esteban Klor, an economics professor at Hebrew University, said Israelis are "paying twice" for the war. The first cost is through reduced government social spending and investment in public services due to budget cuts, even as debt rises. "Education will suffer, the quality of infrastructure will decline, as will the performance of the healthcare system," he warned. The second cost is to economic growth, though less visible as GDP returned to 2022 levels by 2024 and continues to grow. However, mobilization of tens of thousands of reservists since October 2023 is affecting production.
According to a survey by the Israel Democracy Institute, 31 percent of respondents reported a decline in wages or income since October 7, 2023, hitting self-employed and low-income workers hardest. At the Herzliya conference, Tamar Levy-Boneh, deputy head of budgets at the finance ministry, warned of a "trauma economy" where the shock of October 7 leads the military to demand more funding. "The security establishment must learn to meet its needs in a way that does not undermine the standard of living," she said.
Netanyahu's Vision
Netanyahu advocates the opposite view. In September 2025, he said Israel must become a "super-Sparta," a reference to the ancient Greek city-state devoted to war. As divergences emerge with US President Donald Trump over Israel's offensive against Hezbollah in Lebanon and the war with Iran, Netanyahu pushes for greater self-sufficiency. He vowed on May 3 to invest 350 billion shekels over the next decade in the defense industry to ensure "overwhelming aerial superiority."
Klor warned the defense budget could exceed 10 percent of GDP and called for a swift return to a "more reasonable" level. Israel is one of the developed countries with the most glaring inequality, and the war is exacerbating it. According to the Israeli National Insurance Institute, the proportion of children living below the poverty line rose from 27.6 percent to 28 percent between 2023 and 2024.
