Israel to Boost Defense Spending by $12.5 Billion Amid Ongoing Wars with Iran and Gaza

Israel will boost its defense budget by 42 billion shekels ($12.5 billion) over the next two years to cover the costs of the war with Iran and the conflict in Gaza. This increase will bring the defense budget to 110 billion shekels for this year, one of the highest in the world relative to GDP. The funding will be used for procurement contracts to ensure Israel's national security.

Israel has announced a significant increase in its defense budget, allocating an additional 42 billion shekels ($12.5 billion) over the next two years to meet the costs of the recent war with Iran and the ongoing conflict in Gaza. This move underscores the fiscal impact of Israel's multi-front war since late 2023 and will bring the defense budget to 110 billion shekels for this year, one of the highest in the world relative to GDP [1].

The funding will be used to sign "urgent, substantial procurement contracts for the sake of Israel’s national security," according to a joint statement from the Israeli finance and defense ministries [1]. This includes the purchase of more Arrow interceptor missiles, which were crucial in intercepting the roughly 500 ballistic missiles fired by Iran last month [1].

The agreement between the two ministries will allow for immediate procurement deals, ensuring that Israel's military is well-equipped to face ongoing and future security threats [2]. Defense Minister Israel Katz emphasized the need for military, technological, and operational superiority to meet the challenges posed by enemies who openly vow to destroy Israel [1].

The Israeli Finance Ministry has stated that the 2025 target budget deficit, currently set at 4.9% of GDP, is unlikely to change despite the additional defense spending. This is due to higher state revenues than initially forecast [1].

Despite the financial strains, Israel's military spending has surged, with a 65% increase from 2023 to $47 billion, equivalent to around 8% of GDP [1]. The central bank has urged the government to reduce defense spending in the medium to long term and prioritize expenditure that will boost the economy [1].

Investors have shown confidence in Israel's security efforts, with heavy buying of Israeli stocks and fixed-income securities this year. The main equity gauge is up 36% in dollar terms, and shekel bonds have also jumped in value, reflecting investors' belief in Israel's improved security situation [1].

References:
[1] https://www.bloomberg.com/news/articles/2025-07-17/israel-to-boost-budget-by-12-5-billion-for-iran-and-gaza-wars
[2] https://www.reuters.com/world/middle-east/israel-raise-defence-spending-meet-security-challenges-2025-07-17/