Israelis Struggle With Cost-of-Living Squeeze as War Costs Rise

Israelis are grappling with a cost-of-living crisis as the ongoing war with Hamas in Gaza continues to drive up expenses, straining household budgets and the overall economy. The conflict, now in its eleventh month, has led to a significant increase in defense spending, which is putting additional pressure on the public purse and contributing to a rise in inflation.

According to the Bank of Israel's yearly report for 2023, the war's adverse impact on the economy was seen on many levels, including a contraction in GDP, a decline in private consumption and investment, and a decrease in exports. The report also highlighted the adverse impact on employment, particularly in the construction and agriculture industries, where there was a severe shortage of foreign workers due to a prohibition on employing Palestinian laborers.

The amended 2024 state budget, approved in March, added tens of billions of shekels to fund Israel's war against Hamas in Gaza. The amended budget sets a deficit of 6.6% of gross domestic product (GDP) in 2024, revised from a pre-war level of 2.25%. In February, the deficit rose to 5.6% over the previous 12 months from 4.8% in January. The ratio of public debt to GDP grew from 60.5% to 61.9% this year.



The rising defense spending and war-related costs have led to an increase in Israel's public debt and a higher deficit, which pose a risk to the country's fiscal stability. To mitigate these risks, the government must ensure that any additional defense spending is accompanied by appropriate fiscal adjustments.

The war's impact on tourism and consumer confidence has also significantly influenced Israel's retail and service sectors. The decline in tourism, due to major airlines suspending flights to Israel, has hurt thousands of small businesses and workers in the tourism industry. This decline in tourism has a ripple effect on the retail and service sectors, as tourists typically spend money on local goods and services.

The uncertainty and fear caused by the war have negatively impacted consumer confidence, leading to reduced spending on retail and services. The prolonged nature of the conflict and the threat of further escalation have created a harsh impact on the economy, with businesses failing and luxury hotels being half empty.

The war's impact on labor force participation and skills development will likely have significant implications for Israel's long-term productivity growth. The massive mobilization of reservists has led to a significant labor shortage, particularly in the high-tech sector, which employs many reservists. This shortage can lead to decreased productivity in the short term, as companies struggle to maintain their workforce and output.

The prolonged absence of workers from their civilian jobs can hinder skills development and maintenance, leading to a skills gap upon their return. Additionally, the war has spooked some foreign investors, making it harder for early-stage startups to secure funding and grow, which could further impact skills development.

To mitigate the long-term impact of the war on the labor market and productivity, Israel's government and private sector can implement targeted policies and investments. These include encouraging small and medium-sized local companies, investing in tech and labor productivity, addressing labor shortages in specific sectors, supporting early-stage startups, promoting education and skill development, and fostering a stable political and economic environment.

In conclusion, the ongoing war with Hamas is putting significant pressure on Israel's economy, leading to a cost-of-living crisis and straining household budgets. The government must take targeted steps to mitigate the long-term impact of the war on the labor market and productivity, while also addressing the rising defense spending and war-related costs to maintain fiscal stability.