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21 August 2024

Implications of Continuing the War on Israel’s Economy—Three Scenarios

Tomer Fadlon, Esteban Klor & Ofer Shelah

Israel stands at a crossroads regarding the continuation of the war in the Gaza Strip and the broader campaign against Iran and the “Axis of Resistance,” which are directly involved in the conflict. Every decision about the future will inevitably have major economic implications. This is especially critical given the starting point where the projected budget deficit for 2024 is expected to significantly exceed the forecast underlying the current state budget. This is further compounded by the war’s impact on defense spending, economic growth, direct foreign investment in Israel, its credit rating, and other critical parameters of economic resilience. This paper examines three scenarios:
  1. Continuation of the Current Situation: Israel continues the war with varying intensity in the Gaza Strip while the fighting on the northern front continues in its current format—daily exchanges of fire, but without any major escalation.
  2. Escalation in the North: This could lead to significant disruptions in the country. It is clear that it is difficult to predict where such an escalation, initiated by Israel, might lead. In a severe but plausible scenario, it could develop into a large-scale war on the northern front and even become multiple fronts, with involvement by Iran and other elements of the axis (proxy militias operating from Syria and Iraq, fire from Yemen, Iran, Iraq, and Syria, in addition to Hezbollah’s missile and rocket arsenal, and of course, continued fighting in Gaza and daily activity in Judea and Samaria). However, for the purpose of analysis in this document, we assume a limited Israeli operation in the north, resulting in a high-intensity campaign lasting about a month against Hezbollah alone.

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