Tel Aviv – Ma’an – The Israeli cabinet approved an increase of 3.4 billion shekels (about $923 million) to the state budget for 2024 to help finance evacuees until the end of the year, the Finance Ministry said.

Tens of thousands of Israelis in the north have moved into hotels following daily rocket attacks by Lebanon’s Hezbollah since the war between Israel and Hamas broke out on October 7.

The decision to increase the budget also includes residents of towns adjacent to the Gaza Strip, which the Israeli cabinet calls “conflict areas.”

The Finance Ministry said that NIS 525 million of the total budget returned to state coffers after previous spending cuts, while another NIS 200 million will be allocated to fund the army’s reserve forces.

The tourism sector is suffering

In Jerusalem’s Old City, almost all souvenir shops are closed, airlines have cancelled flights, businesses have ground to a halt, and half the rooms in luxury hotels are empty.

Nearly 11 months into the war, Israel’s economy is struggling
as the country’s leaders press ahead with an offensive that shows no sign of ending and threatens to escalate into a wider conflict.

Prime Minister Benjamin Netanyahu has sought to calm fears by saying the economic damage is only temporary. But the deadliest and most destructive war ever between Israel and Hamas has damaged thousands of small businesses and dented outside confidence in an economy once seen as a powerhouse of entrepreneurship. Some leading economists see a ceasefire as the best way to stem the damage.

‘The economy is currently experiencing a lot of uncertainty, and it’s all about the security situation, how long the war will last, how intense it will be, and whether there will be further escalation,’ says Karnit Flug, a former governor of the Bank of Israel, who is now deputy head of research at the Israel Democracy Institute, a think tank in Jerusalem.

The Israeli economy has previously recovered from shocks, including short wars against Hamas. But this longer war has created greater press
ure, including the cost of reconstruction, compensation for victims’ families, the call-up of reservists, and massive military spending.

The prolonged fighting and the threat of further escalation with Iran and Hezbollah have had a particularly negative impact on the tourism sector. Although tourism is not a major driver of the Israeli economy, the war has hurt thousands of workers and small businesses.

Trade sector

Once a bustling port, Haifa was a major import and export hub, often home to huge container ships. Now it is completely quiet.

With repeated attacks by Yemen’s Houthi group on ships passing through the Red Sea, many have abandoned stopping at Israeli ports, according to a port official, who spoke on condition of anonymity because he was revealing inside information.

He added that Israeli ports witnessed a 16 percent decrease in shipping in the first half of the year, compared to the same period in 2023.

Major airlines have also suspended flights to and from Israel.

Jacob Sheinin, an Israeli
economist and adviser to Israeli prime ministers and ministries for decades, said the total cost of the war could reach $120 billion, or 20 percent of the country’s gross domestic product.

Among the 38 member states of the Organization for Economic Co-operation and Development, Israel’s economy saw the biggest slowdown in the April-June period, the organization said Thursday.

Israel’s GDP was expected to grow by 3 percent in 2024, while the Bank of Israel now expects a growth rate of 1.5 percent – if the war ends this year.

Fitch also downgraded Israel’s rating from A+ to A earlier this month, following similar downgrades by Standard and Poor’s and Moody’s. A downgrade could push up the government’s borrowing costs.

Fitch warned in its downgrade note of the potential for ‘significant additional military spending, destruction of infrastructure, and further sustained damage to economic activity and investment,’ adding that ‘in our view, the conflict in Gaza could continue into 2025.’

In another worrying
sign, the Finance Ministry announced this month that the country’s deficit over the past 12 months had risen to more than 8 percent of GDP, a far bigger overshoot than the 6.6 percent of GDP deficit the ministry had forecast for 2024.

The budget deficit amounted to about 4 percent of GDP.

The credit rating downgrade and the deficit have increased pressure on the Israeli government to end the war and reduce the deficit, which may require unpopular decisions, such as raising taxes or cutting spending.

But Netanyahu needs to keep his coalition together, and his hardline finance minister, Bezalel Smotrich, is demanding that the war continue until Hamas is completely eliminated.

Flug, a former central bank governor, said the current situation was unsustainable and the coalition would have to cut spending, such as unpopular support for Haredi schools, which many Israelis view as wasteful.

“Israelis will have a hard time accepting this if the government does not make clear that the gravity of the situation forc
es it to give up some of the things they love,” Flug added.

Smotrich said the Israeli economy was “strong” and pledged to pass “a responsible budget that continues to support all wartime needs, while maintaining fiscal frameworks and strengthening growth engines.”

The unemployment rate fell below pre-war levels to 3.4 percent in July, compared to 3.6 percent in July 2023, Sheinin said. But when Israelis forced out of the labor market are taken into account, the rate rises to 4.8 percent, still considered low in most countries.

Meanwhile, many small businesses have closed their doors after their owners and employees were called up for military service as reservists, while the rest are struggling amid the slowing economy.

The Israeli business information company Coface BDI reported that about 46,000 companies have closed their doors since the start of the war, 75 percent of them small businesses.

Even the famous American Colony Hotel in Jerusalem, whose guests include politicians, diplomats and movie stars
, has laid off workers and is considering wage cuts, said Jeremy Berkowitz, who represents the hotel’s owners.

“At one point we thought about closing for a few months, but that would of course mean laying off all the staff, and it would mean neglecting the gardens we have developed over decades, leaving them without care,” he added.

The best way to help the economy recover is to end the war, Sheinin said, adding, “But if we persist and continue this war, we will not recover.”

Source: Maan News Agency