Israel's Economy Faces $20 Billion Hit as 12-Day Iran Conflict
Israel's economy is reeling from massive financial losses exceeding $12 billion following the recently concluded 12-day military conflict with Iran, with experts warning the total economic impact could reach $20 billion when indirect costs are fully calculated. The conflict, which ended with a Trump-brokered ceasefire on Tuesday, saw Israel spend approximately $5 billion in just the first week of operations while burning through $725 million daily in military expenditures.
The unprecedented economic toll highlights the severe financial strain of modern warfare on even technologically advanced economies. Israel's budget deficit is expected to rise by 6 percent, while compensation payments to displaced citizens threaten to further deteriorate the country's public finances, according to financial experts and government sources.
The conflict's economic ramifications extend far beyond direct military costs, disrupting key industries, displacing thousands of citizens, and forcing the government to implement emergency tax measures to cover mounting expenses.
Breaking Down the Staggering War Costs
The financial breakdown of Israel's 12-day military campaign reveals the enormous expense of modern warfare operations. Of the $725 million spent daily, approximately $593 million went toward offensive operations while $132 million covered defensive measures and military mobilization, according to reporting by the Financial Express.
Anti-missile defence systems alone cost Israel between $10 million to $200 million daily.
As reported by The Wall Street Journal. These sophisticated defence networks, crucial for protecting civilian populations from Iranian ballistic missile attacks, represent some of the most expensive military technologies deployed during the conflict.
The Israel-based Aaron Institute for Economic Policy calculated that had the military operations continued for a whole month, total costs would have exceeded $12 billion. This projection underscores the unsustainable nature of prolonged high-intensity military operations for national budgets.
"The attacks not only directly affected Israel's military spending but also the country's production activities. Directly and indirectly, the war could cost Israel up to $20 billion."
This assessment comes from Naser Abdelkarim, an assistant professor of finance at the American University of Palestine, who spoke with Anadolu Agency about the conflict's broader economic implications.
Civilian Displacement and Compensation Crisis
The human cost of the conflict translated directly into massive government expenditures for civilian protection and compensation. More than 10,000 Israelis evacuated their homes during the first week alone, while an overwhelming 36,465 people filed compensation claims with the Israel Tax Authority.
These displacement figures represent one of the most significant internal population movements in Israel's recent history outside of the Gaza conflict zone. The government now faces the dual challenge of processing tens of thousands of compensation claims while managing the logistics of housing and supporting displaced populations.
The compensation payments system, designed to support citizens affected by military operations, has become a significant drain on public finances. Each claim requires processing, verification, and payment, creating an administrative burden that compounds the direct military costs of the conflict.
Budget Restructuring and Emergency Measures
Israel's response to the mounting financial pressure has involved dramatic budget restructuring and emergency fiscal measures. The Israeli Ministry of Finance has revealed that current financial resources are rapidly depleting, requesting $857 million to be transferred to the Ministry of Defence while simultaneously demanding $200 million in cuts from the Ministries of Health, Education, and Social Services.
According to the Israeli financial newspaper Globes, most of these emergency defence funds will cover military personnel expenses. The conflict required mobilizing approximately 450,000 reservists, resulting in massive personnel costs that extended far beyond equipment and ammunition expenditures.
To offset growing deficits, the government has implemented several tax increases. The value-added tax rate rose from 17 percent to 18 percent, while taxes on health services have also increased. These measures represent the government's attempt to generate additional revenue while managing unprecedented military spending.
Israel's 2025 budget has expanded by 21 percent to a record $215 billion, with $38 billion explicitly allocated for defence, according to Deutsche Welle reporting. This represents the largest budget in Israel's history, reflecting the ongoing security challenges the nation faces.
Industrial and Infrastructure Disruption
The conflict's impact extended well beyond direct military costs, severely disrupting Israel's key economic sectors. Iran targeted critical infrastructure in Tel Aviv and Haifa, including an attack that shut down Bazan, Israel's largest oil refinery, causing an estimated daily loss of $3 million, according to Financial Times reporting.
Ben Gurion Airport, typically handling 300 flights and 35,000 passengers daily, suspended operations during Iranian retaliatory strikes. The airport has only partially reopened for repatriation purposes, with full commercial operations still limited, resulting in massive revenue losses for the aviation sector.
Israel's national airline, El Al, suspended flights and diverted aircraft to prevent targeting. One flight to Paris was diverted mid-route and landed in Cyprus, while a Bangkok-bound flight was forced to land in Rome. The operational costs of these disruptions alone are expected to reach approximately $6 million.
The manufacturing, commerce, technology, and education sectors have all experienced significant disruptions, according to Itay Eter, an Israeli economist from Tel Aviv University, as quoted by Deutsche Welle. Many workers have been unable to return to their jobs since the conflict began, compounding productivity losses across the economy.
Financial Markets and Currency Impact
The conflict triggered significant volatility in Israeli financial markets, with the diamond exchange sector particularly affected. Iranian missiles struck Israel's diamond exchange, a sector representing approximately 8 percent of Israel's total exports, according to the Israel Diamond Institute1.
The attack on the diamond exchange triggered concerns in the Tel Aviv Stock Exchange, leading to investor panic and market selloffs that accelerated broader market declines. The importance of this sector to Israel's export economy magnifies the impact of direct physical damage to trading facilities.
The Israeli shekel fell to 3.7 against the US dollar when the war began, but has since recovered to 3.5, according to financial expert Naser Abdelkarim. This currency volatility reflects both investor uncertainty and the broader economic pressures facing the country during the conflict period.
International airlines halted flights to and from Israel, with some removing their aircraft from Israeli airports entirely. Large portions of Middle Eastern airspace remained closed, further isolating Israel's economy from international commerce and tourism.
Long-term Economic Resilience and Challenges
Despite the massive immediate costs, some analysts point to Israel's economic resilience as a factor. The country's high-tech sector has historically demonstrated adaptability, remaining robust during previous crises, including the COVID-19 pandemic.
Deutsche Welle quoted economist Itay Eter as saying, "War is very expensive, and there is massive uncertainty regarding the short- and long-term future. The costs of both defensive and offensive operations are enormous." Eter warned that these expenses "will certainly have negative effects on the budget deficit, GDP, and Israel's debt levels."
Israel's unemployment rate remained at 3 percent as of April, down from 4.8 percent in 2023, according to Deutsche Welle reporting. However, the extensive use of reservists has created Labor shortages in civilian sectors, with many work permits for Palestinians also revoked, complicating efforts to fill job openings.
The country's military spending had already surged by 65 percent in 2024, reaching $46 billion before the Iran conflict began. This represented 8.5 percent of the country's GDP, ranking second-highest globally after Ukraine, according to the Stockholm International Peace Research Institute.
Government Fiscal Strategy Moving Forward
Facing mounting fiscal pressures, the Israeli government is considering three primary strategies to address the widening budget deficit, according to expert analysis. These options include cutting public spending on health and education, increasing taxes further, or resorting to additional borrowing, which could push the public debt-to-GDP ratio above 75 percent.
Social services are already buckling under pressure, with many Israelis having spent hundreds of days on reserve duty over the past 20 months, while thousands more have been displaced from border areas. The cumulative effect of multiple conflicts has strained the country's social support systems beyond their standard capacity.
The government's request for emergency defense funding, while simultaneously cutting social services, highlights the difficult trade-offs facing policymakers. The $200 million in requested cuts to health, education, and social services represents a significant reduction in public services at a time when citizens are already facing hardship due to military operations.
Regional Economic Context and Comparisons
The Israeli economic impact must be understood within the broader context of regional military spending and conflict costs. Iran, despite suffering an estimated 606 deaths and 5,332 injuries according to its Health Minister, faces significant economic pressures from the conflict.
Global oil markets responded with significant volatility, with Brent crude jumping 8 percent following the initial Israeli strikes and briefly topping $78.50 per barrel. This price surge reflects broader concerns about regional stability and potential disruptions to global energy supplies through critical chokepoints, such as the Strait of Hormuz.
The conflict occurred amid already elevated global military spending, with the Financial Express reporting that 2024 marked "a grim milestone in international geopolitics, with armed conflicts proliferating at an alarming rate". Over 50 nations were embroiled in active disputes in 2024, creating widespread economic strain that extended beyond the Middle East.
Impact on Global Economic Stability
The Israel-Iran conflict has generated broader concerns about global economic stability, particularly regarding energy markets and supply chain disruptions. Oxford Economics analysis suggests that sustained conflict could push oil prices higher and create persistent economic headwinds.
Three economic scenarios have been modelled by analysts, ranging from mild sanctions escalation to a full-scale regional war with the closure of the Strait of Hormuz. Even the most benign scenario could result in Iranian oil production decreasing by about 1 percent of global supply, keeping Brent crude around $75 per barrel.
The interconnected nature of modern global economics means that regional conflicts can have far-reaching impacts on international trade, investment flows, and economic growth. The Israel-Iran conflict has already demonstrated this through its effects on aviation, shipping, and energy markets worldwide.
Technology Sector Resilience and Challenges
Israel's technology sector, often regarded as the backbone of its modern economy, has demonstrated remarkable resilience during the conflict period. The sector's ability to operate remotely and its integration with global markets have helped maintain some economic stability despite the military operations.
However, startup relocations and declining foreign investment pose longer-term challenges to the tech sector's continued growth. International investors are becoming increasingly cautious about committing capital to regions experiencing active military conflicts, which could potentially impact future innovation and development.
The success of Israeli unicorn companies and their acquisition by U.S. investors continues to provide economic strength, but sustained conflict could erode these advantages over time. The tech sector's contribution to GDP and exports makes its continued health crucial for Israel's economic recovery.
Insurance and Risk Assessment Implications
The conflict has underscored the increasing importance of war risk insurance and the associated costs of operating in conflict zones. Shipping insurance premiums have increased due to perceived risks in regional waterways, with these costs ultimately passed on to consumers through higher logistics expenses.
International businesses are reassessing their risk exposure to Middle Eastern operations, which could lead to a reduction in foreign direct investment in the broader region. This risk aversion extends beyond Israel and Iran, affecting neighbouring countries and regional economic partnerships.
The aviation industry's response, including the suspension of flights and aircraft evacuations, demonstrates how quickly military conflicts can disrupt modern economic systems. These disruptions create cascading effects throughout interconnected global supply chains.
Looking Ahead: Recovery and Reconstruction Costs
As the immediate military phase of the conflict concludes with the ceasefire agreement, Israel faces the substantial challenge of economic recovery and reconstruction. The $12-20 billion total cost estimate does not include the expenses associated with rebuilding damaged infrastructure and compensating affected businesses.
The government's fiscal position has been severely weakened, with limited options for addressing the budget deficit, either through significant tax increases or substantial borrowing. Each option carries its own set of economic and political risks that could impact long-term stability.
The conflict has highlighted the substantial financial costs of modern warfare, even for technologically advanced nations with sophisticated defence capabilities. These lessons will likely influence future strategic planning and budget allocation decisions across the region.
Broader Economic Lessons and Policy Implications
The Israel-Iran conflict offers valuable insights into the economics of modern warfare and the fiscal challenges faced by nations engaged in high-intensity military operations. The $725 million daily cost demonstrates how quickly defence expenditures can overwhelm national budgets, even for relatively wealthy countries.
The experience highlights the importance of maintaining fiscal reserves and economic flexibility to handle unexpected military crises. Countries worldwide are likely to examine their preparedness for similar scenarios, particularly given the proliferation of global conflicts noted in 2024.
Social services and civilian infrastructure often bear the hidden costs of military conflicts, as governments redirect resources to defence priorities. The Israeli experience shows how quickly public services can come under strain during extended military operations.
Conclusion: Economic Recovery in an Uncertain Environment
Israel's economy faces a challenging recovery period following the conclusion of its 12-day conflict with Iran. With immediate costs exceeding $12 billion and potential total impacts reaching $20 billion, the nation must navigate significant fiscal pressures while maintaining essential public services and economic competitiveness.
The conflict has demonstrated both the resilience and vulnerability of modern economies during times of military crisis. While Israel's tech sector and underlying economic strength provide advantages for recovery, the scale of expenditures and ongoing regional tensions create substantial challenges for policymakers.
The government's choice between cutting social spending, raising taxes, or increasing borrowing will shape Israel's economic trajectory for years to come. Each option carries risks that could affect everything from unemployment rates to international competitiveness.
As global conflicts continue to proliferate, the Israeli experience provides valuable lessons about the actual costs of warfare in interconnected modern economies. The speed with which military expenditures can overwhelm national budgets underscores the importance of diplomatic solutions and conflict prevention strategies.
The fragile ceasefire agreement brokered by President Trump offers hope for regional stability. Still, the underlying tensions and economic pressures created by the conflict will require ongoing attention and resources to be addressed effectively.