Disheartened Israelis struggle with war funding austerity steps

JERUSALEM – More taxes. Less disposable income. Higher food, water and electricity bills.

As 2025 starts, Israelis face a 40 billion shekel (S$15.04 billion) war bill that will likely deepen social and political divides.

A long list of taxation measures on top of a 1 per cent rise in value-added tax has just gone into effect.

Every household will feel the squeeze, and it’s one of the main topics of conversation on radio and other media.

Business newspaper ‘The Marker’ created a highly popular online calculator that estimates the price tag per household based on a dozen questions. 

“It will cost us more than 17,000 shekels a year,” Ms Adi Einbinder, a working mother of three with a husband in hi-tech, said on a recent radio show.

At 40 years old, she added, she and her husband are forced to lean on their parents. “We’re supposed to be helping them right now. We feel trampled.”

In the 15 months since Hamas’ brutal attack on Israel from Gaza, triggering a multi-front conflict with Iran-backed militias, Prime Minister Benjamin Netanyahu’s government has been reshaping national security.

It’s guiding motto of “Never Again” stresses how even with a ceasefire in Lebanon and fighting in Gaza having eased from a year ago, Israel’s military spending is on a long-term upward trajectory.

The government will increase the defence budget by an estimated annual minimum of 20 billion shekels – 1 per cent of gross domestic product – over a decade.

The 2025 defence outlay totals 107 billion shekels, 65 per cent higher than pre-war spending. 

“Until now, the Israeli public hasn’t directly borne the budgetary costs of the war,” says Dr Momi Dahan, an economics professor at Jerusalem’s Hebrew University. “They were funded by government loans. Now the government will borrow less and take the rest from the public.”

While fighting has devastated Gaza and large parts of Lebanon, Israel’s US$525 billion (S$719.89 billion) economy has also suffered.

Construction and tourism have slumped, and almost all industries have experienced labour shortages with so many people being called up for reserve duty.

The government estimates that GDP rose just 0.4 per cent in 2024, making Israel one of the slowing-growing developed economies.

There will be a rebound in 2025, but the austerity measures will probably limit it.

Analysts say the shifts will further polarise a traumatised society experiencing increased emigration of skilled workers, many of who have done long stints of military-reserve duty.

“The difference will be between those who accept and others who feel harassed or disregarded by the government,” said Mr Mooli Lahad, an Israeli psychologist and trauma specialist.

The latter “are generally the economic backbone of the country, and for some of them it may be the straw that breaks the camel’s back.”

In 2024, Israel borrowed more than 260 billion shekels in international and domestic markets, almost a record for the country.

That sent its budget deficit soaring to 7.7 per cent of gross domestic product. To prevent debt from spiralling, the 2025 target deficit was set at around 4.5 per cent.

The increase in taxes and other fiscal measures to bolster the government’s finances will make what was already one of the advanced world’s most expensive countries even costlier.

Ms Sharon Levin, a spokeswoman for Pa’amonim, a non-profit organisation that provides guidance to households, cites widespread concern over how much harder things are getting.

“Over the past weeks, the number of families approaching us has more than doubled,” she said.

Many were already reeling from a rise in interest rates around two years ago, which pushed up payments on mortgages and business loans.

A government attempt to weaken the judiciary in 2023 caused huge political and social turmoil that also slowed the economy.

For the next three years, income tax bands, tax benefits and some state allowances won’t be adjusted for inflation, which at 3.5 per cent is above the government’s target.

Public-sector salaries will be frozen. Property taxes will grow by at least 5 per cent, the most in more than 15 years.

There’s a consensus among Israelis that much of the pain is necessary to keep the country safe. But there’s also criticism over the ruling coalition for avoiding some cuts that would hurt its right-wing political base.

It failed to shut any of Israel’s 30-plus government ministries, something it considered but abandoned because coalition members refused to part office, and insisted on keeping several billions worth of political handouts that support government voters.

It also scrapped plans to impose levies on sugary drinks, fearing a backlash in government-supporting Orthodox Jewish households.

As the austerity measures start to bite, they may help push more Israelis to move abroad.

The numbers have doubled in the past two years, according to government data. Those emigrating are often among the most skilled – such as doctors and scientists – with the best opportunities in other countries.

Meanwhile, Mr Netanyahu’s government faces a massive challenge of legislating military service for the ultra-Orthodox after decades of exemption.

They still want to be excused from it and their parties are in his governing coalition.

But after months of military reserve duty for many others, the rest of Israeli society is demanding an end to the exemption. Whichever side triumphs, the other will be angry. BLOOMBERG