Israel's defense spending reached approximately 8 percent of gross domestic product at its 2024 peak, a level of military expenditure not seen in the country since the existential conflicts of the 1970s. While the spending has declined somewhat as the operational intensity of the Iran and Lebanon campaigns has reduced, it remains dramatically elevated compared to pre-October 2023 levels, and the Knesset is now confronting the fiscal legacy of that period in budget negotiations that analysts describe as among the most complex in decades.
The 2026 state budget, which was raised to 144 billion shekels, is the focal point of the current political argument. The defense establishment is pushing for sustained high appropriations through at least 2030, arguing that the strategic gains of the past two years must be consolidated and that a premature reduction in military investment would squander the deterrence effect of the recent operations against Iran and Hezbollah. The Finance Ministry, by contrast, has demanded cuts of up to three percent across all government ministries as part of an effort to bring the deficit below 3.9 percent of GDP — the ceiling endorsed by the Bank of Israel Governor.
The Fiscal Math
The numbers are difficult to reconcile. Total war-related costs since October 7, 2023 have run into the hundreds of billions of shekels when direct military spending, reserve system compensation, business disruption payments, and infrastructure damage are aggregated. Revenues have partly recovered as the economy has rebounded — the Bank of Israel projects around 5 percent GDP growth in 2026 — but the structural deficit created by wartime expenditure does not disappear with a single good growth year.
We fought a war that needed to be fought. Now we have to pay for it in a way that doesn't destroy the civilian economy we were protecting. That is the challenge sitting in front of us.
The debt-to-GDP ratio has risen significantly from its pre-war level, and the Finance Ministry has signaled that a multi-year consolidation path is necessary to bring it back to a level that international credit rating agencies and bond market investors consider sustainable. Israel's sovereign credit rating has been under pressure from the major agencies since the conflict began, and any fiscal slippage beyond the committed deficit ceiling risks a further downgrade that would raise borrowing costs across the economy.
Reserve System Costs
One of the less visible but substantial fiscal pressures is the cost of the reserve system. Hundreds of thousands of Israelis have served multiple extended reserve rotations since October 2023, and the state is required to compensate reservists and their employers for income lost during service. The aggregate bill for reserve compensation over the conflict period runs to tens of billions of shekels — a figure that does not include the harder-to-quantify economic output lost when skilled professionals spend months away from their regular employment.
The new multi-year IDF strategic plan, covering 2026 to 2030, is expected to include proposals to restructure the reserve system in a way that reduces the burden on the most frequently deployed units while maintaining readiness. Implementation will require both regulatory changes and investment in training infrastructure — both of which cost money that is currently contested in the budget negotiations.
Civilian Economy Needs
Competing with the defense lobby for budget resources are the housing, education, and health ministries, all of which entered the war period with pre-existing funding pressures that have only intensified. Housing prices in major cities have continued to rise despite elevated borrowing costs, and the government's commitment to build 50,000 affordable units over the next several years requires sustained capital allocation. The political task of balancing these competing demands — all of them legitimate, none of them fully fundable at the levels being requested — will define the current coalition's record through the remainder of its term.