When economist John Maynard Keynes set out to advise Britain on how to fund its war against Nazi Germany in 1940, he didn’t bury his recommendations in academic journals. Instead, he wrote a series of concise, accessible essays in The Times of London, aiming his arguments squarely at the decision-makers and ministers who might never open an economics journal but who held the keys to national policy. His ideas were read, understood, and, for the most part, implemented. As a result, Britain managed to avoid the catastrophic inflation that had accompanied World War I.
Israel finds itself today in a comparable moment of reckoning. Now more than two years into its war against Hamas in Gaza, with additional threats on multiple fronts, the country faces not only a costly and protracted military campaign but also the question of how to sustain that campaign without crippling its economy.
The war’s economic toll
For Israel, a small nation of just 10 million, the burden of this conflict is immense. And while the deepest wounds are counted in lives lost and communities shattered – on both sides – the financial costs are steadily mounting. And they are no less dangerous.
In August, two of Israel’s most respected economic minds – Jacob Frenkel and Karnit Flug, both former governors of the Bank of Israel – chose to speak out. Like Keynes, they bypassed academic circles and went straight to the public, publishing a stark and urgent warning in the Israeli daily Yediot Aharonot.
Their argument was clear: The longer this war continues without an economic strategy, the greater the risk to Israel’s long-term security and stability.
Among their concerns is the recent strategic shift toward a complete military conquest of Gaza. Should this evolve into a prolonged occupation, international law would impose on Israel the obligation to provide for the basic needs of Gaza’s population. The implications of that are massive – both morally and financially.
Even before this escalation, the UN, the World Bank, and the European Union estimated in early 2024 that rebuilding Gaza would cost around $53 billion. That was several months ago. The scale of destruction has only intensified since then, and the rebuilding cost could now be even higher. Gaza City is being reduced to rubble, street by street.
Isolation and erosion
Compounding this internal pressure is a growing wave of global isolation. Israel’s economy is built on exports and international partnerships, but diplomatic and commercial fallout from the war is steadily eroding that foundation.
Foreign governments and companies are reconsidering their ties. Notably, Norway’s sovereign wealth fund – one of the world’s largest – announced it would divest from several Israeli firms, signaling a broader shift toward economic disengagement.
The consequences are already measurable. In June, Israel and Iran fought a 12-day war. Short though it was, the economic impact was sharp. In the second quarter of this year, Israel’s GDP contracted by 3.5%. Consumer spending dropped by more than 4%, while private investment fell a staggering 12%. Exports declined, imports rose, and business confidence faltered.
And this may only be the beginning. Intelligence assessments suggest that Iran is preparing for a second round of conflict, which could exact an even higher toll.
Resilience under pressure
It has become increasingly clear that military strength alone cannot guarantee national security. Tanks, missiles, and intelligence networks depend on the vitality of the economy that funds and sustains them. If that foundation begins to crack, no amount of firepower can compensate.
Up to now, Israel’s economy has shown remarkable resilience under pressure. But resilience, like savings, is finite. Budget deficits are widening. Borrowing costs are climbing. And without a clear, long-term fiscal plan, the resilience we rely on may not last.
History offers clear guidance. After the Japanese attack on Pearl Harbor in December 1941, the United States mobilized not just its military but its entire economy. Coming out of the Great Depression, America doubled its GDP – twice – over the next four years. That industrial surge ultimately overwhelmed both Germany and Japan. The lesson is straightforward: Military victory is inseparable from economic mobilization.
Learning from Keynes
Keynes outlined a wartime economic strategy that began with clear decisions about resource allocation. The entire workforce had to be mobilized. Defense spending had to come first – but civilian needs could not be neglected. Most importantly, the costs had to be shared equitably, not borne solely by the working class.
He understood that if wages were paid in full during wartime, and citizens tried to spend their incomes in an economy producing mostly weapons and tanks, inflation would spiral. Instead, he proposed deferred pay – essentially compulsory saving – where a portion of wages would be held back during the war and repaid when peacetime production resumed. The policy worked. Inflation was kept in check, and the British economy held together.
Israel has employed similar measures in past wars. Perhaps it is time to consider them again. Today, Israelis save very little. If defense spending sharply reduces what is available for consumption but citizens continue spending at pre-war levels, inflation is almost inevitable. Voluntary restraint is unlikely to be enough. As Keynes argued, when voluntary saving fails, compulsory saving becomes a necessary alternative.
The cost of delay
According to some forecasts, the Gaza War could cost Israel up to $400 billion in lost output over the coming decade. That figure reflects not only the cost of reserve call-ups but also the chilling effects of international boycotts, investor hesitancy, and reputational damage. The economic toll is already rippling across the region. The Palestinian economy in the West Bank is in crisis. Gaza’s economy has all but disappeared. Even Egypt’s fragile economy has felt the strain. The International Monetary Fund now predicts lower growth across the Middle East and North Africa.
Israel cannot afford to ignore the economic front. However, today’s budgetary process is marred by political horse-trading, bloated spending, and short-term thinking. The contrast between the professionalism of the Israeli Air Force and the chaos of the government’s economic management is growing starker by the day.
A radical plan
In 1940, Keynes titled his plan “How to Pay for the War: A Radical Plan for the Chancellor of the Exchequer.” It was radical not because of its economic content but because it dared to tell the public the truth: Sacrifice was essential. That truth must be told here, too.
Israelis deserve to know what is required to maintain both national security and economic health. They deserve a plan that protects the economy from inflation and collapse, while also distributing the burden fairly across society. They deserve leadership that tells them the hard truths – and acts on them.
If we fail to organize the economy for the long term, we risk repeating the mistakes of the past. After the 1973 Yom Kippur War, Israel stumbled into a lost decade marked by recession, high inflation, and deep structural damage. It took years to recover.
This must not happen again. With wise strategic thinking, it can be prevented.■
Shlomo Maital heads the Zvi Griliches Research Data Center at the S. Neaman Institute, Technion. He blogs at www.timnovate.wordpress.com.