Israeli public debt increases to 68% of GDP due to war costs

The Israeli government has financed its war in Gaza by increasing public debt, which rose to approximately 68 per cent of its GDP, according to a report by the Bank of Israel issued on Wednesday.

“The war caused the risk premium in the economy to increase at the beginning of the war, and it moderately increased additionally over the course of the year due to increased geopolitical risk,” said the bank. “The government implemented significant fiscal adjustments, mainly on the revenue side, which took effect in early 2025 and are expected to offset the permanent increase in war-related expenses.”

At the end of last year, following the ceasefire in Lebanon and predictions of reduced security risks, markets witnessed an improvement. The shekel strengthened, local stock prices rose and the risk premium declined, although it remained higher than before the war. Government bond yields returned to pre-war levels.

The report noted that, “The war’s impact on economic activity was primarily due to the decline in labour supply, mainly because of the ban on the entry of Palestinian workers, the recruitment of reservists [to fight in Gaza and Lebanon], and the difficulty for workers in conflict areas to reach their workplaces.” The increase in the burden of military service, and especially reserve service, will continue to exact a considerable economic toll, it added.

Developments related to the war significantly impacted economic activity last year, reducing the economy’s productive capacity, particularly due to reduced labour market supply. The ban on Palestinian workers entering Israel for work reduced private sector labour supply by 3.4 per cent, in addition to the loss of approximately 1.5 per cent of the labour force due to military reserve service.

Tech start-up production declined sharply, contributing to a 0.8 per cent decline in output. This decline reflects the decline in global demand for start-up investments since mid-2022.

READ: Majority of Canadians support continued arms ban on Israel, arrest warrant for Netanyahu: Poll