Israelis are bracing for a challenging 2025 as they confront a staggering 40-billion-shekel ($11 billion) war bill, a consequence of the ongoing conflict and heightened national security needs. This financial burden translates into higher taxes, reduced disposable income, and increased costs for essential goods and services, potentially exacerbating existing social and political tensions.
The cost is primarily attributed to a series of recently implemented tax hikes and spending cuts, including a 1% increase in value-added tax (VAT). These measures are expected to impact every household, dominating public discourse and media coverage. A popular online calculator developed by the business newspaper ‘The Marker’ allows households to estimate their individual share of the burden, further highlighting the widespread concern. One Israeli mother, Adi Einbinder, shared on a radio show that the increased costs would exceed 17,000 shekels annually for her family, forcing them to rely on financial support from their parents.
Since the Hamas attack in 2024 and the subsequent multi-front conflict, Prime Minister Benjamin Netanyahu’s government has prioritized national security under the motto “Never Again.” This commitment entails a significant, long-term increase in military spending, even with a ceasefire in Lebanon and reduced fighting intensity in Gaza. The defense budget is projected to rise by at least 20 billion shekels annually (1% of GDP) over the next decade. The 2025 defense allocation alone reaches 107 billion shekels, a 65% surge compared to pre-war levels.
Economist Momi Dahan from Hebrew University points out that until now, the war’s financial burden was largely absorbed through government loans. The current shift towards increased taxes and reduced borrowing places the cost directly on the public.
Beyond the direct military expenditures, the conflict has negatively impacted Israel’s $525 billion economy. The construction and tourism sectors have experienced significant declines, and widespread labor shortages plague various industries due to increased reserve duty call-ups. While GDP growth was a mere 0.4% in 2024, a rebound is anticipated in 2025, although likely constrained by the austerity measures.
People walking in a city
These economic challenges are expected to further polarize Israeli society, potentially accelerating the emigration of skilled workers seeking better opportunities abroad. Psychologist Mooli Lahad emphasizes the potential strain on those who feel burdened or disregarded by the government, particularly those who constitute the economic backbone of the country.
To address the soaring budget deficit, which reached 7.7% of GDP in 2024 due to record borrowing, the government aims to reduce it to approximately 4.5% in 2025. This necessitates the implementation of fiscal measures that will inevitably increase the cost of living in an already expensive country. Non-profit organizations like Pa’amonim report a surge in families seeking financial guidance, reflecting the growing economic anxieties. The situation is further complicated by rising interest rates, impacting mortgage and loan payments, and previous political turmoil stemming from the government’s attempt to overhaul the judiciary in 2023.
The government’s austerity plan includes a three-year freeze on adjustments for income tax bands, tax benefits, and state allowances, despite inflation exceeding the government’s target. Public sector salaries will also remain frozen, while property taxes are set to increase. While there’s a general acceptance of the need for financial sacrifices to ensure national security, criticism arises from the perceived avoidance of cuts that would affect the ruling coalition’s right-wing political base. The government faced backlash for maintaining all existing ministries and preserving certain political handouts, while also abandoning plans for levies on sugary drinks due to potential opposition from Orthodox Jewish communities.
As these austerity measures take hold, emigration, already doubled in the past two years, could further increase, particularly among highly skilled professionals. Simultaneously, Netanyahu confronts the contentious issue of mandatory military service for the ultra-Orthodox community, currently exempt. Resolving this matter will inevitably alienate one segment of society, adding to the existing tensions. The confluence of economic hardship, social divisions, and political challenges presents a complex and uncertain future for Israel in 2025.
