The Taub Center is proud to present the State of the Nation Report 2024. The chapters of the report will be released gradually over the coming month. The chapter being presented now, the first of eight chapters, focuses on macro-economic trends. All chapters will be available on the Taub Center’s website as they are published.
Israel’s Economy 2024: A Nation at War
Taub Center researchers, Prof. Benjamin Bental and Dr. Labib Shami, analyze the Israeli economy against the backdrop of the ongoing war, examining its effects on key economic sectors and presenting forecasts for the coming years. Additionally, they highlight long-term trends in the Israeli economy unrelated to the war.
In the early stages of the war, military expenditures and reconstruction costs were estimated at approximately NIS 250 billion (about 13% of GDP), based on the assumption that the conflict would conclude during 2024 and that no northern front would open. Additional costs due to the prolonged conflict and northern fighting have not yet been systematically assessed but are likely to amount to an additional NIS 100 billion (about 5% of GDP).
Despite a decline in GDP in the last quarter of 2023, moderate recovery observed in early 2024
The researchers show that GDP fell sharply in the last quarter of 2023 at an annual rate of 4.1% compared to the same period in the previous year. However, this decrease was much smaller than the decline during the second quarter of 2020 — the first quarter of the Covid-19 crisis — when GDP fell 8% compared to the same period in 2019. In the first two quarters of 2024, the pace of GDP contraction significantly slowed.
When examined by GDP components, the rise in public consumption offset the drop in investments and more. Most of the decline in investment is attributed to a decrease in construction investments due to a severe shortage of construction workers, caused by an embargo on Palestinian workers entering Israel. GDP growth for 2024 is expected to be negative, signifying a substantial decline in per capita output (given Israel’s positive population growth). With regard to foreign trade, the decline in imports during the last quarter of 2023 was greater than the decline in exports, but this trend was somewhat inverted in the first two quarters of 2024. Since the share of exports in GDP is very close to that of imports, these changes had little impact on Israel’s current account surplus. A surprising and rapid recovery was observed in private consumption, which shifted from a sharp drop of 7.8% in the last quarter of 2023 to an increase of 3.5% in the third quarter of 2024, compared to the same periods in the previous year.
Exceptional budget increases — the changes in public expenditures during the war
The study reports on government expenditures and revenues, including those in 2022 (during the period of the Bennett-Lapid government known as “the government of change”), highlighting the dramatic expenditure increases that began in the last quarter of 2023, when the war broke out, compared to previous periods. Government revenues were already trending downward before the war and hit their lowest point at the end of 2023 but recovered during 2024 to levels similar to those recorded in 2022. After large deficits in the last months of 2023, the deficit stabilized in 2024 at an average monthly level of about NIS 12 billion, amounting to an annual calculation of 7%–8% of GDP.
The study shows that without adjusting for population size, civilian expenditures (broadly, including everything that is unrelated to defense and security) increased in 2023–2024 compared to 2022. In fact, they have risen by about NIS 5–6 billion per month since the war began. Adjusting civilian expenditures for inflation and population growth reveals that, until the outbreak of the war, civilian expenditures for 2023 were very similar to those in 2022. However, due to the significant civilian needs in the first months of the war, these expenditures were higher than those recorded in the same period the previous year. Patterns then shifted. Despite ongoing and rising civilian needs, monthly civilian expenditures remained constant later in 2024, effectively returning to pre-war levels after adjustment. In contrast, monthly defense expenditures, which averaged about NIS 7 billion in 2022 and 2023 before the war, doubled during the war months.
Economic forecasts indicate dramatic increases in deficits and debt burden
Deficits: Before the war, both the Bank of Israel and the International Monetary Fund (IMF) predicted a deficit of less than 2% for 2023, with S&P even forecasting a small surplus. After the outbreak of the war, estimates were revised to 5%, and the year ended with an actual deficit of 4.1% of GDP. The Bank of Israel revised its 2024 deficit forecast from 1.5% to 6.6% of GDP (in line with the Ministry of Finance’s assessment), while S&P adhered to its earlier estimate that the deficit would reach only 4.4% of GDP. The IMF, even before the escalation in the North, predicted an 8% deficit for 2024 and has recently updated its forecast to 9%. The deficit in 2025 is also expected to remain significantly higher than it would have been without the war.
Debt-to-GDP ratio: All three entities revised their projections for Israel’s debt-to-GDP ratio due to the war. At the end of 2022, the ratio was 60.5% and was expected to continue declining. The IMF even anticipated it would drop below 60% by 2023. However, the war’s impact on the deficit and GDP growth reversed this trend, with the ratio reaching 62% at the end of 2023. According to updated forecasts, this figure will approach or exceed 70% in 2024–2025.
Israel’s high-tech industry remains a stable economic anchor
The high-tech sector occupies a central and unique role in Israel’s economy. In 2023, it employed 11.6% of salaried workers aged 25 and older, generated about one-fifth of GDP, and accounted for 53% of Israel’s exports. Between 2018 and 2023, high-tech contributed about 40% of Israel’s GDP growth due to increased employment and high labor productivity. Consequently, the sector accounted for approximately 24% of all tax revenues in 2020 and about 36% of income tax revenues from wages in 2021, reflecting the high salaries of its workers.
In the last quarter of 2023, during the early months of the war, there was a slight decline in high-tech jobs. As to wages, the study examines wage trends in the industry and its three main subsectors — R&D, programming and consulting, and computer manufacturing — from 2012 to 2024, compared to other industries. In 2012, the average high-tech wage was twice that of other sectors, and by mid-2024, this ratio had grown to nearly three times. Wage developments in all three subsectors were similar, with the programming sector experiencing the most significant acceleration. These wage trends reflect employment growth and continued high demand for workers in the sector.
While Israel’s GDP accounts for only about 0.3% of global GDP and 1.6% of the US GDP, investments in Israeli high-tech in the 2019–2024 period constituted 2%–4% of global high-tech investments and 4%–8% relative to the US. During the Covid-19 years, global investors channeled substantial funds into high tech, leading to a sharp increase in investments in Israel. In the fourth quarter of 2021, Israeli high-tech investments were four times their pre-pandemic levels, exceeding $8 billion. In 2023–2024, global investment levels returned to approximately pre-pandemic levels, with a similar trend observed in Israel (with fluctuations). Despite uncertainties due to the ongoing war, notable investments occurred in the first half of 2024, with third quarter investments approaching $2.5 billion, comparable to 2019 levels. Even if the war adversely affects investments, the substantial capital inflow during the Covid-19 years ensures continued activity for several years.