War Costs Put Public Services at Risk of Collapse

Renewed fighting in Gaza and higher defense funding needs will put Israel’s already strained public services at risk of collapse, said Prof. Karnit Flug, a former governor of the Bank of Israel and current senior fellow at the Israel Democracy Institute (IDI).

These services include hospitals, schools, and public transportation, she said, speaking to The Times of Israel ahead of this week’s IDI Eli Hurvitz Conference on Economy and Society in Jerusalem.

Meanwhile, the looming menace of economic sanctions and international isolation by Israel’s Western allies over the country’s conduct in Gaza is feared to further impinge on the quality of life of Israelis.

All these factors threaten to bring down the standard of living, curtail the country’s growth engines, and trigger a massive outflow of taxpayers and human capital, unless the government changes its course of policy, cautioned Flug.

“What worries me is that, without changes in the government’s course of budget policy and without internalizing the potential snowball effect of sanctions and restrictions, Israel will find itself on a very risky path,” Flug said. “It’s not sustainable to increase the burden on the part of the population that serves in the country, pays taxes, and has high productivity, because they are also the ones who are the most mobile [to leave the country], and we don’t want to go down that road. Israel is a small country with very few natural resources, an economy dependent on human capital as its main source of growth, and adequate infrastructure that is necessary to meet its potential for growth,” she said.

This year, Israelis are already grappling with higher taxes, eroding their disposable income, while receiving fewer public services as the government implements austerity measures to finance ballooning war costs. Meanwhile, Israel’s government, led by Prime Minister Benjamin Netanyahu, has been harshly criticized for failing to make necessary changes to the composition of budget expenditure, in light of higher future defense spending and the need to bring down the country’s debt to help the war-torn economy recover.

Without changes in the government’s course of budget policy and without internalizing the potential snowball effect of sanctions and restrictions, Israel will find itself on a very risky path.

At this week’s conference, Flug will present the findings of a study on the repercussions of the government’s shift in budget priorities since the outbreak of war with the Hamas terror group on Oct. 7, 2023.

The study also examines the implications that the planned increase in defense spending might have for civilian spending and public services.

Flug said that, in the study conducted with IDI researcher Roe Kenneth Portal, the two found that during the war, funds earmarked for social welfare needs were mainly spent on war-related expenses, such as medical bills for those affected by the war, emergency infrastructure, and rebuilding costs for areas damaged or destroyed on and after Oct. 7. As a result, she said, spending on basic public services was squeezed or compromised.

While the proportion of the budget allocated for social welfare remained unchanged relative to 2019, its composition has shifted during the war to answer the pressing needs of reserve soldiers and evacuees from the Gaza envelope and Northern borders, to provide emergency infrastructure, and to support the budget of the Tkuma reconstruction directorate, according to the study.

“Civilian services such as education, health, and welfare, and the level of infrastructure that comes with these services, have a direct positive impact on both the quality of life and growth of the economy,” said Flug. “Even before the war, these services were at a relatively modest level in Israel.”