How Will Israel Pay for Its War?

While the world’s eyes are on Gaza, another drama is unfolding in Jerusalem. There, lawmakers and government ministers are tussling over how to pay for the war against Hamas. There’s a debate over how much, if any, of the money should come from special allotments that were made earlier this year to the ultra-Orthodox and to settlers in the West Bank.

Eight days after the murderous Oct. 7 attack by Hamas, Bezalel Smotrich, the radical rightist who serves as finance minister in the government of Prime Minister Benjamin Netanyahu, said at a news conference that he had issued instructions to change the order of budgetary priorities. At the time, he didn’t seem to exempt so-called coalition funds, much of which are earmarked for the ultra-Orthodox and the settlers. Coalition funds are an obvious potential source for the war effort because they’re not required for the basic operations of government.

More recently, though, Smotrich has shown little interest in diverting funds intended for the ultra-Orthodox and the settlers to pay for the war and for aid to displaced civilians. “There really isn’t a lack of money,” Smotrich said, according to an article in TheMarker, a business daily published by Ha’aretz. Pressed on whether some war funding would come from the ultra-Orthodox and the settlers, he said, “At least in the war, let’s put populism aside.”

Smotrich’s seeming protection of the special allocations to the ultra-Orthodox and the settler movement isn’t likely to sit well with many Israelis. Impatience with those two groups was rising even before the war. It’s likely even stronger now.

One reason is that nearly half of ultra-Orthodox men don’t work, and the vast majority don’t serve in the army. (The Hamas attack did produce a burst of enlistments.) The ultra-Orthodox have their own school system, funded by the government, that teaches few if any skills needed by the modern work force. The budget passed last spring increases state funding for religious seminaries by at least 50 percent and more than triples funding for the ultra-Orthodox school system, according to an assessment by the Berl Katznelson Center, a political research group.

As for the settlement movement, its rapid expansion in the West Bank, subsidized by the right-wing government, enrages Palestinians as well as Arabs in other countries. (The International Court of Justice has stated that the settlements violate international law — a stance the Israeli government rejects.) Smotrich is one of the settler movement’s strongest supporters. He obtained new powers over civilian life in the West Bank as a condition of joining Netanyahu’s government. He approved construction of thousands more homes in the occupied territories and made it harder for Palestinians to build homes and move around. He has written that his goal is a full Israeli takeover of the West Bank, with Arab residents given local self-governance but no right to vote, at least at first, in national elections.

While the political system hasn’t stopped Smotrich and other right-wing figures in the Netanyahu cabinet — including Itamar Ben Gvir, the minister of national security — economic reality might slow them down. As war expenses grow, there will be increasing pressure to take back some of the special aid promised to the ultra-Orthodox and the settlers.

Israel has mobilized about 360,000 soldiers for a possible invasion of Gaza and to defend Israel from a potential full-scale attack by Hezbollah across the northern border. That takes many prime-age workers out of the labor force. In addition, many Israelis have been evacuated from towns and villages near Gaza and the border with Lebanon. Some are being housed at government expense. Revenue from tourism has shriveled. In the long run, perhaps the biggest expense will be strengthening defenses so people feel safe returning to those areas. The supposedly impregnable fence on the border with Gaza clearly wasn’t.

The Israeli shekel, which was already losing strength, has fallen 5 percent against the dollar since the beginning of the month, before the Hamas attack. The value of the shekel is a “seismograph” of investors’ feelings about Israel, Karnit Flug, a former governor of the Bank of Israel, told me. Israeli stock indexes have slumped and the cost of buying protection against the default of government bonds has soared. Standard & Poor’s Global Ratings, Moody’s Investors Service and Fitch Ratings have warned that they may cut the credit ratings on those bonds.

It’s important not to overstate Israel’s financial woes. Before the Hamas attack, the economy was healthy, unemployment was low, inflation was under control, the government budget deficit was small (at around 1.3 percent of gross domestic product), foreign currency reserves were ample and what’s called the current account — a broad measure of trade in goods and services plus investment income — was in surplus. The Bank of Israel projected on Monday that if the war is mostly over by the end of December and is confined to Gaza, gross domestic product growth will come in at 2.3 percent this year (down 0.7 percentage point from its prewar projection) and 2.8 percent in 2024 (down 0.2 percentage point from its prewar projection). Those are healthy numbers.

On the other hand, things could turn out much worse — say, if the Iran-backed Hezbollah forces in southern Lebanon attack on a large scale or if things go badly for Israel in Gaza. Even a prolonged period of uncertainty would be harmful. Manuel Trajtenberg, an Israeli economist who has served in the Knesset and in government advisory roles, told me that Israel’s predicament is unprecedented since the nation’s founding in 1948: lots of troops mobilized, many people displaced from their homes, and no idea when it will end. “People are so devastated by this,” he said. “The idea of Jews being refugees in their own country. It’s inconceivable and we are experiencing that now within Israel.”

As a small country in a dangerous neighborhood, Israel gets less benefit of the doubt from investors than, say, the United States does. With that in mind, Trajtenberg argues that Israel should keep its financial house in order in part by diverting funds from the ultra-Orthodox and settlers to pay for the war, rather than just borrowing the money. “Once you go that route,” of borrowing rather than reprioritizing, “it’s a very bad signal for a country that’s already going through a crisis,” Trajtenberg said. “You want to signal that you can be fiscally responsible.”

Flug, the former central bank chief who is now the vice president for research at the Israel Democracy Institute in Jerusalem, had a similar message. “I think it’s very irresponsible” to run a big budget deficit, she told me. “We can’t afford getting to a point where our debt sustainability will be questioned by the market.”

At the moment Israel remains in shock over the lethal Hamas attack and torn over how to deal with the threat that continues to emanate from Gaza. As the weeks go on, though, I predict, people will return to the issues that troubled the country before Hamas struck. And the public pressure for givebacks from the ultra-Orthodox and the settlers — overlapping groups, by the way — is bound to increase.

Elsewhere: More Clean Energy, More Jobs

From when President Biden took office through this August, private companies announced plans for about 94 gigawatts of new clean power generation projects, Heather Boushey, who is the chief economist of what Biden calls his Investing in America cabinet, wrote in a blog post on Monday. Employment in power generation and supply, which had fallen about 5 percent in the decade since 2011, has rebounded and now exceeds its 2011 level, according to a chart in her post. West Virginia, Oklahoma and New Mexico have led in the percentage growth of clean energy jobs, the post added. The Biden administration is trying to show that fighting climate change doesn’t have to be a job killer.

Quote of the Day

“Work, for many on the career track, is greedy. The individual who puts in overtime, weekend time or evening time will earn a lot more — so much more that, even on an hourly basis, the person is earning more.”

— Claudia Goldin, “Career and Family: Women’s Century-Long Journey Toward Equity” (2021)

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