Operation Protective Edge to cost NIS 8.5b

Operation Protective Edge

The cost assumes the operation will be similar in scope to Operation Cast Lead.

The total economic damage from Operation Protective Edge, which began yesterday, is estimated at NIS 8.5 billion, assuming that the operation will be similar to Operation Cast Lead in 2009, meaning a prolonged campaign that includes the entry of ground forces into the Gaza Strip. This is more expensive than Operation Pillar of Defense in 2012, which was restricted to air attacks and lasted only a short time.

The costs of the operation can be divided into two categories: direct costs, meaning the cost to the IDF, the cost of damage caused by missiles (e.g. property damage) and compensation for businesses; and indirect costs resulting from lost GDP.

One of the significant direct cost items is property damage. In Operation Pillar of Defense, for example, which lasted eight days, there were 1,250 cases of property damage, including buildings, vehicles, and agriculture. The volume of direct damage in that operation was estimated at NIS 50 million. If the current operation continues for at least 20 days, the estimated direct damage will be NIS 100 million.

Minister of Finance Yair Lapid said this morning in the Knesset Finance Committee that there are already 100 property damage claims totaling NIS 10 million. "Property tax teams are reaching the sites quickly and helping those whose property has been damaged," he said. "Because of the security situation, compensation will be assessed only after the campaign. We'll take care of everything, including both lost workdays and direct damage. Everything will be handled."

At the same time, the damage is not expected to affect the budget, since the money to cover the cost will come from a special Tax Authority fund, not the state budget. Nor will postponement for residents of southern Israel of income tax and VAT payments have any consequences for the budget. They will only affect cash flow, because no payments are being canceled. Nevertheless, the situation is expected to affect the deficit figures for August, which could be higher than expected. The effect of the campaign is already expected to dissipate in September.

The other significant direct cost involves the IDF budget. The cost of Operation Cast Lead was estimated at the time at NIS 3.3 billion in 2008 prices. Based on this calculation, the cost of the current operation is expected to reach NIS 3.5-3.7 billion (assuming 10% inflation for military products and a steep 15% shekel appreciation, compared with 2008). Operation Pillar of Defense cost the IDF NIS 200 million (less than 10% of the cost of Operation Cast Lead). It is important to qualify these calculations by saying that it is not yet known how many IDF reservists will eventually be called up, and how many days they will serve. This figure is of critical importance in calculating the cost for the IDF. Every reservist costs the IDF an average of NIS 500 a day.

It is also important to keep in mind that the cost of Operation Cast Lead did not include Iron Dome - a critical factor in Operation Pillar of Defense, and certainly also in Operation Protective Edge.

Van Leer Institute Prof. Michel Strawczynski estimates that every Iron Dome interception costs $100,000. 430 rockets were fired at Israel in Operation Pillar of Defense, making the cost balloon to $43 million (about NIS 170 million at the time). If we assume that the number of rockets is at least twice as many, the operational cost of Iron Dome will be at least NIS 300 million.

Indirect damage

The first level of indirect damage involves worker absenteeism and damage to companies' business. No compensation mechanism has been established yet, but it is reasonable to assume that it will be similar to those utilized in the two previous campaigns. It is believed that the Ministry of Finance will announce compensation for businesses and plants in southern Israel equivalent to what was granted in 2012 and 2009.

According to Tax Authority figures, the indirect damage of Operation Cast Lead totaled NIS 390 million after 22 days of fighting - NIS 450 million in 2014 prices. In contrast to 2009, however, Hamas's range of damage has significantly expanded, so defining the regions entitled to compensation is of decisive importance.

The second level of indirect damage, which is also the most difficult to calculate, involves loss of GDP during the campaign, referring mostly to GDP lost as a result of the halt in industrial production and a reduction in activity in the trade and services sector. According to calculations by senior economists, this damage amounts to 0.2% of GDP in the first 10 days of fighting. They add that the damage to GDP decreases with time, due to adaptation to the new situation and a concentration of shocks at the beginning of the campaign. If we assume that the operation lasts 20 days, the loss in GDP will be 0.4%, amounting to about NIS 4 billion. If the operation lasts an additional 10 days, the loss in GDP during these extra days will be 0.1% of GDP, or about an additional NIS 1 billion.

The jump in the defense budget

The defense establishment received NIS 2.45 billion in compensation for Operation Cast Lead in the 2009 budget. In 2013, on the other hand, the defense establishment received no compensation for Operation Pillar of Defense, because Ministry of Finance representatives claimed that the operation was short and was confined to flying hours and ammunition, which are in any case used in training, without any entry in the Gaza Strip by ground forces. Furthermore, in Operation Pillar of Defense, the government had a NIS 40 billion budget deficit, NIS 22 billion higher than the target (more than double the target). The situation today is slightly different. The current budget deficit is NIS 25 billion, NIS 5 billion below the target.

It is believed that if the operation is a long one and includes ground operations, the IDF will not accept less than NIS 3 billion in compensation. Even before Operation Protective Edge, the defense establishment was demanding a NIS 6-8 billion budget supplement for 2015. The total supplement permitted for all government ministries for 2015 according to the new spending rule is NIS 8 billion, while at the same time, Minister of Finance Yair Lapid has declared that there will be no tax increases.

Published by Globes [online], Israel business news - www.globes-online.com - on July 9, 2014

© Copyright of Globes Publisher Itonut (1983) Ltd. 2014

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