The defense budget approved by the government for 2025 is NIS 117 billion, or 6.5% of Israel’s GDP. The amount is NIS 15 billion above the Ministry of Finance’s original proposal, and almost NIS 60 billion more than in a regular year. The budget is similar to that for the current year, but still high by international standards. Ukraine’s spending on defense is four times higher as a proportion of GDP, but, in those terms, Israel’s defense budget is larger than that of military powers such as Russia and the US and all the NATO countries.
The current budget is far from being unprecedented. After the Six Day War in 1967, defense spending as a proportion of GDP shot up to 19.7%, and for two years following the Yom Kippur War of 1973 it reached 28.7%, after which it consistently declined.
Prof. Esteban Klor, a professor of economics at the Hebrew University of Jerusalem and a senior researcher at INSS (Institute for National Security Studies), points out that until the outbreak of war in October last year, the defense budget had fallen steadily to 4% of GDP. "The consequences of a continued high defense budget are significant, because it comes at the expense of other things," he says. "It is therefore very important that the government should be able to channel its other expenditure to sources of growth. If in the past we could free up sources for things that did not lead to growth in the economy, the non-defense burden has now become heavier, because much spending has to be diverted to defense.
"In the 1970s, the defense budget was over 20% of GDP, and that led to the lost decade, because the economy could not support such high costs," Prof. Klor says. "I suggest that we won’t reach such levels. At the moment, we’re talking about a rise from about 4% to 7%, which are significant costs, but they should ensure reasonable security for the residents of the State of Israel. To avoid a repeat of the lost decade, it’s important to know what to do with civilian spending. Where should the other expenditure in the budget be directed so that we will be able to afford the defense expenditure, but also ensure the growth of the economy, which will secure the existence of the state? If we raise the defense budget disproportionately and don’t direct resources to growth engines, we will get into an unstable and dangerous economic situation."
To a large extent, the defense budget will determine Israel’s fiscal deficit in the coming years. "Before the war, a multi-year budget outline for the Ministry of Defense was agreed for 2023-2027, but October 7 threw everything up in the air," says Brigadier General (res.) Motti Besser, who served as financial adviser to the chief of staff and head of the Budgets Division of the Ministry of Defense from 1997 to 2000. "In the past, we aspired to see a constant decline in the proportion of GDP to 3%. We are now getting light years away from that."
Besser sees higher defense spending continuing even after the war. "I estimate that restoring our capabilities will require an additional NIS 10 billion a year. That is to say, over eight years, I see an addition of NIS 80-100 billion to the regular budget. The defense budget also has indirect economic costs. Extending the period of compulsory service, for example, postpones the entry of young people into higher education and the labor market. Reserve duty of previously unknown dimensions diverts labor inputs from the civilian to the military sector and harms business output. There will also have to be an increase in defense R&D, and if we add that to defense production, that will take away from industry and high tech."
The undending war
To put matters into international perspective, Ukraine has been coping with the effects of its long war with Russia, beginning with the occupation of Crimea by Russia in 2014 and escalating since the invasion of Ukraine in 2022. Ukraine’s defense budget, which amounted to 22.1% of GDP this year, is expected to grow to 26.3% next year. In addition, Western aid to Ukraine amounts to 10-12% of its GDP, according to Daniil Monin of the Wilson Center, who advised Ukraine’s President Volodymyr Zelenskyy last year on taxation and pensions.
According to the "Costs of War" project of the Watson Institute for International and Public Affairs at Brown University in the US, in the first year of the Swords of Iron war, the US invested $17.9 billion in military aid to Israel, amounting to 3.8% of Israel’s GDP.
On the other side of the war in Ukraine, Russian president Vladimir Putin has decided on an unprecedented 13.5 trillion ruble ($145 billion) defense budget for 2025, 25% higher than in 2024, and amounting to 6.3% of GDP. This is 2.5 times the country’s defense budget in 2022, the first year of the war. At least at present, the Russian government hopes to reduce defense spending by 5% by 2026.
NATO reaches target
In 2014, when Russia annexed the Crimean Peninsula, the NATO alliance countries set a target of a defense budget amounting to at least 2% of GDP for each member.
In 2021, only six of the 32 member countries of NATO met that commitment. Today, 23 of them are above the 2% level. Well below it are Spain (1.26% of GDP in 2024), Slovenia and Luxembourg (1.29% each). At the other end of the scale are Poland, whose defense budget has risen from 2.22% to 4.12% of GDP within three years, Estonia (3.43%), the US (3.38%, down from 3.53% in 2021) and Latvia (3.15%). According to an article by Clara Falkenek, an intern at the Atlantic Council’s Geoeconomics Center, aggregate defense spending by the NATO countries rose by 18% this year, and amounted to 2.71% of GDP on average.
Britain’s defense budget has risen by just 0.04% in the past three years, to 2.33% of GDP. The new Labour government has committed to raising investment in defense to 2.5% of GDP by 2030.
Under President Recep Tayyip Erdogan, NATO member Turkey’s defense spending has risen from 1.58% of GDP a decade ago to 2.09% this year. Erdogan plans a rise of 17.5% in Turkey’s defense budget next year to $47 billion.
China’s defense budget for 2024 was 1.66 trillion yuan ($231 billion), 7.2% more than in 2023. The last time that the World Bank carried out a comparison of defense budgets as a percentage of GDP between the US and China was in 2022, when China’s defense budget was $204 billion.
At that time, the World Bank found that China was investing 1.6% of its GDP in defense, which compared with 3.5% by the US. According to Reuters, the US defense budget currently amounts to $886 billion, four times that of China. The gap is very large, but the trend is clear. China’s defense budget has grown annually by a single digit percentage since 2016.
This has led Japan, which traditionally spent less than 1% of its GDP on defense, to change its policy radically. Under Prime Minister Fumio Kishida, Japan’s defense budget has grown from 5.1 trillion yen ($33 billion) in 2021 to 8.9 trillion yen ($58 billion), representing 1.8% of GDP. In the long term, Japan plans to come into line with NATO, and to reach defense spending amounting to 2% of GDP by 2027.
Published by Globes, Israel business news - en.globes.co.il - on November 4, 2024.
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