How Israel’s War Economy Defied Economic Predictions
Many observers thought that years of prolonged war would cripple Israel’s economy. But the opposite has happened. By giving billions of shekels in compensation to reservists, Israel has managed to keep its citizens spending while Gaza burns.
Israel has managed to keep its economy humming in wartime by paying reservists, in some cases $8,000 per month, plus benefits and access to social services.(Mamoun Wazwaz / Anadolu via Getty Images)
When Hamas launched its attack on Israel on October 7, 2023, and Israel went to war, economists worldwide braced for a familiar pattern. History teaches us that wars devastate economies in predictable ways: people stop buying cars and furniture, businesses shut down, unemployment soars, and governments take over the economy by spending massively on weapons and military equipment.
Israel seemed destined for this classic wartime economic transformation. Defense spending has shot up by more than 50 percent since October 2023. The Israel Defense Forces (IDF) has called up hundreds of thousands of reservists, pulling workers out of offices, factories, and shops. International investors, many of whom expected the economy to crater under the weight of prolonged conflict, have grown nervous. Instead, something unexpected has happened.
Rather than collapsing, Israel’s economy proved remarkably resilient. While exports declined sharply and many core sectors — like tourism and construction — struggled, the overall economy has continued to enjoy modest levels of growth. The Israeli shekel has also remained strong against major currencies and the Tel Aviv Stock Exchange, defying gravity, continues to climb throughout the conflict. Most surprising of all: Israelis are still shopping.
The secret lies in a fiscal trick that most people — including many economists — initially overlooked. Israel didn’t just mobilize reservists; it paid them extraordinarily well. Between October 7, 2023, and May 2025, the government allocated sixty billion shekels (about $18 billion) specifically for reservist compensation. This huge amount, that since May 2025 has increased by billions — especially with the recent reenlistment of tens of thousands of reserve soldiers for the conquest of Gaza City — is equivalent to more than 1.5 percent of Israel’s annual GDP.
This is not military spending in any traditional sense but direct payment for participation in documented violations of international humanitarian law. The system has transformed military service from a civic obligation into economic opportunity. Reservists receive an average of nearly $8,000 per month — almost double Israel’s average salary and five times the minimum wage, supplemented by generous bonus payments and social services free of charge.
Many can maintain civilian employment part-time while receiving full military compensation for participation in operations that include deliberate targeting of civilian infrastructure, forced displacement of populations, and systematic destruction of Gaza’s basic services.
Military Keynesianism Meets State-Sponsored Atrocities
This represents an evolution of what economists call military Keynesianism, but with a crucial difference. Rather than traditional defense procurement creating jobs in weapons manufacturing, Israel channels military spending directly through household consumption for participation in documented war crimes. The system realizes what John Maynard Keynes theorized in his famous thought experiment — the famous “old bottles” story — about economic stimulus:
If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise . . . the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.
Israel’s innovation inverts Keynes’s logic: instead of building houses, the state pays citizens to participate in their destruction in Gaza as part of its annihilation project. The economic stimulus effect remains identical — money flows to households, maintaining consumption — while facilitating what international courts and human rights organizations document as systematic crimes.
It is important to note that the money the state transfers into the private accounts of hundreds of thousands of soldiers is spent within the Israeli economy on daily needs such as food, clothing, mortgages, entertainment, and more. In this sense, we are talking about billions of shekels that help drive the Israeli economy, even while the country is at war. As the Keynesian multiplier suggests, these household “expenses” generate additional spending within the economy, leading to higher overall income and increased aggregate demand.
When governments typically spend money during wars, they purchase tanks, missiles, and military equipment, much of it imported. That money flows out of the domestic economy quickly. Israel did something different: instead of just buying more weapons, it gave families large monthly checks that didn’t disappear overseas. Israeli families used that money to pay rent, buy groceries, go to restaurants, and maintain normal spending patterns, keeping the consumption engine running.
The strategy’s effectiveness relies fundamentally on Israel’s consumption-based economic structure, established since the 2008 financial crisis. Unlike export-dependent economies that would face immediate balance-of-payments crises from such massive domestic transfers, Israel’s consumption-driven model can absorb the more than 60 billion shekel expenditure as direct substitutes for civilian wages.
Maintaining State Legitimacy Through Economic Performance
The maintenance of economic growth is crucial for preserving multiple layers of institutional stability and legitimacy. Sustained GDP growth and continued consumer spending provide the Ministry of Finance with essential credibility in justifying the massive fiscal expenditures required for the annihilation project. Without economic resilience, Treasury officials would face impossible choices between fiscal responsibility and policy continuation.
The economic performance also maintains crucial legitimacy with international rating agencies, whose downgrades could trigger capital flight and fiscal crisis. While agencies like Moody’s, the S&P, and Fitch have already implemented downgrades, the continued domestic economic activity prevents the complete collapse in creditworthiness that would make the systematic destruction financially impossible to sustain. The consumption-driven growth demonstrates to international financial markets that Israel retains economic viability despite massive military expenditures, preserving access to international capital markets necessary for financing continued operations.
This economic architecture provides the foundation that makes Israel’s crimes fiscally sustainable in the short term. The same consumption dependency that creates vulnerability to international boycotts also creates resilience against domestic economic disruption from military mobilization, while maintaining the institutional support necessary for policy continuation. Families continue spending, businesses continue operating, the Treasury maintains fiscal credibility, and rating agencies avoid complete downgrades.