Following the 12-day war between Israel and Iran—which ended with direct US strikes on Iranian nuclear sites, a halt to hostilities, and the resumption of US-Iranian negotiations—Israel has incurred significant and wide-ranging economic losses.
These losses have been mounting since 8 October 2023, when the war on Gaza began. Israel’s conflict with Hezbollah, its strikes against the Houthis in Yemen, and the recent bombing of official Syrian targets in Damascus, have further compounded the pain. With Israel still threatening its adversaries across the Middle East, the bill may yet be higher.
For 21 months, Israel has waged war in an attempt to break Iran’s ‘Axis of Resistance’. It has achieved a measure of success, but the economic cost of such a prolonged war has been devastating for the Israeli state. This is no simple war. Its objective is to eliminate Iran’s regional proxies—politically, economically, and financially—and to “change the Middle East,” as Prime Minister Benjamin Netanyahu has repeatedly declared.
That change is economic and financial, not merely political and security-related. But the cost is high, given how deeply rooted Iran and its proxies are in the region, having spent decades building political and security networks that have expanded into parallel economic and financial systems mirroring those of the states where Iran’s allies operate.
Diverse military losses and costs
The David’s Sling system, developed jointly by Israel and the US to intercept missiles aimed at Israel, costs around $700,000 per activation, assuming two interceptors are launched per shot. That’s the minimum, according to Yehoshua Kalisky, senior researcher at the Institute for National Security Studies in Tel Aviv. The Arrow 3 system, which also defends against long-range ballistic missiles, costs approximately $4mn per interception, while the older version—Arrow 2—costs around $3mn per shot.
Kalisky also noted the cost of keeping dozens of fighter jets, such as F-35s, in the air for several hours at distances of up to 2,000km from Israeli territory. Each aircraft costs an estimated $10,000 per flight hour, not including fuel and ammunition. Zvi Eckstein, head of the Aaron Institute for Economic Policy at Reichman University in Israel, stated that the daily cost of war with Iran far exceeded that of operations in Gaza or with Hezbollah, due to the scale of both defensive and offensive munitions.
Eckstein estimated that a month-long conflict with Iran could cost around $12bn, according to The Wall Street Journal. The paper quoted experts as saying Israel's highest individual cost is in the missiles required to intercept Iranian rockets, amounting to between $10mn and $200mn per day.
The Israeli newspaper Maariv reported that Iranian attacks caused significant damage to property and infrastructure, stirring public discontent among citizens who felt their government had failed to protect them. The government has struggled to compensate residents affected by the attacks due to bureaucratic complications. In parallel, the Israeli daily Haaretz noted that the war on Gaza has caused high casualty rates among Israeli troops, with growing frustration among the ranks due to a lack of clear objectives.
Meanwhile, the Israeli government is facing internal criticism over its ongoing military operations in Gaza. Without any tangible achievements, questions are being asked about the campaign's usefulness. What's more, analysts have warned that continued hostilities on the Lebanese front could lead to a prolonged war of attrition, according to Monte Carlo Doualiya, weakening Israel's military and economic capabilities.
The soaring economic burden of war
Israel's Ministry of Finance estimated that the cost of the war, as of late 2024, stood at $31bn, with expectations that this could rise to $70bn by the end of 2025, according to the Palestine Chronicle. The outlet also reported that the war has destroyed vast swathes of forests and agricultural lands, negatively affecting both the economy and the environment in Israel.
In an interview with Al Majalla, Professor Khodr Zaarour, an expert in international relations at North Carolina State University, said: "Investment, trade, and infrastructure have all been affected by Israel's wars in Gaza, Lebanon, Syria, Yemen, and Iran. Additionally, military spending has steadily increased at the expense of funds originally allocated for development and the operation of state institutions and municipalities. The Israeli state is losing $5bn from its government programmes every three months by transferring them to the Ministry of Defence."
Zaarour added: "Israel's defence system is incurring daily losses ranging from $10mn to $200mn, covering defence infrastructure, interceptor missiles, and the Iron Dome, all aimed at neutralising the impact of missiles targeting Israel from Lebanon, Gaza, Yemen, and, most recently, Iran. During the war on Gaza, Israel was also targeted by a missile from Iraq. There are also indirect losses resulting from missile strikes, including spending on emergency medical services, evacuations, and various forms of assistance to Israeli citizens due to the war. These are all economic costs."
These costs have been heightened by significant reductions in tourism and damage to Israel's international standing. "There are also losses related to tourism, travel, and transport caused by airport closures," said Zaarour. "Not only did Israeli citizens flee the country via sea or overland through Jordan and Sinai, but foreign businessmen, company owners, investors, and many evangelicals who spend money in Israel also left.
"As for the investments that were promised to Israel for the summer, amounting to $10bn, they were thrown into disarray. Some were delayed, and others were redirected. Many investors have postponed their plans until 2026. The one-year delay in operationalising these investments represents another layer of losses, estimated at $6bn in lost tax and fee revenues over a year or more."
Foreign aid to Israel
In his interview with Al Majalla, Zaarour confirmed that "Major powers like the US, the UK, and France support Israel in this situation to avoid the appearance of loss and decline in front of both domestic and international public opinion. Such an image would have dire consequences for attracting trust, which is considered the most significant and economically damaging loss. Israel realises that it's been working for 78 years to build a viable state and doesn't want to see its achievements disappear due to the Gaza war. A loss of investor confidence would be its most severe setback."
Reconstruction in Israel "may prove difficult, even if the security situation stabilises in the near future, because the missiles that struck Israel affected national security," continued Zaarour. "These are economic losses, not merely security or military ones… Israel's economic losses are becoming more layered, including a drop in annual tax revenue, rising national debt, damage to infrastructure, destruction of housing and agriculture, and losses in personal property. The government is reimbursing insurance companies for the cost of these damages, not to mention the loss of direct capital flight."
"The losses of Ben Gurion Airport also worsened due to flight rerouting or cancellations," added Zaarour. "The daily losses were estimated at $6mn, including compensation for passengers affected by delays. In addition, there's the personal cost of travel cancellations for citizens, which directly impacts their household budgets, especially since the airport was closed for 12 days."
In addition, foreign labour has been significantly affected. Most workers, said Zaarour, have left Israel and not returned due to a lack of security. For Israel, which relies heavily on this workforce for agriculture, industry, construction, and cleaning, this is another measurable economic loss.
Positive indicators in the Israeli economy
Despite the ongoing conflict, the Israeli economy is showing remarkable signs of resilience, with key indicators pointing toward a strong recovery. Its GDP recorded an annual growth rate of 3.4% in the first quarter of 2025, later revised upwards to 3.7%. This was driven by a surge in exports—particularly in natural gas and defence technologies—alongside a rebound in private consumption and infrastructure investment. Inflation has begun to recede after peaking earlier in the year, while the unemployment rate has remained low at around 2.6%, and the shekel has stabilised.
The advanced technology and defence sectors have played a pivotal role in this recovery, continuing to attract global investment despite heightened regional tensions. Notably, the fields of cybersecurity, AI, and advanced manufacturing have shown particular strength, while major defence companies, such as Elbit Systems, have experienced a significant rise in demand for their products in both domestic and international markets. These sectors have played a crucial role in supporting economic activity and maintaining investor confidence, even amid wartime conditions.
The strong performance of the Tel Aviv Stock Exchange stands out as a remarkable indicator of this resilience and confidence. After a sharp decline in the wake of the 8 October attack, the TA-35 Index rose by nearly 14%, while the broader TA-125 Index surged by around 50% over a year, making the Israeli market one of the best-performing globally during this period.
Collateral financial losses for the US
It's also necessary to account for the collateral financial losses sustained by other countries. The US, for example, has incurred significant expenses through its assistance to Israel in striking Iran's nuclear facilities.
According to a report prepared by the Congressional Research Service, Israel has been the top recipient of US foreign aid since the Second World War. The report states that since the establishment of the State of Israel in 1948, Washington has provided Tel Aviv with $158bn in missile defence assistance alone. Between 1971 and 2007, Israel also received substantial economic support.
In 2016, Washington and Tel Aviv signed a third 10-year memorandum of understanding on military aid, which came into effect in 2019 and extends through 2028. The agreement includes $38bn in military assistance, comprising $33bn in foreign military financing and an additional $5bn for missile defence systems. Under this arrangement, Israel has already received 50 F-35 fighter jets as part of three separate assistance packages, according to the report.
Additional costs of the Gaza war
Aside from the losses and costs mentioned above, Israel's trade relations have been significantly impacted. Several countries, led by the UK, have threatened to suspend talks on enhancing trade agreements in response to Israel's policies in Gaza.
In May, the UK, France, and Canada threatened to take "concrete action" against Israel if it did not lift its blockade on humanitarian aid into Gaza. Likewise, the European Union announced a review of its trade cooperation agreement with Israel.
According to UN statistics, the UK ranked 11th among exporters to Israel, with a total export value of $1.96bn in 2024. The UK was also the eighth-largest importer of Israeli goods, purchasing $1.57bn worth of exports, including diamonds, chemical products, and electronics.
These statistics also revealed that Israeli imports from around the world totalled $91.5bn in 2024, while its exports stood at $61.7bn. The US was the largest importer of Israeli goods, buying $17.3bn worth of products in 2024, followed by Ireland ($3.2bn) and China ($2.8bn). Had some Western countries followed through on their threats to review trade agreements, Israel's economic losses would have been far greater.
The end of the state of Israel (1947 - 202?)
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