Markets jump after Israel strikes Iran, but is the economy really resilient? - analysis

Even before the US strike, the shekel jumped sharply, and stocks and bonds gained just days after Israel began striking in Iran.

At the bond auction, Israel sold NIS 2.75 billion ($785 million) of various debt maturities in a sale that was multiple times oversubscribed. All of the Big Three credit ratings agencies put out updates following Israeli strikes on Iran, all holding Israel’s rating steady while warning that an escalation of the fighting could negatively impact it.

All of these things indicate that investors remained confident in Israel’s economy and that this confidence was significantly bolstered when Israel’s security situation seemed to greatly improve as the Iranian nuclear threat was damaged. The economy’s resilience seemed to be on full display over the course of Israel’s conflict with Iran, but the impressive numbers cited this week, while very important, don’t show the full picture.

Decreased security risk, lower interest rates on government debt, increased growth and production, and higher tax revenue are all important things for Israel’s economy, but their effects may take a while to be felt by Israel’s battered middle class and lower-income families.

The Israel-Hamas War has left these families in economically precarious situations. Economic support NGOs on the ground report that many more families are coming to them for help than previously, and they only expect this number to continue to increase.

Small business owners and freelancers have repeatedly said that they are in need of greater government support, as the war has impacted their ability to work and earn a living. Many small businesses have closed because of the war.

CURRENT PROPOSALS by the IDF and government don’t seek to widen the pool of those who will be drafted to the IDF in a significant way but to increase the number of days of reserve duty done by those already buckling under Israel’s increased security needs. The financial strain is one of the most significant impacts of this extended reserve duty.

Price hikes during the war on everything from food items to utility prices to public transport have only increased these burdens.

Beyond the tragic loss of life, Israel’s latest round of strikes against Iran also saw enormous amounts of property damage, businesses shuttered for over 10 days, and a closed airspace.

The distress of Israel’s middle class and lower-income population shows a more well-rounded picture – the country’s economy is strong and resilient, but the war has poured lighter fluid on the slow burn of Israel’s already existing economic challenges. To build deep resilience and repair the economic damage, the country’s leadership must now address the deep-rooted problems that Israel’s economy has been facing for years, rather than continuing a policy of sectoral budgets and pork barrel politics.

In order for the economy to be really resilient, budgets need to be allocated and policy must be set in accordance with national priorities. An example of when this does not happen is the haredi (ultra-Orthodox) draft exemption, which is being reevaluated now in the Knesset.

In order to be effective, policy set on this exemption must be in line with Israel’s needs for more IDF manpower, or a more productive labor supply from the haredi population. The current policy disincentivizes both IDF service and effective workforce participation.

There has also been almost zero public and legislative attention for effective regulation during the Israel-Hamas War that could protect Israeli consumers. Around 50% of the population does not pay income tax because they don’t make enough to reach the lowest rung on the tax ladder. Just 20% of the population pays 93% of all income tax, according to the Shoresh Institution.

This means that a narrow part of the population is paying to support the rest. It’s also worth noting that those bearing this tax burden are those who can afford to relocate if it becomes too great. In order to really be resilient, Israel’s economy must include a strong middle class and effective economic policy that is in line with national interests. This requires policy-setting by Israel’s political echelon.