While most Israelis may not feel an immediate financial blow from the war with Iran, the deeper economic consequences could emerge in places less visible - particularly in education, long-term growth, and fiscal stability, according to Prof. Ayal Kimhi of the Shoresh Institution for Socioeconomic Research.
“Most citizens will not necessarily feel an immediate economic impact,” Kimhi told The Jerusalem Post on Tuesday, noting that the primary short-term burden falls on self-employed workers and hourly employees. “But the direct military costs - reserve days, flight hours, interceptors and munitions - amount to billions. And the cost of partially shutting down economic activity may be even greater.”
Kimhi divides the immediate economic toll into two layers: the direct cost of the military campaign itself, and the broader loss of output caused by halted or disrupted activity. While some sectors - particularly hi-tech - may be able to function remotely, others face more serious constraints.
“Agriculture does not stop even under missile fire,” he noted. Industry, however, is more vulnerable to prolonged disruption.
In the short term, investor sentiment remains uncertain. “It’s too early to assess after only a few days,” Kimhi said. “Investors think long term. If they believe this war will eventually stabilize the region, Israel’s attractiveness could even increase.”
Yet the more troubling implications lie beneath the surface.
Shoresh Institute warns about structural economic weakness
For years, the Shoresh Institute has warned about structural weaknesses in Israel’s economy: low labor force participation among certain groups, gaps in human capital, and productivity challenges. According to Kimhi, a prolonged conflict risks intensifying those trends - particularly through disruptions to the education system.
“The most problematic issue in the long term is that schools are closed,” he said. Drawing on lessons from the COVID-19 pandemic period and the past three years of instability, he warned that students struggle to reintegrate even after systems reopen. “It also does not appear that the Education Ministry learned from previous experience and prepared adequately for remote learning.”
Given that human capital is Israel’s primary economic resource, Kimhi described this as a genuine cause for concern. Educational gaps between stronger and weaker students may widen further, as more advantaged households are better equipped to cope with disruption.
On the fiscal front, Kimhi predicts that most of the war’s costs will ultimately be covered by increasing the deficit.
Even before the current escalation, the government had struggled to pass a 2026 budget. “The question is less economic and more political,” he said. “The cost of the war will have to be covered.”
Kimhi said he does not expect cuts to sectoral allocations benefiting ultra-Orthodox (haredi) communities or settlements, arguing that the government’s primary objective is political survival. Nor, in an election year, does he foresee deep cuts to budget items that directly affect the public.
Instead, he anticipates delays in planned reforms - including tax bracket adjustments and reforms in regulated markets - alongside a likely expansion of the deficit.
If the war becomes a prolonged strategic reality rather than a short-term episode, the implications could extend to Israel’s credit rating. “An increase in the deficit will certainly increase national debt, and possibly lead to a downgrade,” Kimhi said.
Still, he outlined two divergent scenarios. If the conflict drags on without fundamentally altering Iran’s posture, costs will accumulate, and investment may suffer. But if the war ends relatively soon and results in a diminished Iranian threat, economic recovery could be rapid - and growth potential may even improve.
“That,” he cautioned, “depends on whether Israel has a government that takes the right steps for the economy.”