Ballooning defense costs are placing heavy pressure on the country and putting the government’s ability to provide other services for its citizens at risk, a policy research institute in Jerusalem warned this week, while also expressing optimism that the stabilization of the security situation could help re-energize economic growth.

According to the Taub Center’s 2025 State of the Nation Report published Monday, the country’s economy is at a “highly sensitive point,” weighed down by a sharp rise in defense spending to meet security needs over the next decade, alongside deep-seated problems and long-term trends that do not stem from the war alone, chief among them low labor productivity and high price levels.

“Defense expenditures, which have risen dramatically due to the war, will remain high and impose a heavy economic burden on the economy,” said Prof. Benjamin Bental, Chair of the Taub Center Economic Policy Program.

“Until now, the government has kept civilian spending in line with population growth,” Bental added. “However, in view of the expected rise in defense spending, only accelerated economic growth will allow this trend to continue and prevent severe harm to civilian services.”

The prolonged two-year war with Hamas, which broke out following the terror group’s onslaught on southern Israel on October 7, 2023, doubled defense spending, which in turn increased the government budget deficit, the level of debt relative to GDP, and the burden of debt interest payments, according to the report.

The war has been halted since October, but there remain concerns that fighting could resume in Gaza, against the Hezbollah terror group in Lebanon or against Iran.

The report found that high war costs lifted the ratio of public debt to GDP to almost 70 percent at the end of 2024, up from about 61% in 2023. Over the decade preceding the Hamas war, the debt burden had declined steadily, reducing its impact on the state budget and public finances.

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