Israel Bank: The military operation is not expected to have a significant impact on the GDP

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by Ifi Reporter Category:Financial Aug 8, 2022

The military operation against the Islamic Jihad terrorist organization is not expected to have a significant impact on the Israeli GDP, according to Bank of Israel economists. According to estimates, if the ceasefire reported last night is maintained and the fighting ends, the fighting will not have a wide economic impact.
The dawn events came at a sensitive time: the whole world is trying to overcome a significant inflationary outbreak, and on the other hand there is a global fear of entering a recession. The USA has already recorded two consecutive quarters of contraction in GDP, and Israel recorded a contraction of 1.9% in the domestic GDP in the first quarter.

Security events are frequently mentioned as one of the significant risks to Israel's economy, for example in the publications of the credit rating companies. However, it seems that the rating companies as well as the financial markets have so far gotten used to the fighting rounds of the last decade, and these are not particularly influential.
The most significant harm from such a security escalation does not come from the outside, but rather from the reduction of economic activity, due to limitations of the frontline command or due to a decrease in consumption resulting from the public's tendency to shut themselves in their homes when there is a threat of missile damage. Operation Solid Cliff, the most significant military operation in the last decade, which lasted more than 50 days in 2014, did damage the domestic product. According to the estimates of the Bank of Israel, the GDP was affected by 0.3% in Operation Tzuk Eitan.
According to the Bank of Israel's analysis, the deepest damage is in the field of tourism, which has been most severely damaged by military conflicts. The effect of such a round is not only noticeable during the fighting days, and according to the bank, the activity does not recover immediately either. For example, in Etan Cliff, tourism activity returned to its pre-operation level only a year later, and after NIS 2 billion in damage to GDP.
Another significant section is damage to private consumption, the purchase of services or trade. This section is particularly important because it is 20% of the GDP. At Tzuk Eitan there was a considerable impairment in consumption due to the length of the combat round.
However, an examination of the revenue index (based on VAT data) throughout the last promotions in the last decade reveals that these will not cause a long-term damage to consumption. That is, even when there was a point decrease during the promotion period, a "correction" was recorded afterwards and the upward trend continued.
"Experience shows that in the macro we will not see almost any effect if the operation lasts a week," says Alex Zbzinski, Meitav's chief economist. According to him, "if the operation lasts for a month, we will feel the data", but this damage will also probably be temporary, and will be corrected afterwards.
But besides the direct damage, if there is any, military operations cause indirect damage to the economy and its rate of development. The direct military cost of each day at Tzuk Eitan was 80-120 million shekels, and to this must be added the costs of the Iron Dome missiles - 50 thousand dollars per missile.
After Operation Wall Guard, it was decided to give the security system an additional budget of NIS 7 billion. Although the increase in the budget is not described as a direct harm to the Israeli economy, it causes funds to be diverted from other sections of the budget, for example from the education system or infrastructure development.
Since public spending in Israel is relatively low even so, military operations cause a further reduction in the investment potential in such areas, and in general a missed growth acceleration. "This money has to come from somewhere," says Dan Ben David, professor of economics at Tel Aviv University and CEO of the Root Institute for Economic and Social Research. "Either they raise taxes or increase the debt or take from others."
Ben David believes that such measures not only harm social services, but are harmful mainly because of the way they are done. "Every time there is a budget problem like this, they say, 'Let's take budgets from other ministries,'" he explains. "Usually this is not done in an intelligent way, but cuts across all government budgets, and then the discussions begin on where not to cut. It has nothing to do with real needs and considerations. It is a political trade without economic rationale. We pay a lot for it from the social and economic points of view ".
The main problem, according to Ben David, is that citizens cannot monitor government spending. "The IDF would not impose a blockade on the south without reason. If they did, they probably know why, but it also has a price we must pay. The price is at our expense, and maybe we have to pay it, but there is a problem of the lack of transparency in the state budget."
According to him, "You can't clearly say how much a locality in the Gaza Strip costs and if it costs us more than other localities. It's like you don't know how much is spent on the ultra-Orthodox. We also don't know what the spending is on the education system, because there are budget items for education that don't come from the ministry at all Education. "Therefore, in order to know what the damages are from an operation, the first thing that is needed is transparency in the budgets. Even if we make concessions, maybe it's time we do it wisely."

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