Israeli Economy Threatened by Possibility of Long-term Gaza Mission

Effects of prolonged operation could include a weakened shekel and a rise in oil prices.

It is still much too early to estimate the final cost of the military operation that began Saturday in Gaza: it is still not known how long it will last and whether it will include ground forces, require the call-up of reserves or include a prolonged stay in the Gaza Strip.

However, each day of such a military operation costs tens of millions of shekels for Air Force strikes and bombs, plus many other expenses. This in itself will not cause a budgetary problem, said a senior government official, since even a week-long ground operation could be absorbed by the existing defense budget and would only be felt in the 2009 state budget.

The Defense Ministry has refused to comment on this matter.

However, costs would skyrocket if the government decided to call up large reserve forces, if the IDF takes control of large sections of Gaza and sets up a civil administration to run the affairs of the local population, or if a large appropriation was needed to reinforce protection for a large number of communities beyond the Gaza envelope area. Such costs would reach into the hundreds of millions of shekels, and possibly billions.

The treasury says if the operation lasts more than a week, then Prime Minister Ehud Olmert will have to hold discussions with the treasury and Defense Ministry over the effects on the budget and how to pay for it. As opposed to the situation before the Second Lebanon War, the state's coffers are now in bad shape, the treasury says, and it will not be possible to be as generous with the IDF this time.

The defense budget totals NIS 48.8 billion for 2009, as approved by the cabinet last August. However, next year's budget still has not passed the Knesset and is unlikely to do so until well after the elections and the formation of a new government. Obviously, changes are likely.

Defense Minister Ehud Barak demanded from the treasury an additional NIS 3 billion over the past few months, half in 2008 and half for next year. Barak says Olmert promised the increase, but due to the present political situation no final decision has been made or approved by the Knesset. Defense also has demands for another NIS 3-4 billion for the next two years already in the pipeline, it says to compensate for higher prices, development of new weapons systems and purchases of other equipment.

At the same time, the Tax Authority is preparing for the possibility of escalated attacks on Israeli communities and has sent workers and appraisers out to evaluate damage from rocket attacks and quickly compensate citizens.

So far the IDF has called up very few reservists, each of whom costs an average of NIS 450 per day, not including what it costs to feed, clothe and equip a reserve soldier. The NIS 450 only includes direct payments in lieu of salary lost and also does not include the true cost of lost productivity to the reservist's workplace while the soldier is in the army.

Economists are divided over what they see as the effects of the operation, named Cast Lead. One institutional investor said the "market will fall apart," explaining the mere threat of such an operation brought the stock market down 3% last Tuesday, and the market was was already in a very sensitive situation due to the world economic crisis. If the firing of the rockets expands well beyond the present areas it may very well affect foreign investors, he said. Of course, the market will also see a downturn if Israeli investors respond hysterically.

Other effects of a prolonged operation could include a weakening of the shekel and a rise in oil prices, alongside an increase in the budget deficit.