- Israel

Social-Economic Implications of the War: Taub Center Report

Preliminary observations: July 20, 2006

The long-term implications of the war cannot be analyzed at this early juncture. They clearly depend on two factors: how long the war will last and how it will end. The range of possible outcomes is vast — from a mere ceasefire on the Lebanese front to a full-scale agreement on a new order in Lebanon. The latter possibility, an optimistic one, may create an opportunity and a big boost for the Israeli economy. The immediate cost in terms of economic losses, however, is spiraling every day, as is the social cost. In addition to the basic personal emotional burden of being closed in shelters for some ten days, the fear of explosions, and overall stress, all organized youth activities in the north have been halted. Summer camps have been cancelled; community centers are closed. Who in Israel thinks these days of family vacations — not only in the north, but anywhere in the country?

Economic activity in the northern part of the country has been practically paralyzed. Most factories and other businesses in the north have suspended their operations. The heavy industries in the Haifa area, including the petrochemical plants, are functioning at low capacity only. The loss of product in the business sector is estimated at NIS 300 million-NIS 400 million per day. Direct damage to houses and facilities that were hit by rockets is estimated at NIS 150 million at the present writing. It is not yet clear whether, and how, government will compensate employers so that they may continue to pay their idled employees.

The tourism industries are suffering the heaviest losses of all. Most tourist arrivals in July and August have been cancelled. This is an industry that managed in the last two years to recover from a drastic slowdown during earlier stages of the security problems, those related to the second Intifada, which began in 2000. Total tourism revenues climbed to $1.3 billion in 2005 and were projected at $1.7 billion (about NIS 8 billion) this year. This projection, realistic at the time, would of course serve as a source of tax revenue — much of which will not materialize in the near future.

In more general terms, economic activity has slowed and, in turn, government revenues are lagging — possibly leading to a reduction in government civilian expenditure. The newly elected government intended to increase spending on numerous old and new social programs, while cutting the defense budget and gradually downsizing the budget deficit in order to reduce the large government debt. The underlying assumption was that Israel would be able to sustain a growth rate of 5%. Some observers questioned this assumption even before the war erupted, let alone now. The probable outcome of the original scenario should have been an increase in government spending and the boosting of various social programs. The war, at least in the short term, has stopped this course of events. A cut in defense spending by NIS 1 billion —NIS 2 billion, as had been envisaged, is now unlikely. Indeed, an increase of similar magnitude may well be necessary.

If the more positive scenario of the results of the war comes to pass, we may still expect auspicious developments for the Israeli economy and its ability to better handle its social problems. Until such an outcome materializes, however, Israel and its people are experiencing some very difficult times.

TAUB CENTER FOR SOCIAL POLICY STUDIES IN ISRAEL is an independent, non-profit and non-partisan research institute. The Center was established to address social policy issues that challenge Israeli society, to broaden the public debate on these issues and to formulate viable social policy alternatives to enhance the quality of life and social well-being for all of Israel's inhabitants. The Center was established in 1982 under the leadership and vision of the late Herbert M. Singer, Henry Taub and JDC.

July 2006