NextFin News - Israel has spent about $142 billion on its wars since October 2023, an amount equal to more than half of the country's total annual budget, and its prime minister is no longer treating that cost as a problem to be solved. As he heads into the October 27 election after three years of fighting, Benjamin Netanyahu has made the wars themselves the strategy: preemptive military action against every potential threat, security zones seized on almost every border, and a public doctrine of conflict without end. The question for investors is not whether Israel can win those wars, but whether its economy, its currency, and its political system can outlast them.
The paradox at the heart of the story is that Israel's markets have barely blinked. The shekel has gained roughly 30 percent against the dollar, including a 13 percent lift in the last year alone, and the Bank of Israel has been cutting interest rates as if the region were at peace. Yet the fiscal arithmetic underneath that calm is deteriorating, the Israel Defense Forces is running out of trained manpower, and the election could hand power to a centrist former general who has promised to end "the longest war in Israeli history" without committing to a single concrete change. The wars may be forever, but the market's tolerance for them is not.
The Netanyahu Doctrine: War as Strategy, Not Failure
What began in October 2023 as a response to the Hamas massacre has hardened into an explicit governing philosophy. Amos Harel, the defense analyst and author of a forthcoming study on the road to the October 7 attack, writes that Netanyahu "now publicly and explicitly supports waging wars without end," arguing that Israel must take preemptive military action against every potential security threat it faces, regardless of the consequences. Defense Minister Israel Katz has gone further, saying Israel will remain in its self-styled security zones in southern Lebanon, Syria, and the Gaza Strip for years to come. Ministers in the coalition are already scouting for the next adversary: Turkey's Recep Tayyip Erdogan has been elevated to the threat level of Hezbollah and Hamas, and some cabinet members have claimed, without evidence, that Syria's president, Ahmed al-Shara, is preparing to attack Israel.
The doctrine is not an accident of escalation. It is a political product. With polls showing him struggling to form a government after October 27, Netanyahu has doubled down on a platform of zero concessions and zero compromises, presenting territorial seizure as achievement rather than burden. The strategy depends on an enemy roster that never shrinks: when one front quiets, another must be found, because a country at permanent war has no use for an election fought on domestic grievances.
The price of that posture is no longer abstract. Reservists are serving on average more than 100 days a year since the 2023 attack, and the standing army has had no time to train. The war spending — about $142 billion, or more than half of Israel's annual budget — is a direct claim on resources that would otherwise fund infrastructure, education, or tax relief. Harel's central argument is that the Netanyahu doctrine could outlast Netanyahu himself, precisely because it has been normalized across the security establishment and much of the electorate. That is the structural risk investors must price: the wars are not tied to one man's tenure.
The Market That Refused to Panic
If the security picture is deteriorating by design, the financial picture has been improbably serene. The shekel is trading around 2.9 to the dollar, its strongest position in more than three decades, and the currency has appreciated roughly 30 percent against the greenback since the war began. In July 2026, analysis of global currency moves noted the shekel's 13 percent lift over the prior year as one of the strongest performances among a broad sample of economies — all while Israel was engaged in simultaneous conflicts across Gaza, Lebanon, Syria, and, briefly, Iran.
The Bank of Israel has treated that strength as the main economic problem. In May 2026 the central bank cut its policy rate to 3.5 percent from 3.75 percent, with the monetary committee saying: "The inflation rate in May remained stable around the midpoint of the target range, and the risk premium is similar to before October 2023." The bank framed the cut as necessary "to ease the cost of living and balance the strengthening of the shekel." In January 2026 it had already cut to 4 percent. Rate cuts in the middle of a multi-front war would have been unthinkable in any previous Israeli cycle.
"A sharp reduction in the interest rate is the right step that will ease the cost of living and balance the strengthening of the shekel."
There are real reasons for the calm. Israel's high-tech and defense-export sectors have absorbed capital even as tourism and construction have weakened; the United States remains engaged; and the February 2026 US-Israel campaign against Iran ended in a ceasefire that temporarily removed the largest tail risk. The shekel's strength is also a function of strong dollar-denominated inflows — foreign investors buying Israeli tech, sovereign and corporate debt held domestically, and a current account bolstered by gas exports. But the central bank's own research department has issued a warning that the fiscal foundation of this calm is thinning.
The Fiscal Bill Comes Due
The Bank of Israel's Research Department projects that if the defense budget is not increased beyond the buffer already reserved in the state budget, the government deficit will reach 4.9 percent of GDP in 2026 and 4.2 percent in 2027. Those numbers assume restraint. The political direction of travel is the opposite. Katz has committed to years of occupation in three theaters; Netanyahu has rejected compromise; and a permanent-war posture requires a permanent defense build-up that no budget buffer can contain.
The bank's research arm warns that the deficit is "expected to be 4.9% of GDP in 2026 and 4.2% of GDP in 2027" — and that is the optimistic path.
Consider the arithmetic. A deficit approaching 5 percent of GDP in a country that has just spent half an annual budget on war is not a cyclical blip — it is a regime shift in public finance. Israel entered the war with one of the lowest debt-to-GDP ratios in the OECD. It will not leave it there. Every additional year of high-intensity conflict adds to the stock of debt while subtracting from the growth that services it. The shekel's strength today is being bought with rate cuts that will not be available once inflation, or a currency reversal, forces the central bank's hand.
This is where the cyclical-versus-structural call matters most. The market calm is cyclical: it rests on a ceasefire with Iran, on rate cuts, on a strong dollar, and on the hope that the October 27 election produces a government willing to de-escalate. Cyclical conditions revert. The security doctrine, by contrast, is structural: it has been adopted by the right, accepted in principle by the center, and embedded in the operational reality of an army deployed on three borders. A structural shift does not self-correct. That asymmetry — cyclical calm layered over structural deterioration — is the mispricing.
The Election: Change Without a Mandate
Gadi Eisenkot, the former IDF chief of staff who joined Netanyahu's war cabinet four days after the October 7 massacre and entered politics four years ago, is running ahead of Netanyahu in the polls. His pitch is that he can end the longest war in Israeli history. But his record complicates the narrative. Eisenkot has been blunt and sometimes caustic about the prime minister, yet on some issues — including how to deal with Hamas in Gaza — he has sounded more hawkish than Netanyahu. In a rare statement in August, he said he opposed a Palestinian state, endorsing a position that is now consensus across Israel's center, center-left, and right.
The implication is uncomfortable for anyone expecting a clean break. An Eisenkot government would most likely produce incremental rather than dramatic change: a different tone with Washington, a more disciplined war cabinet, perhaps a negotiated off-ramp in one theater. It would not produce a return to the pre-2023 status quo, because the electorate that would install him has itself moved rightward. Harel notes that the most important variable is not whether change is possible, but what kinds of changes, and with what kind of engagement from Washington — specifically, from US President Donald Trump.
That is the second-order risk for markets. A post-Netanyahu government that de-escalates selectively would be a net positive for Israel's risk premium. But a government that inherits the same fronts, the same reservist burden, and the same fiscal trajectory — while losing Netanyahu's personal relationship with Trump — could face the worst of both worlds: continued war spending without the diplomatic cover that has kept capital confident. The election is not a binary between war and peace. It is a choice between two versions of a militarized state, only one of which has a coherent fiscal plan.
What Would Break the Thesis
The strongest counter-thesis is simple: Israel has survived worse. It has fought multi-front wars before, absorbed mass immigration, and built a technology economy through repeated crises. The shekel's 30 percent gain is not irrational complacency but a vote of confidence in an economy that has repeatedly proven more resilient than its geography suggests. Defense exports are booming; the high-tech sector is recruiting; and the Bank of Israel still has room to cut before real rates turn punitive. On this view, the "forever wars" are expensive but sustainable — a new normal, not a breaking point.
That argument is not wrong about the past. It is wrong about the margin. Resilience is a stock, and it is being drawn down. The difference between surviving a war and institutionalizing one is the difference between a sprint and a permanent change in gait. The counter-thesis also depends on the shekel staying strong and the deficit staying contained — two variables that move together in the wrong direction. If defense spending forces the deficit above 5 percent of GDP, or if the shekel reverses more than 10 percent from its current level, the "resilience" story loses its empirical anchor.
The falsifying signal is specific and observable: if the Bank of Israel's Research Department revises its deficit projection above 5.5 percent of GDP for 2027, or if the shekel depreciates below 3.5 to the dollar and stays there for a month, the structural-deterioration thesis is wrong and the market's calm is justified. Until then, the burden of proof rests on those who believe a war-without-end doctrine can be financed like a temporary emergency.
What to Watch
In the short term, watch the October 27 election result and the coalition math that follows. A deadlocked outcome — which Netanyahu may prefer to an opposition government — would extend uncertainty and keep the risk premium elevated. In the medium term, watch the 2027 state budget: the defense line item and the deficit target will reveal whether the next government is serious about fiscal consolidation or is simply continuing the spending trajectory under new management. In the long term, watch the reservist burden and the IDF's training cycle: an army that cannot train is an army losing readiness, and readiness gaps eventually force either escalation or withdrawal.
The base case is incremental change: whoever wins, Israel remains a garrison state, but the intensity of conflict moderates enough to keep the shekel and the deficit within current ranges. The upside case is a genuine off-ramp in Gaza or Lebanon, which would compress Israel's risk premium and allow the Bank of Israel to normalize rates without currency intervention. The downside case is a new front — Turkey, Syria, or a re-armed Hamas — that forces defense spending beyond the reserved buffer and pushes the deficit toward 6 percent of GDP, at which point the currency's strength becomes the first casualty.
Israel can end its forever wars. The question is whether it wants to. Three years in, the answer from its leadership is no — and the market has not yet decided whether to believe that answer is affordable. The wars may be forever, but the calm that has financed them is not.
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