Economic Challenges 2025–2035: Security and Diplomatic Scenarios

Following the government’s decision to launch Operation “Merkavot Gideon II” aimed at the occupation of Gaza City, the Aaron Institute for Economic Policy conducted an analysis in early September 2025 assessing the economic implications of three potential security–political scenarios concerning the Gaza front in 2025:
(a) cessation of hostilities accompanied by an international arrangement for civilian administration of the Gaza Strip;

(b) cessation of hostilities without an accompanying arrangement;

The analysis distinguishes between the short term (2025–2027) and the long term (2028–2035). For each scenario, estimates were produced regarding the required scale of reserve mobilization, the expected share of workers absent from the labor force, defense-related expenditures, and their implications for the fiscal deficit, economic growth, and debt-to-GDP ratio. Some scenarios incorporate assumptions of political isolation and partial economic sanctions—processes that have already begun and have been advanced by several countries.

The purpose of the analysis is to provide quantitative assessments of the economic significance of the alternative scenarios and to enable policymakers to anticipate the expected costs and macro-financial risks associated with different courses of action, thereby allowing these considerations to be integrated into security and policy decision-making processes.

The scenario involving full occupation of the Gaza Strip and prolonged civilian administration by Israel—which ultimately did not materialize—was associated with substantial economic risks, including lower growth and the potential for brain drain. In contrast, under the emerging scenario of cessation of the war accompanied by an international arrangement for Gaza, combined with the implementation of growth-enhancing reforms, Israel’s economy is projected to expand at an average annual rate of 3.7% over the long term (2028–2035).