Can Israel and Iran Afford a Prolonged War? A Deep Dive into Economic Pressures

As military exchanges between Israel and Iran intensify, economic analysts are raising critical questions about whether either side can sustain a long-term war effort. Both countries are already under immense economic pressure—Israel due to the prolonged Gaza conflict, and Iran because of crushing international sanctions. A deep dive into each nation’s economic standing reveals a perilous path ahead should this conflict continue unabated.

A Historic Financial Burden

Israel's ongoing military operations, first in Gaza and now expanded to direct conflict with Iran, have pushed its defense expenditure to record highs. The Gaza war alone had cost Israel approximately 250 billion shekels ($67.5 billion) by the end of 2024, making it the most expensive military campaign in the nation’s history.

The opening days of the current Israel-Iran conflict have only added to the fiscal strain. According to military budget advisors, the first two days of engagement with Iran racked up 5.5 billion shekels ($1.45 billion) in costs. If this pace persists, Israel could exceed the Gaza war’s costs in less than two months.

Escalating Defense Budget

Israel’s defense budget has risen steeply—from 60 billion shekels ($17 billion) in 2023 to an estimated 118 billion shekels ($34 billion) in 2025. This expansion is not just a reflection of increasing military needs but also a strategic realignment in anticipation of multi-front engagements. However, such increases test the limits of Israel’s fiscal discipline, especially with a budget deficit ceiling set at 4.9% of GDP (105 billion shekels or $27.6 billion).

Economic Downturn and Growth Revisions

The conflict’s ripple effects are evident across the broader Israeli economy. The 2025 growth forecast has been revised downward from 4.3% to 3.6%, despite a slight uptick in expected tax revenues. The downturn is linked to reduced business activity, supply chain disruptions, and a sharp drop in tourism—a sector still struggling to rebound from the events of October 2023.

Corporate Closures and Credit Risk

Approximately 60,000 Israeli businesses shuttered in 2024 due to labor shortages and logistical bottlenecks. This economic fragility is further highlighted by warnings from S&P Global Ratings, which has threatened to downgrade Israel’s credit rating from A to A- if the war continues. Such a downgrade would elevate borrowing costs and reduce investor confidence, potentially pushing Israel into a debt spiral.

Targeted Strikes and Oil Disruption

While Israel’s economy is under stress, Iran's is grappling with more structural vulnerabilities. Israel’s attacks have specifically targeted Iran’s economic lifelines—its oil and gas sectors. Crude exports, typically averaging 242,000 barrels per day, have plunged to 102,000 bpd since the conflict began, according to energy analytics.

Particularly alarming is the halt of exports from Kharg Island, Iran’s main oil terminal responsible for over 90% of its crude shipments. No tankers have been observed anchoring there since the Israeli strikes started.

Gas Field Damage and Refinery Attacks

The partial suspension of gas production at the South Pars field—shared with Qatar and accounting for 80% of Iran’s gas output—is a critical blow. Although the full extent of the damage remains unknown, the attack underscores the vulnerability of Iran’s energy infrastructure.

Additional strikes on the Shahr Rey refinery and fuel depots near Tehran will likely compound long-term disruptions in production and distribution, further squeezing an economy already reeling under limited export capacity.

A History of Financial Isolation

Iran’s economic woes did not start with the current war. The country has long been isolated due to sanctions dating back to the 1979 Islamic Revolution. Although briefly eased during the 2015 JCPOA agreement, sanctions were reinstated and intensified under President Trump in 2018.

As a result, Iranian crude exports have dwindled from a peak of 2.8 million bpd in 2016 to under 200,000 bpd in recent years. This has cut Tehran’s oil revenues by over 90% and gutted its foreign exchange earnings.

Dependence on China and Currency Collapse

China remains one of the few major buyers of Iranian oil, helping Tehran stave off complete economic collapse. Still, the sanctions have had devastating effects. The Iranian rial has lost over 90% of its value against the dollar since 2018. Inflation, officially reported at 40%, is believed by some analysts to exceed 50% in reality. This has made imports prohibitively expensive, further straining domestic consumption.

Water and Energy Shortages

Beyond external pressures, Iran is plagued by internal infrastructure challenges. Declining natural gas production, inefficient irrigation, and minimal investment in energy systems have resulted in frequent blackouts and chronic water shortages. These issues are especially problematic in rural provinces where state support is already thin.

Poverty and Unemployment

The human cost of economic hardship is stark. As of January, nearly a quarter of the population was living below the poverty line. Unemployment, officially listed at 9.2%, is likely higher when underemployment and informal labor are factored in. Iran’s Supreme Assembly of Workers’ Representatives suggests that a significant portion of the population lacks access to stable, subsistence-level employment.

Constraints on Defense Spending

Iran’s military budget, estimated at 3-5% of its GDP, totals around $12 billion—less than half of Israel’s 2025 defense budget. This limited funding restricts Iran’s ability to escalate or sustain a high-intensity military campaign. While it holds approximately $33 billion in foreign exchange reserves, any large-scale withdrawal to finance war efforts could erode long-term economic stability.

Public Sentiment and Internal Stability

While Iran has witnessed a short-term nationalist surge, this sentiment could quickly evaporate if Israeli strikes escalate and civilian casualties mount. Economic analyst Hamzeh Al Gaaod warns that using reserves to fund military operations would be a short-sighted move, sacrificing economic resilience for temporary military leverage.

Israel: Financial Muscle with Fragile Fundamentals

Israel enters this conflict with stronger economic fundamentals and international support, but its fiscal runway is limited. High-tech exports, defense ties with the U.S., and a robust taxation system provide short-term cushioning. However, mounting war expenses, a potential credit downgrade, and a contracting business environment could reverse years of economic progress.

Iran: Resilience Borne of Adversity

Iran, on the other hand, is no stranger to economic hardship. Years of sanctions have forced it to adapt through underground networks, strategic partnerships with China and Russia, and reliance on domestic production. Yet its limited reserves, decaying infrastructure, and inflation-ridden currency leave little margin for escalation.

Conclusion: A War Neither Side Can Afford

Both Israel and Iran are on precarious financial ground as they wage a dangerous game of brinkmanship. Israel risks overextending its budget and weakening investor trust, while Iran may find its already fragile economy buckling under the combined pressure of sanctions and targeted infrastructure destruction.

In purely economic terms, this is a war neither side can afford for long. The longer it continues, the greater the cost—not only in human lives but also in economic ruin. A strategic pause or mediated truce may not only prevent regional destabilization but also rescue two already beleaguered economies from self-inflicted collapse.