Israel has been in a state of war for nearly three years, starting from October 2023, with battle lines expanding in rounds from Gaza, to Lebanon, the Red Sea, and Iran, and costs piling up for military expenditures, reserve deployments, reconstruction, evacuations, and debt financing.
According to estimates by the Bank of Israel in 2026, the fiscal cost of the war from 2023 to 2026 is approximately 350 billion shekels, and this figure does not yet fully account for the additional military expenditures against Iran incurred after the end of February 2026.
By the end of 2025, Israel's public debt as a percentage of GDP had risen to 68.5%, significantly higher than the pre-war level of around 60%.
Looking at these numbers alone, it appears to be an increasingly expensive war. However, when another set of numbers is considered, the picture becomes quite different. In 2025, Israeli high-tech companies' private financing reached $15.6 billion, continuing to rise from $12.2 billion in 2024; the total amount of tech mergers and acquisitions for the year reached $74.3 billion, with Google acquiring cybersecurity company Wiz for $32 billion and Palo Alto Networks acquiring another cybersecurity company, CyberArk, for approximately $25 billion. Military exports also set a record, reaching $19.2 billion in 2025, with growth of nearly 30% from the previous year.
Thus, an interesting financial question arises - as the war makes the country increasingly expensive, why are some of its tech assets also becoming increasingly valuable?
The answer lies in the increasingly apparent divergence within the Israeli economy. The war has left costs for the treasury, families, and ordinary businesses, but at the same time, it has expanded global demand for cybersecurity, air defense, unmanned systems, AI security, and intelligence technology. More crucially, Israel has the capability to quickly turn this demand into products and then convert these products into valuations, financing, and exports through the US capital market and the global defense industry system.
To understand this point is to see clearly the chain that links war, economy, and technology, which appears to be contradictory but is actually quite clear.
Cost of War
A long war first changes where a government's money is spent.
In 2024, Israel's economy is expected to grow by about 1%, and recover to around 2.9% in 2025. The Bank of Israel still predicted in July this year that 2026 could see growth of 4%, with the debt ratio expected to stabilize at around 69%. However, this forecast is highly conditional.
It assumes a decrease in the intensity of fighting in the direction of Lebanon and also assumes that there will be no new round of war against Iran during the forecast period. One of the most important macro variables for the Israeli economy now, in addition to interest rates, consumption, and investment, also includes when the next war will occur and how long it will last.
During wartime, looking at GDP can be particularly misleading
Government purchases of intercept missiles, subsidies for reservists, and relocation of evacuated residents can all be included in economic activity statistics. If private enterprises reduce investment by a certain amount and the government increases military spending by the same amount, the overall economic impact may not immediately appear to be a collapse. However, the significance of these two types of expenditures is completely different. When enterprises build new factories, residents purchase new homes, or universities expand their laboratories, they typically leave behind future production capacity; after an intercept missile completes its mission, its economic value basically disappears.
This is also why Israel's GDP in recent years has been more resilient than many people imagined, while fiscal pressure has continued to accumulate. The Bank of Israel estimates that the war-related fiscal costs from 2023 to 2026 will be approximately 35 billion shekels (around 60 billion yuan), with about half relying on debt financing. In 2025, the central government budget deficit will still reach 4.7% of GDP, and the debt-to-GDP ratio will rise to 68.5%. Before the war, Israel had always considered lower debt to be an important buffer for a small open economy to withstand external shocks, but this buffer has been consumed by the war to a considerable extent.
It is more difficult to quantify the impact on people. Approximately 300,000 reserve personnel have repeatedly left their posts, and the construction and agricultural sectors have long been short-staffed due to a decrease in Palestinian labor. The catering, tourism, retail, and real estate industries face even more direct troubles. Although the war has not brought the Israeli economy to a standstill, it has continuously increased the cost of maintaining normal operations. Existing research has already shown that the impact of the war is gradually spreading from simple output losses to labor, private investment, and the household sector.
So, when looking at Israel's economy, it's not just about whether it can still grow. What's truly important is what's sustaining that growth. Government spending is taking up an increasingly large share, the defense budget has a higher priority, private investment faces higher risk discounts, and education, healthcare, infrastructure, and social welfare have to compete in a tighter fiscal space. Over time, the opportunity cost of military spending will transition from the fiscal balance sheet to people's daily lives and also affect the accumulation of human capital for the next generation.
This is where a long war truly becomes expensive.
The battlefield decides the flow of money
If macroeconomic data is a record of a country's overall accounts, then industry data shows how war redistributes opportunities. The most obvious beneficiary is the defense industry.
Israel's Ministry of Defense released data this year showing that defense exports reached $19.2 billion in 2025, setting a record for the fifth consecutive year, more than doubling over the past five years. Missiles, rockets, and air defense systems accounted for approximately 29% of total exports, while electro-optical and observation systems also saw significant growth. Notably, more than half of the export value came from large projects worth over $100 million each, with government-to-government military trade agreements nearing $10 billion.
Israel's Ministry of Defense barely skirted the connection between war and exports when releasing these figures, explicitly stating that systems proven in combat during past military operations have increased demand for Israeli defense technology on the international market.
"Combat-proven" - or verified in actual combat - is a highly valuable label in the defense industry market.
Does radar work in complex environments, can air defense systems intercept real missiles, and have unmanned systems withstood electronic interference - these are questions that are difficult to answer with exhibition promotional materials. War provides the most brutal and direct testing ground. What Israel consumes domestically is missiles, military expenditure, and personnel, but what its defense industry gains is a set of combat records that can be showcased to overseas customers.
Changes in the tech industry are more interesting. In 2025, Israel's high-tech private financing reached $15.6 billion, significantly higher than $12.2 billion in 2024. Cybersecurity financing was approximately $4.1 billion, second only to enterprise software. Meanwhile, the total number of financing deals for the year was only 717, already at a 10-year low, but the median single financing amount rose to $10 million, a 67% increase from the previous year.
These numbers are worth a closer look. The money has returned, but it hasn't been spread evenly across the startup ecosystem. Investors are making fewer bets, yet they're willing to place larger wagers on a select group of businesses they understand and that have already proven themselves.
It's entirely possible for "record-high financing amounts" and "pressures on the startup ecosystem" to occur in the same year.
Wiz and CyberArk are the two most typical examples.
Google is willing to pay $32 billion for Wiz, with the core judgment being that cloud security has become one of the most important infrastructures in the AI era. Palo Alto Networks spent around $25 billion to acquire CyberArk, targeting identity security and the permission management market that is expected to expand rapidly with the emergence of a large number of AI entities in the future. Both companies have deep Israeli technological roots, but they serve global customers, with capital, employees, and business boundaries long since transcending Israel's borders.
The war has created a unique amplification effect here. The more the world worries about cyberattacks, unmanned systems, missile defense, and critical infrastructure security, the harder it is to cut related budgets. While ordinary consumer industries facing war are concerned about disappearing demand, the security industry facing war sees more orders. This is also the most noteworthy aspect of this round of the Israel war from a financial perspective.
The risk of war at the national level and business opportunities at the enterprise level have never been so clearly moving in different directions.
Gunfire has not scared away American capital
A country that has been subject to long-term missile attacks, has had its sovereign rating downgraded, and is experiencing a widening fiscal deficit, would normally prompt investors to demand increasingly higher risk premiums.
In recent years, however, Israeli tech assets have frequently achieved record-breaking valuations, largely because the boundaries of Israeli tech companies have long since ceased to coincide with those of the Israeli national economy.
Israel's tech industry has been highly internationalized from the start. R&D teams may be based in Tel Aviv, with main customers in the US, financing platforms in New York, and sales teams scattered across Europe and Asia. Data from the Israel Innovation Authority illustrates this point.
Israeli tech companies now employ approximately 440,000 people overseas, surpassing the roughly 400,000 employed domestically. Between October 2023 and July 2024, an additional 8,300 high-tech workers left Israel for more than a year.
This globalization was previously mainly about getting closer to customers and capital, but after the war it has taken on an additional role: reducing companies' dependence on any single geographic location.
The office is temporarily closed, but employees can still work remotely; the founder has been summoned, and the overseas team can still maintain customer and delivery services; as domestic risks rise, companies can move more operational and financing processes abroad. For light-asset tech companies, missiles can destroy buildings, but they have a hard time destroying code, patents, and distributed research and development networks.
The second reason comes from the United States.
What makes Israel's tech industry truly unique is that it is embedded in both the US capital system and security system to a large extent. US venture capital firms have long been involved in Israeli tech financing, and US tech giants are the most important acquirers. The war has increased the risk of Israel as a country, but US capital can price excellent Israeli security companies as global tech assets.
Wiz's $32 billion valuation is not wealth conjured out of thin air by war. The expansion of AI and cloud computing was already elevating the importance of cybersecurity; the war has further reminded global enterprises and governments that the risk of attacks on digital infrastructure is rising. Israel happened to possess mature technology, a high density of engineers, and extensive security expertise at this moment, so American capital was willing to pay a higher price.
There is also a crucial causal relationship that is often easily misunderstood: while war can create demand and provide a testing environment, it does not automatically generate innovative capabilities.
Many countries in the Middle East have long been plagued by war, but few have been able to continuously produce world-class tech companies. Israel's ability to transform wartime needs into products today relies on the talent system, military technology departments, university research, networks of retired technicians starting businesses, venture capital, and the US market that have been built up over the past few decades. War has simply accelerated existing capabilities in the direction of the most pressing demands.
As a result, Israel has seen a rare pricing phenomenon in recent years, with a rising country risk premium on one hand and a rising security tech premium on the other. The two forces are acting simultaneously, with the latter temporarily outweighing the former in some tech companies.
This is also why looking only at the Israeli stock market, tech financing, and defense exports would lead to an overly optimistic conclusion; while looking only at the fiscal deficit, debt, and war losses would underestimate the resilience of the economy.
The True Value of War
The prosperity of cybersecurity technology does not necessarily mean the entire Israeli tech ecosystem is doing well.
Data released by the Israel Innovation Authority this year has already revealed some concerning shifts.
In 2025, high-tech employment reached approximately 400,000, up 2.5% year over year — a return to growth, though the average pace over the past decade was closer to 6%. More critically, the number of domestic R&D personnel fell for the first time in ten years, down about 3,500, and R&D positions' share of high-tech employment slipped from 51% to 49%. Meanwhile, the long-term departure of high-tech talent continued to rise, with the number of people leaving for extended periods in summer 2024 up 14% from the same period a year earlier.
These numbers indicate that there is a gap between the prosperity of the capital market and the country's indigenous innovation capabilities.
Large companies can easily secure financing, mature and safe enterprises have high valuations, and multinational corporations are also willing to make acquisitions, but young entrepreneurs are facing narrower financing channels, research and development personnel are flowing overseas, and more and more companies are relocating their operations, and even parts of their research and development, abroad.
A company's value can still be counted as part of the "Israeli tech" statistics, but its employment, tax payments, decision-making power, and future additional investments may not all remain in Israel.
This may be one of the most overlooked costs of a long-term war. As cybersecurity, drones, air defense, and intelligence analysis receive increasingly more funding, agricultural technology, climate technology, medical innovation, and other civilian fields must compete for the remaining capital and talent.
In a few years, this concentration will make the overall data look good, as the strongest tracks will become even stronger. However, if we look at a 10-year timeframe, the question becomes whether this country still has a wide enough range of innovation.
Israel, once dubbed the "Start-Up Nation", has never relied solely on its defense and cybersecurity industries. Drip irrigation, medical devices, semiconductors, communication technologies, and enterprise software have all emerged from this ecosystem. A healthy innovation system requires numerous attempts that may not yield immediate returns, capital that tolerates failure, and young engineers willing to spend years solving problems without military orders.
The longer the war drags on, the more certain the demand for security becomes, and the easier it is for capital and talent to flow in the same direction.
In this sense, I would rather describe the structure being formed in Israel as a kind of "security capitalism." Security is becoming an important coordinate for allocating finances, capital, talent, and technology. The government budget is tilted towards national defense, capital is concentrated in security technology, talent is flowing into industries with clear security needs, and international economic connections are also increasingly tied to security alliances. A system that originally served national security is increasingly extending into investment, entrepreneurship, and industry choices.
This pattern is extremely strong during wartime, but the truly subtle issue may arise on the day peace arrives. If regional risks decrease significantly, it will be difficult for defense orders and security technology valuations to continue growing at the pace they did during wartime; meanwhile, civilian innovation, education investment, and early-stage entrepreneurial ecosystems that have been squeezed for many years will not automatically recover the day after a ceasefire.
War can generate a surge in security demand within months, yet industrial diversity takes years to regrow.
So, Israel's experience over the past three years has not proven that "war can make a country rich".
What it truly demonstrates is that a small economy with a strong technological foundation, a mature mechanism for converting military technology to civilian use, and deep integration into the US capital and security systems, has the capability to transform a portion of its wartime demands into military-industrial exports, venture capital, and corporate valuations, and then use these gains to offset a portion of the losses caused by the war.
Offsetting never means cost-free. The price of war is ultimately paid by the fiscal purse and taxpayers, with reservists bearing the cost in time and tourism, construction, retail, and ordinary households absorbing the hit to income and daily life. On the other side, defense contractors, security technology firms, and those holding related equity capture more orders and higher returns on capital.
Being able to survive in war is a capability, but being able to continue innovating when war is not necessary is a more difficult test for an economic system.
This may be the economic phenomenon most worthy of study in this war.