In 1950, Israel spent some $400 million on defense, equal to approximately 8.5 percent of GDP. By 1975, this had increased thirty-five-fold in real terms to reach approximately $14 billion, or 30 percent of GDP. By 2009, it had fallen to an estimated $12 billion, or approximately 8 percent of GDP (these figures are all in 2005 prices). This chapter examines the defense budget as well as other defense-related spending in the state budget. It then details the extra-budgetary costs of defense that are largely associated with the conscription of manpower. This is followed with an analysis of the costs of conflict and the development of military industries. The chapter concludes by analyzing the role of defense in decision making and its effects on economic growth.

Is defense a burden or a service? If a country is threatened and decides to defend itself, then defense is a service that it buys, like education or health. It ensures that life can continue and in this respect, defense is like other publicly provided service. If defense is viewed as an expenditure that results from the pressures of the military-industrial complex, or because of mistaken political policies, then it may be regarded as a burden. The funds spent on defense could go to improving civilian services or reducing taxation. The truth lies in between these definitions: Defense provides a service that many would prefer not to need. The allocation of resources to defense reduces the costs of insecurity. At the same time, it reduces the volume of resources available to the civilian economy. There are static and intertemporal effects and all have to be considered in calculating how much to spend. Most Israelis agree that defense spending is necessary; however, most would also prefer the volume of this defense spending to be lower.