“It is my responsibility to see that our policy in Israel fits in with our policy throughout the world; second, it is my desire to help build in Palestine a strong, prosperous, free and independent democratic state. It must be large enough, free enough, and strong enough to make its people self-supporting and secure,” President Truman said in a speech October 28, 1948.
Truman's commitment was quickly tested after Israel's victory in its War of Independence when she applied to the U.S. for economic aid to help absorb immigrants. President Truman responded by approving a $135 million Export-Import Bank loan and the sale of surplus commodities to Israel. In those early years of Israel's statehood (also today), U.S. aid was seen as a means of promoting peace.
In 1951, Congress voted to help Israel cope with the economic burdens imposed by the influx of Jewish refugees from the displaced persons camps in Europe and from the ghettos of the Arab countries. Arabs then complained the U.S. was neglecting them, though they had no interest in or use for American aid then. In 1951, Syria rejected offers of U.S. aid. Oil-rich Iraq and Saudi Arabia did not need U.S. economic assistance, and Jordan was, until the late 1950s, the ward of Great Britain. After 1957, when the United States assumed responsibility for supporting Jordan and resumed economic aid to Egypt, assistance to the Arab states soared. Also, the United States was by far the biggest contributor of aid to the Palestinians through UNRWA, a status that continues to the present.
U.S. economic grants to Israel ended in 1959. U.S. aid to Israel from then until 1985 consisted largely of loans, which Israel repaid, and surplus commodities, which Israel bought. Israel began buying arms from the United States in 1962, but did not receive any grant military assistance until after the 1973 Yom Kippur War. As a result, Israel had to go deeply into debt to finance its economic development and arms procurement. The decision to convert military aid to grants that year was based on the prevailing view in Congress that without a strong Israel, war in the Middle East was more likely, and that the U.S. would face higher direct expenditures in such an eventuality.
Israel has received more direct aid from the United States since World War II than any other country, but the amounts for the first half of this period were relatively small. Between 1949 and 1973, the U.S. provided Israel with an average of about $122 million a year, a total of $3.1 billion (and actually more than $1 billion of that was loans for military equipment in 1971-73) . Prior to 1971, Israel received a total of only $277 million in military aid, all in the form of loans as credit sales. The bulk of the economic aid was also lent to Israel. By comparison, the Arab states received nearly three times as much aid before 1971, $4.4 billion, or $170 million per year. Moreover, unlike Israel, which receives nearly all its aid from the United States, Arab nations have gotten assistance from Asia, Eastern Europe, the Soviet Union and the European Community. Congress first designated a specific amount of aid for Israel (an "earmark") in 1971.
Meeting Israel's Special Needs
Since 1974, Israel has received nearly $100 billion in assistance, including three special aid packages. The first followed the signing of the Israel-Egypt peace treaty and Israel's withdrawal from the Sinai. The redeployment of Israeli forces and rebuilding of air bases in the Negev cost $5 billion. To partially compensate for this sacrifice, Israel received $3 billion ($2.2 billion of which was in the form of high-interest loans) in U.S. aid in 1979.
The second special package was approved in 1985, following a severe economic crisis in Israel, which sent inflation rates soaring as high as 445 percent. The $1.5 billion in emergency assistance-disbursed in two installments, in 1985 and 1986-was provided as part of Israel's economic stabilization program, which was implemented under the guidance of the U.S.-Israel Joint Economic Development Group (JEDG).
An extraordinary package was approved in 1996 to help Israel fight terrorism. Israel is to receive a total of $100 million, divided equally between fiscal years 1996 and 1997.
Regular Economic and Military Assistance
Israel's economic aid changed from the Commodity Import Program (CIP), which provides funds to foreign nations for the purchase of U.S. commodities, to a direct cash transfer in 1979. In return, Israel provided the Agency for International Development with assurances that the dollar level of Israel's non-defense imports from the U.S. would exceed the level of economic assistance granted Israel in any given year. Thus, Israel guaranteed that U.S. suppliers would not be disadvantaged by the termination of Israel's CIP Program.
Starting with fiscal year 1987, Israel annually received $1.2 billion in all grant economic aid and $1.8 billion in all grant military assistance. In 1998, Israel offered to voluntarily reduce its dependence on U.S. economic aid. According to an agreement reached with the Clinton Administration and Congress, the $1.2 billion economic aid package will be reduced by $120 million each year so that it will be phased out in ten years. Half of the annual savings in economic assistance each year ($60 million) will be added to Israel's military aid package in recognition of its increased security needs. In 2005, Israel received $360 million in economic aid and $2.22 billion in military aid. In 2006, economic aid is scheduled to be reduced to $240 million and military aid will increase to $2.28 billion.
For several years, most of Israel's economic aid went to pay off old debts. In 1984, foreign aid legislation included the Cranston Amendment (named after its Senate sponsor), which said the U.S. would provide Israel with economic assistance "not less than" the amount Israel owes the United States in annual debt service payments. The Cranston Amendment was left out of the FY1999 and subsequent appropriations bills. At that time Israel received $1.2 billion in ESF and owed only $328 million in debt service so the amendment was no longer needed.
In 1998, Israel was designated as a “major non-NATO ally,” which allows it to receive outdated military equipment the U.S. military wishes to sell or give away.
Roughly 26 percent of what Israel receives in Foreign Military Financing (FMF) can be spent in Israel for military procurement. From FY1988 to FY 1990, Israel was allowed to use $400 million in Israel. From FY1991 to FY1998, the amount was increased to $475 million. As U.S. military aid to Israel increased, according to the agreement to cut economic aid, the amout set aside for defense purchases in Israel has increased (but the percentage has remained roughly the same). In 2009, the figure was $671 million. The remaining 74 percent of FMF was spent in the United States to generate profits and jobs. More than 1,000 companies in 47 states, the District of Columbia and Puerto Rico have signed contracts worth billions of dollars through this program.
At the end of 1998, Israel requested an additional $1.2 billion in aid to fund moving troops and military installations out of the occupied territories as called for in the October 23, 1998, Wye agreement. Israel received $600 million of this in military aid in FY1999 and $300 million in each fiscal year 2000 and 2001 (see Wye funding table).
In February 2003, for the first time, Congress voted to cut aid to Israel against the wishes of the pro-Israel lobby and the government of Israel. The 0.65 percent deduction was not aimed at Israel; however, it was an across the board cut of all foreign aid programs for fiscal year 2003. The lobby and government also suffered a defeat when Congress deleted an administration request for an extra $200 million to help Israel fight terrorism. Even while cutting aid to Israel (which still was budgeted at $2.1 billion for military aid and $600 million for economic assistance), Congress included a number of provisions in the aid bill viewed as favorable to Israel, including a provision that bars federal assistance to a future Palestinian state until the current Palestinian leadership is replaced, and that state demonstrates a commitment to peaceful coexistence with Israel, and takes measures to combat terrorism.
The setbacks were also temporary as the Administration approved a supplementary aid request in 2003 that included $1 billion in FMF and $9 billion in loan guarantees to aid Israel's economic recovery and compensate for the cost of military preparations associated with the war in Iraq. One quarter of the FMF is a cash grant and three quarters will be spent in the United States. The loan guarantees are spread over three years and must be spent within Israel's pre-June 1967 borders. Each year, an amount equal to the funds Israel spends on settlements in the territories will be deducted from the loan amount, along with all fees and subsidies.
Altogether, since 1949, Israel has received more than $106 billion in assistance. This includes the four special allocations, the $10 billion in loan guarantees (spread over five years) approved in 1992, the $9 billion in guarantees offered in 2003, and a variety of other smaller assistance-related accounts, such as refugee resettlement (nearly $1.6 billion overall since 1973), the American Schools and Hospitals Abroad Program (ASHA), which supports schools, libraries and medical centers that demonstrate American ideas and practices (($144 million), and cooperative development programs (a total of $186 million since 1981).
The total does not include funds for joint military projects like the Arrow missile (for which Israel has received more than $1 billion in grants since 1986), which are provided through the Defense budget. President Bush requested $60 million for the Arrow for FY2003 and $136 million in FY2004. The United States also has provided $53 million for the Boost Phase Intercept program and $139 million for the Tactical High Energy Laser program under development in Israel to complement the Arrow.
Though the totals are impressive, the value of assistance to Israel has been eroded by inflation. While aid levels remained constant in total dollars from 1987 until 1999, the real value steadily declined. On the other side of the coin, Israel does receive aid on more favorable terms than other nations. For example, all economic aid is given directly to the Israeli government rather than allocated under a specific program. Also, starting in 1982, Israel began to receive all its economic aid in a lump sum early in the fiscal year instead of in quarterly installments as is done for other countries. Israel also receives offsets on FMS purchases (U.S. contractors agree to offset some of the cost of military equipment by buying components or materials from Israel).
A 10-Year Military Aid Agreement
In August 2007, the Bush Administration agreed to increase U.S. military assistance to Israel by $6 billion over the following decade. Israel is to receive incremental annual increases of $150 mllion, starting at $2.55 billion in FY2009 and reaching $3.15 billion per year for FY2013-2018.
Israel receives the FMF aid in a lump sum in the first month of the fiscal year. The funds are placed in an interest bearing account and that interest is used to pay down Israel’s debt to the United States, which was $1 billion as of December 2006.
In addition to FMF, Israel also receives money for the joint development of missile defense systems. These amounts have been growing over the years, with the bulk of the funding going to the Arrow program.
Defense Budget Appropriations for U.S.-Israeli Missile Defense
Sources: Clyde R. Mark, "Israel: U.S. Foreign Assistance," Congressional Research Service, (July 12, 2004); U.S. State Department; USAID, Congressional Budget Justification for FY06 Foreign Operations, March 2005; Jeremy M. Sharp, “U.S. Foreign Aid to Israel,” (DC: Congressional Research Service, December 4, 2009); Jim Zanotti, "Israel: Background and U.S. Relations," Congressional Research Service (February 28, 2014).