In answer to your question, eloethan, yes, though my understanding, which could of course be faulty, is that the Arab Palestinians (those in power) refused to live in peace with Jews after the 1967 war though that option was open to them and what the Israelis (those in power) agreed to. As I understand it, the Arab Palestinians in power refused to make peace so that ever since then they have been, essentially, still at war. They do not accept a state of Israel.
Israel has spent much of its defence funds on protecting its civilians from rocket attacks from neighbouring countries (the Iron Dome which intercepts most rockets, though not all) Gaza appears (that word is important) to have spent its defence funds on setting up rocket launches from civilian bases in the hope of using its people as a shield.