The road to recovery following Moody’s hits on Israel’s credit rating - opinion

Moody’s downgraded Israel’s credit rating for the first time and lowered its outlook from stable to negative. While the main focus of the downgrade was the war’s impact on Israel’s economic and fiscal stability, Moody’s list of concerns also included political upheaval and heightened security risks – even after the war in Gaza winds down or stops.

The political and social risks Moody’s mentioned in its announcement are relevant to Israel’s credit rating because they could impact key economic variables like economic growth, budget deficit, and the debt-to-GDP ratio. Direct impacts could include reduced investment and private consumption, due to the negative effects of political uncertainty, and slower economic growth.

Indirect impacts could arise through decisions of the government and the Knesset on economic policy issues (making it difficult to implement unpopular economic decisions, such as fiscal adjustments and structural reforms). What can the government do to improve the economic and fiscal soundness of the Israeli economy in the eyes of the rating agencies and financial markets, amid war and political uncertainty?

More could be done The government had a rare opportunity to carry out large-scale and significant actions during the preparation of the revised budget for 2024, which was recently presented to the public and is currently undergoing legislative proceedings in the Knesset. While the government made some moves to reduce the deficit in 2024 and in subsequent years, certainly more could have been done – especially long-term moves and less reliance on one-time measures to reduce expenses or increase income from various sources.

Structural reforms to boost long-term economic growth were lacking. For example: it decided to raise the VAT rate and increase the health tax, instead of canceling tax exemptions and benefits that create distortions and failures in the economy. It maintained enhanced budgets for yeshivot and for some educational institutions that do not teach basic skills – that will not support future economic output. And the government avoided a significant reduction in the number of government ministries and the number of ministers, which are much bigger than needed.

A road map to recovery

There is a silver lining for Israel. It is not too late for the government to correct course and move forward on a road map for recovery. Even if the proposed budget is approved by the Knesset, the government still has room to implement efficiency measures, drive additional structural reforms for growth, and reorder priorities where necessary.

While other rating agencies mull over their decisions regarding Israel’s creditworthiness, and as the war continues, Israel’s security and economic future are being tested. Israel can pass this test, but the government has a narrow window to make meaningful changes and improvements.

The government’s response to Moody’s downgrade will not only determine Israel’s credit rating but will also shape Israel’s economic path forward. Israel must act quickly and boldly.

Israel’s road to recovery can, and must, begin now.

The writer is the head of the Kohelet Economic Forum.