PM downplays Fitch’s downgrade but top economists warn about handling of war economy
Opposition leaders say Fitch rating cut is due to government’s management of the economic fallout of the war; leading economists urge progress on 2025 budget to regain confidence
Sharon Wrobel is a tech reporter for The Times of Israel.
Israel’s Prime Minister’s Office downplayed the credit rating downgrade by Fitch as a consequence of the prolonged war with Hamas as top economists and opposition leaders warned about the dangers of the government’s management of the economy and its public finances.
“Israel’s economy is resilient and functioning well,” the Prime Minister’s Office said. “The rating downgrade is a result of Israel facing a multifront war that was imposed on it. The rating will rise back when we win — and we will indeed win.”
Late on Monday, Fitch downgraded Israel’s credit rating by one notch to A from A+ expecting the “conflict in Gaza could last well into 2025,” weighing on the country’s hard-hit public finances as the country faces the threat of military operations on multiple fronts. The move marked the third global credit agency to lower Israel’s credit rating this year, following S&P and Moody’s.
Fitch maintained a negative outlook on the country’s economy leaving the room open for the likelihood of additional downgrades as it raises concerns about the government’s management of the fiscal impact of “additional military spending, destruction of infrastructure and more sustained damage to economic activity and investment.”
Opposition Leader Yair Lapid cautioned that Fitch’s downgrade, which increases the interest the country pays on its debt and the risk for investors, will affect the Israeli public.
“This will cost us. The Israeli middle class will feel it in their pocket,” Lapid asserted. “The unbearable prices will go even higher. The state will pay higher interest.”
“The credit rating firms are telling us that Israel’s economy is not being managed,” he added.
Fitch’s move did not come as a surprise to economists and market players who projected in recent weeks that credit rating downgrades could be in the offing unless the government gets its act together and takes the necessary steps to bring down the budget deficit and to avert public finances from spiraling out of control.
A group of senior economists warned that the downgrade of Israel’s credit rating is a sign of the continued deterioration of the country’s economy and the result of a “never-ending series of government failures,” since the current right-wing government was formed in December 2022.
The forum, which includes former senior finance ministry and central bank officials, criticized Finance Minister Bezalel Smotrich for delaying the preparation of the state budget for 2025, while ignoring calls for action by Treasury officials and warnings of the Bank of Israel.
Alongside the reasons for the downgrade, Fitch issued a clear wake-up call and warning to the government that it views “political fractiousness, coalition politics and military imperatives,” as risks to the government’s ability to implement recent fiscal measures such as raising the value-added-tax rate in 2025 and other steps that are being discussed to cut spending and increase revenues.
Fitch expects the Israeli government to permanently increase military spending by close to 1.5 percent of GDP versus pre-war levels as the country strengthens its border defenses and amid “plans to widen mandatory draft and to increase domestic military production, which would also add to spending.”
In response to Fitch’s concerns, Finance Ministry top accountant Yali Rothenberg urged the government to create as much certainty as possible for the Israeli economy, investors and rating agencies by acting swiftly to formulate a responsible state budget for 2025.
Similar to the Prime Minister’s Office, Finance Minister Smotrich appeared to dismiss Fitch’s warnings as a “natural” consequence of the war and said Israel’s economy would bounce back following responsible steps he plans to advance.
“Israel’s economy is strong,” said Smotrich. “We will pass a responsible [2025] budget that will continue to support all the needs of the war, while maintaining fiscal frameworks and promoting growth engines.”
Preliminary discussions on the 2025 budget were started in June but deliberations with the government have since stalled.
Meanwhile, National Unity party chief Benny Gantz pinned the blame for Fitch’s downgrade on the government’s refusal to pass budget amendments cutting superfluous spending on coalition parties’ demands.
“We saw yesterday the result of favoring political interests over national interests, in the lowering of the credit rating, and unfortunately we all will pay the price,” Gantz said.
The forum of top economists said that Education Minister Yoav Kisch promotes the transfer of huge sums to ultra-Orthodox educational institutions that do not teach core studies. In addition, the government’s policies subsidize the mass evasion of military service by the ultra-Orthodox population and thereby increase the burden of the army service on the general public, they warned.
“The government harms state institutions and civil society that are essential to the prosperity of Israel’s economy, such as the public service, the legal system, and academia,” the economists cautioned. “Israelis need to wake up and call as soon as possible for a fundamental change in the work of the government.”
“Otherwise the damage the government causes may not be able to be repaired.”
Among the members of the group are Prof. Zvi Eckstein, former deputy governor of the Bank of Israel; Rony Hizkiyahu, former Bank of Israel supervisor of banks and accountant general; Yair Avidan, former supervisor of banks; Prof. Avi Ben-Bassat, former finance ministry director general; Prof. Eugene Kandel, former chairman of the National Economic Council; Prof. Eytan Sheshinski of the Hebrew University of Jerusalem; and Prof. Leo Leiderman of Tel Aviv University.
