Israel’s budget chief on Wednesday warned the government about expanding the state’s spending limits without making appropriate cuts and adjustments to finance it as the country could be facing another credit rating downgrade.
Speaking at a Knesset Finance Committee meeting, Finance Ministry budget commissioner Yogev Gradus cautioned that increasing the budget framework could be dangerous for the economy and send a negative signal to investors. The committee meeting discussed the expansion of NIS 3.4 billion ($900.4 million) in the 2024 state budget to help fund evacuated civilians and reserve soldiers until the end of the year amid the ongoing months-long war with the Hamas terror group.
The measure has already faced significant backlash from officials in the Finance Ministry as well as opposition politicians, who rebuffed Finance Minister Bezalel Smotrich’s assertion that the expansion would not push the budget deficit past the annual target of 6.6 percent of gross domestic product set for the end of 2024.
“We are in an unusual period, there are precedents but nothing like this,” said Gradus. “As we increase the spending limit, it adds debt costs and therefore it should be carried out in a very careful and measured manner.”
Gradus elaborated that Israel is already facing higher interest costs when raising debt to fund the ballooning military and civilian costs of the war after the three major global credit agencies – Moody’s, Fitch and S&P – cut Israel’s credit score this year.
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A lower credit rating makes it more expensive for the Israeli government to raise debt at a time, when it needs billions of shekels to fund the costs of the ongoing war, while investors see more risk to invest in the country.
Finance Minister Bezalel Smotrich speaks during a press conference at the Ministry of Finance in Jerusalem, September 3, 2024. (Chaim Goldberg/Flash90)
“We are facing a local crisis, the credit rating agencies have already lowered the country’s rating and maintained a negative outlook, which means very high interest costs,” Gradus lamented. “We are still raising debt, and we still have access to the markets, but the question of when we lose the confidence of investors is still there and, therefore we do not want to breach the limits of the budget framework.”
Israel’s fiscal deficit in August grew to 8.3% of GDP, marking the fifth month that the deficit is above the annual government target of 6.6% of national output set for the end of 2024. Israel posted a budget deficit of 4.2% in 2023.
Earlier this year, US ratings agency Moody’s downgraded Israel’s credit rating due to the impact of its ongoing war with Hamas in Gaza, cutting it by one notch from A1 to A2. The outlook was changed to negative from stable opening the door for further downgrades as the cost of the continued fighting weighs on public finances.
The ratings agency is expected to publish an update on Israel’s sovereign rating and is reportedly holding talks with Israeli officials ahead of an upcoming decision.
“We explain to the credit rating companies that Israel has always known how to return to a reasonable debt-to-GDP ratio,” said Gradus.
However, he noted that “Israel’s risk premium is very high, and it does not match the current credit rating, which shows that the market prices Israel’s country risk higher.” It essentially means that the market is pricing in further downgrades.
Gradus disclosed that expenditure on debt interest payments has already increased “dramatically.”
“Already in the 2025 budget that will be brought here in a few months, we anticipate higher interest costs of about NIS 7 billion compared to the period before the war,” said Gradus.
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