Budget delay, canceling VAT hike jeopardize Israel’s credit rating

Bezalel Smotrich, Benjamin Netanyahu  credit: Knesset spkesperson's office, Shutterstock  processing: Tali Bogdanovsky
Bezalel Smotrich, Benjamin Netanyahu credit: Knesset spkesperson's office, Shutterstock processing: Tali Bogdanovsky

There is major concern that the government’s economic policies could lead to a further cut in Israel’s credit rating.

The Ministry of Finance is busy preparing the state budget for 2025, but the work is becoming more complex every day. While senior ministry officials are trying to promote a balanced fiscal plan to deal with higher defense spending, the politicians, led by Prime Minister Benjamin Netanyahu and his economic advisor Prof. Avi Simhon, are pushing for tax breaks and are in no rush to move ahead with the new budget.

One of the main disputes is over the VAT hike from 17% to 18%, due to come into effect in January 2025. This measure, which was already approved by the Knesset as part of the 2024 state budget last March, is seen by the Ministry of Finance as one of the main anchors in the fiscal plan for the coming years. However, Simhon is pressing for cancelation of the hike, and proposes instead to use the expected revenues from a plan to release trapped corporate profits that he is promoting.

The situation is causing major concern in economic circles, especially due to Israel's recent rating downgrades. Last February, Moody's cut Israel's credit rating for the first time in history, and in April S&P followed suit. Both rating agencies commended the VAT hike as a positive step that would strengthen Israel's fiscal stability. In fact, the VAT increase was the main measure that the Ministry of Finance and the Bank of Israel marketed to the rating agencies in their efforts to prevent the cut.

Moody’s said in its announcement earlier this year, "The government's willingness to raise taxes is a positive sign regarding the strength of the state's institutions, as previous governments have avoided raising taxes in the past." Moody’s added, "As long as they are approved in full, these measures can roughly offset the increase in defense spending and higher interest rates."

In its most recent update on Israel two months ago, Moody’s said about the VAT hike that it "considers it an important step in responding to the deterioration in the fiscal data, which will help limit their weakening from 2025 onwards." S&P echoed this sentiment saying, "The State of Israel has taken several measures to contain the fiscal impact for the longer term by hiking the VAT rate from 2025."

Moody’s warning

Attempts to cancel the VAT hike raise serious concerns that Israel may cross the red line set by the rating agencies. Both agencies have already given Israel’s rating a negative outlook as well as downgrading it, which hints at further future downgrades.

The situation gets even more complicated due to concerns about further delays in preparing the budget. The budget is usually approved by August. Due to delays in recent weeks by the prime minister's advisors, which have prevented the setting of frameworks for the budget and progress in its preparation with the various ministries, it is doubtful whether they will be able to meet the August deadline.

Ministry of Finance officials believe the prime minister and his advisors may even be aiming not to pass a budget and get by as they did during the Covid pandemic with a budget linked to this year’s budget with "additional payments." All this could further exacerbate economic uncertainty.

While Prof. Simhon claims, "The economic situation is good and there is no need to raise taxes", senior officials in the Ministry of Finance warn that without significant measures, the fiscal deficit could exceed previous forecasts. They are proposing a package of cuts and tax hikes amounting to at least NIS 30 billion, with the aim of a deficit of about 4% next year.

So is Israel’s credit rating in danger of being cut further? In fact there is no need to predict because last May, Moody's listed, "Factors that could lead to a downgrade." These included, "Indications that Israel's institutional capacity is reduced even more than the agency currently estimates due to the need to focus on the country's security will also be negative. Moreover, an increase in the likelihood of a substantially larger negative impact on the economic and fiscal strength of the country in the medium term, than the agency’s current forecasts, will exert downward pressure on the rating."

Put simply Moody’s is saying Israel's institutional capacity is, among other things, the state's ability to make difficult decisions and stand behind them. The VAT hike, as noted by analysts at the rating agencies, is the most prominent of them.

If the government does a U-turn on the issue, Moody's may see it as "indications that Israel's institutional capacity is even more limited than the company estimates." All the more so if the government refrains from passing an orderly state budget, in efforts to avoid cuts and painful measures for political reasons. In such a case, the other scenario that Moody's warns of will also materialize: "An increase in the likelihood of a substantially larger negative impact on the economic and fiscal stability of the country in the medium term."

November or before

According to the formal timetable, the next round of Israel's rating announcements from Moody's and S&P will be in November. However, in recent times there have been ‘spontaneous’ early publications by the rating agencies due to the upheavals in Israel - the war and before that the judicial reform. The rating agencies closely follow what is happening in Israel and they could advance announcements if they see that Israel is crossing the red line that they have drawn.

The credit rating reflects the risk that a country (or business company) will not repay debt. One of the most important indicators for analysts when calculating a country's risk is the debt-to-GDP ratio. In Israel, this ratio is relatively low compared to Western countries. However, it has been on a dangerous upward trend since last year. According to the S&P forecast, which calculates the figure slightly differently from the Ministry of Finance, Israel's debt is expected to jump from 60.5% of GDP in 2022 to 69.3% of GDP in 2025, and remain unchanged in 2026.

Israel's S&P rating is A+, down AA-. Moody's rates Israel one grade lower at A2, equivalent to A on the S&P scale. The third rating agency, Fitch, gives Israel a A+ rating. All three agencies have a negative outlook for Israel.

Published by Globes, Israel business news - en.globes.co.il - on July 25, 2024.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2024.

Bezalel Smotrich, Benjamin Netanyahu  credit: Knesset spkesperson's office, Shutterstock  processing: Tali Bogdanovsky
Bezalel Smotrich, Benjamin Netanyahu credit: Knesset spkesperson's office, Shutterstock processing: Tali Bogdanovsky
Unframe founders credit: Yossi Yarom Israeli AI enterprise platform co Unframe raises $50m

Unframe’s turnkey AI solutions enable companies to solve any enterprise AI use case at scale with fully functional, customized AI solutions for businesses in a matter of hours, rather than months.

Combatica credit: Combatica Combatica launches next-gen VR AI training platform

The Israeli company's virtual reality platform includes 50 AI generated scenarios, seven maps and even situations for operating night vision.

Shekel credit: Shutterstock Vladirina 32 Shekel volatility after US tariffs announcement

The shekel is weakening sharply against the euro, which is gaining following the unveiling of Donald Trump's tariffs plan.

Minister of Finance Bezalel Smotrich credit: Noam Moskovitz Knesset Spokesperson Treasury assesses potential damage to Israel's US exports

Israel will be charged a higher tariff on its exports to the US - its biggest export customer - than Turkey and the UAE.

Iranian flag credit: Shutterstock Why inflation haunts Iran

With a month-on-month increase of 3.3% and an annual rate of 37.1%, inflation reflects the struggles of millions of Iranians.

APM merges with lawyers from Doron, Tikotzky Kantor, Gutman credit: Eyal Merilos APM merges with 12 lawyers from Doron, Tikotzky Kantor, Gutman

With the addition of these 12 lawyers, Amit Pollak Matalon & Co. will now have 135 lawyers.

US President Donald Trump credit: Reuters Sipa USA Israel on list as Trump unveils tariffs

Relatively low reciprocal tariffs will be imposed on Israeli goods sold in the US.

Deflated unicorn credit: Shutterstock Big Tech 50 reports more huge falls in startup valuations

Israeli R&D partnership Big Tech 50 reports that an investment of $2 million in Orcam made in 2021, shrank to just $31,000 at the end of 2024.

NextFerm technologies based on yeast credit: NextFerm Food-tech co NextFerm suspends operations

The company, which produces food ingredients in yeast without genetic engineering, cannot pay its debts and is seeking a buyer.

Minister of Finance Bezalel Smotrich credit: Shlomi Yosef OECD sees recovery in growth but high inflation

The OECD Israel Economic Survey 2025 recommends that the Israeli government take several restraining measures, in order to exit the economic storm created by the war.

Dano Ben-Hur credit: Dror Sithakol Statisticians contradict BoI on impact of housing finance deals

The Central Bureau of Statistics insists the impact of 20/80 buy now pay later financing deals on the real estate market and housing prices is minimal.

Governor of the Bank of Israel Amir Yaron  credit: Government Press Office Debt fears top Bank of Israel's concerns

Most unusually, Governor of the Bank of Israel Amir Yaron's press conference last week did not focus on inflation and the impending interest rate decision.

US President Donald Trump  credit: Reuters/Leah Millis Israel moves to avoid Trump's tariffs axe

Minister of Finance Bezalel Smotrich has signed an order canceling all tariffs on imports from the US. The impact will mostly be on agricultural produce.

Forbes Rich List credit: Shutterstock Maslowski Marcin Wiz founders ranked in Forbes 2025 Rich List

There are a few dozen Israelis listed in the 2025 Forbes Real-Time Billionaires List including Wiz founders Assaf Rappaport, Yinon Costica, Roy Reznik and Ami Luttwak.

SatixFy CEO Nir Barkan credit: Ariel Barkan Canada's MDA Space to buy Israeli satcom co SatixFy

MDA Space will pay $269 million for the Israeli company, including taking on a $76 million debt and a 75% premium on SatixFy's closing price on Nasdaq yesterday.

Raising dollars credit: Shutterstock Israeli startups raised over $1b in March

Israeli privately-held tech companies have raised $2.1 billion in the first three months of 2025, according to IVC-LeumiTech, up 24% from the corresponding quarter of 2024.

Twitter Facebook Linkedin RSS Newsletters גלובס Israel Business Conference 2018