Moody’s reaffirmed Israel’s Baa1 credit rating on Wednesday and kept its stable outlook, but warned that a weakened judicial system could trigger a downgrade. The agency said Israel’s institutional strength has weakened in recent years amid deepening political polarization and growing tensions between key state institutions. That’s the polite language of a state machine grinding against itself while ordinary people pay the bill.
Debt, Defense, and the Election Machine
The warning landed as Israeli officials and analysts focused on the country’s fiscal path ahead of elections on October 27. Bank of Israel Governor Amir Yaron said whoever wins the election later this year must rein in defense-led state spending, which has grown in recent years, and put more money into education, infrastructure and other growth engines. He said fiscal policy was the main challenge, especially since the defense budget has swelled to as much as 8% of gross domestic product, double that of before the Hamas attacks on Israel on October 7, 2023, that triggered the Gaza war.
Yaron said, “We face a clear challenge for any government that enters office. First of all our debt must not continue to increase. Currently, we are on a path of rising debt,” and noted the debt-to-GDP ratio had risen to 70% from around 60% in 2023. The numbers tell the story cleanly enough. The state expands its war footing, the debt climbs, and the public gets handed the invoice.
He added, “The second is the defense budget ... and third is investing in growth engines like education and infrastructure.” Yaron also said Israel needs to better integrate population groups like ultra-Orthodox Jews into the labor market. Budget director Maharan Frozenfar said the Finance Ministry was building a multi-year plan to boost growth that he hoped the next government would adopt. Frozenfar said, “We need to take difficult actions to keep the momentum going and achieve even greater growth.” He added that the economy at large must adapt to the prospect of a strong shekel against the dollar.
The State’s Monopoly on Spending
With defense spending expected to stay high given Israel’s many regional threats, Yaron advocated raising taxes in 2027 to help keep debt under control. He said, “Realistically, we will likely have a higher budget than before October 7.” Frozenfar said he was “strongly opposed” to raising taxes and that stronger economic growth could help lower the debt burden. Same apparatus, different managers. One wants taxes up, one wants growth to do the trick, and both are talking about how to keep the machine funded.
On the heels of easing inflation pressures caused by the Gaza and Iran wars, the Bank of Israel last week reduced its benchmark interest rate by 25 basis points to 3.5%, its second straight cut. Yaron said that as long as Israel does not return to war and inflation remains stable, short-term interest rates would likely continue to fall, but monetary policy needed to remain cautious due to price pressures in areas such as wages and housing rents. The central bank has said it expects the key rate to reach 3% by next June.
Markets, Sentiment, and the Cost of Rule
Yaron also said the economy had been resilient, but negative global sentiment towards Israel acted like a tax on trade and could have longer-term effects that should be part of the decision-making process. That’s another cost of state power: not just the bombs and budgets, but the drag that follows the violence, the polarization, and the institutional rot that Moody’s said was weakening Israel’s standing.
The election on October 27 is being treated as a fiscal turning point, but the article’s own figures show a narrower reality. Defense spending has doubled since October 7, 2023. Debt has climbed to 70% from around 60% in 2023. The central bank is cutting rates while warning about wages and rents. The Finance Ministry is drafting a multi-year plan. Moody’s is watching the courts. Everyone in the hierarchy is busy managing the fallout of a system that keeps choosing war, then calling the bill “policy.”