Moody’s Frowns on Spending Plus Tax Cuts

The Moody’s rating agency has turned out more dubious than it seemed at first about the health of Israel’s economy in its latest reports.

Moody’s analysts were critical of the new 2017-2018 budget, which projects twice as much spending as initially planned, along with tax cuts that could swell the debt ratio, Globes reported on Sunday.

In a preliminary report, it had been more upbeat, and upheld Israel’s A+ rating. But that was released while budget debates were still taking place. The full report reflected the final budget framework, and it was less favorable, taking Israeli politicians to task for undue reliance on increased tax revenues resulting from higher private consumption, which it cautioned was only a temporary development.

Debt ratio is a crucial factor in determining a nation’s credit rating. Standard and Poor’s explained that its decision to lower Mexico’s rating last week was based on a combination of disappointing growth and an increase in Mexico’s ratio of government debt to GDP to 46.8 percent. The rating change precipitated a sharp downturn in the value of the country’s currency and its stock exchange also plunged.

Mexico’s S&P rating is now BBB+, three lower than Israel, whose rating is A+. This, despite the fact that Israel’s current debt ratio is 63.9 percent of GDP. However, Israel’s debt situation has been mending, after it fell significantly in 2015, and is expected to continue falling in 2016, for the 14th consecutive year (other than a one-time rise in 2009). Combined with other positive indicators, Moody’s justified the A+ rating. Subsequent comments suggest that Israeli politicians will be under pressure to be spending less in the future.

The Ministry of Finance on Sunday seemed unworried by the appraisal. It said that Moody’s analysis had nothing new to say about reversing the downtrend in the ratio of debt to GDP, and emphasized Israel’s high marks in a number of parameters, including economic and institutional power.