Major distrust in the ability of Israel's government, and especially its Finance Minister, to bring about a responsible budget and a serious plan to reduce the deficit is a significant factor behind the Moody's credit ratings drop, Tel Aviv University Economist Prof. Dan Ben-David explained.

Ben-David, who established and heads the Shoresh Institution for Socioeconomic Research, said that it is "difficult to overstate the significance" of Big Three ratings agency Moody's downgrade of Israel's rating by two notches to Baa1 on Friday.

Israel was assigned its first rating by Moody's in 1995, and over the two decades since has been upgraded by the agency twice, Ben-David explained, emphasizing that "not even the horrendous second Intifada lead to a reduction [in the credit rating], because we had clearly defined and internationally acceptable military and economic plans."

"Within just a few months this past year, Israel not only lost the two ranks that it took us decades to earn, it even fell below where we were when our first credit ratings 30 years ago," he added.

Considering the ratings drop in the context of Israel's current economic situation paints a bleak picture. The Israel-Hamas war has demanded massive government spending as it has slowed growth, and Israel's deficit has swollen.

"What the lower credit rating does now is to raise even further the interest costs of the already ballooning government deficit," explained Ben-David.

Asked what he thinks about Finance Minister Bezalel Smotrich's reaction to the rating's drop, in which he reassured Israelis that "after winning the war, those who dropped the rating will raise it back to the real level of the Israeli market," Ben-David said that Israel has a "clueless finance minister."

Smotrich has "not internalized that when this war ends, we’ll need to spend tens of billions more per annum on defense, along with an additional tens of billions more to rebuild the south and north.  And now, because of the need to borrow at higher rates today because of the drop in credit ratings, we’ll need to spend a further tens of billions more that we had not planned on, just to fund all of the above, and much more," he said.

Ben-David also responded to the reaction of Israel's Accountant-General Yali Rothenberg, who said that Moody's ranking was "exaggerated" and "unjustified."

He explained that Rothenberg's role dictates that he must try to inspire confidence in Israel's economy.

"His job is to raise the money that Israel needs to borrow and to convince people that our emperor is actually wearing clothes, despite what our eyes – and the credit agencies – actually see."

Ben-David emphasized the fact that Moody's rating decision was not only based on the war but on the Israeli government's lack of an exit strategy from military conflict or from the risks that are undermining the country's relations with key allies.

Moody's highlights risks in security, gov. instability

Listing additional factors, Moody's "are very explicit about the risks emanating from tensions between the government and the security services; about the government’s delay in drafting Haredim and thus reducing the reserve duty burden on those already serving; and the justice minister’s continued disregard for Supreme Court rulings," Ben-David added.

Ben-David stressed the magnitude of the interest that Israel pays on its deficit in a "good year," emphasizing how impactful the increase of interest due to the ratings drop could be.

Offering as an example an economically "good year," Ben-David explained that interest payments in 2022 cost more than Israel's entire primary and secondary school systems.

"Similarly, our total expenditures on all of Israel’s hospitals and all of the country’s’ higher education system combined were less than our interest payments," he added.

"And now, thanks to the major drop in credit rating, we will be paying a whole lot more when we borrow."

"Imagine what we could do with that money if we simply had a functioning government that radiated confidence – domestically and internationally – in its professional approach to the crisis," he said.

Ben-David stressed that Israel's long-term future could continue to deteriorate if the government does not "understand the gravity of the moment."

"Since the 1970s, Israel changed its budgetary priorities from national objectives to sectoral and personal political directions." This has caused a productivity gap between Israel and the G7 countries that has tripled since the mid-70s, Ben-David explained.

This gap has caused a steady, if slow, brain drain, he explained. A brain drain is a situation in which professionals and the educated leave a country, taking training that they have acquired in their home country it and that could benefit it with them.

"What the past year and a half have done is to turbocharge this process," said Ben-David. He explained that while the picture is not yet complete, there are anecdotes of a potential brain drain from Israel in which those who leave are "those with many options abroad - physicians, hi-tech innovators, and scientists – the very people who have kept Israel at the top tier of the developed world."