Israel has a world-class economy and a third-world fiscal problem
S&P data reveals a country split between a high-growth private sector competing with the world’s best economies and government finances weighing down its credit rating.
The most significant contribution of S&P’s semiannual report on Israel, published at the end of last week, is not the forecasts or the rating itself. Those were already known from the agency’s May review.
What makes the report interesting is what appears alongside Israel’s data: the same indicators, calculated using the same methodology and presented on the same page, for another 141 countries. This turns Israel’s chapter from an isolated assessment into a global comparison.
And once placed in that context, the picture becomes far more complex than the rating alone suggests. S&P’s data reveals an economy that performs among the world’s strongest on some measures, while lagging significantly on others.
Of the 142 countries ranked by S&P, only 10 receive the agency’s highest score of 1 in both economic performance and external position. Achieving the top score in both categories is highly unusual and reflects an economy that is considered exceptionally resilient and financially independent.
Israel is part of this exclusive group, alongside Norway, Singapore, Sweden, Switzerland, Germany, Austria, Hong Kong, South Korea and Taiwan. All nine of those economies are rated AA or higher. Israel, by contrast, carries an A rating, at least two notches lower.
The reason for that gap is not Israel’s economy itself. It lies elsewhere.
The most striking part of S&P’s analysis is that Israel is the only country among the 142 ranked economies that combines a top score of 1 for economic strength and external resilience with significantly weaker scores for institutions and fiscal policy.
Israel receives a score of 4 for institutional quality, 4 for budget performance and 4 for its debt burden, on a scale where 6 represents the weakest position.
That combination is unique. No other country in S&P’s database simultaneously demonstrates the strength of Israel’s private sector and external position alongside its fiscal and institutional weaknesses.
The contrast becomes clearer when comparing Israel’s scores with those of other countries.
On institutional quality, Israel is grouped with countries such as Latvia, Lithuania and Ras Al-Khaimah, one of the United Arab Emirates’ emirates.
On economic performance, it sits alongside Singapore and Switzerland.
These are two very different peer groups, and that gap captures the central challenge facing the Israeli economy: it is effectively made up of two separate worlds.
The first is the economy created by the private sector, particularly technology companies and exporters. The second is the economy shaped by government spending, deficits and fiscal policy.
S&P expects Israel’s economy to grow by around 6% in 2027, the fourth-highest forecast among the 53 countries rated A or above.
The only economies expected to grow faster are Qatar, Abu Dhabi and the United Arab Emirates, all of which benefit from oil and gas revenues.
That means Israel is projected to have the strongest growth rate among developed economies that are not dependent on hydrocarbons.
The growth surge is expected to push GDP per capita from approximately $60,400 to $69,300 in a single year. Part of that increase, around 15%, reflects the weaker dollar and stronger shekel, but the headline figure remains significant for investors evaluating Israel’s economic potential.
Inflation, meanwhile, is expected to decline to 2.2% and converge toward 2% by the end of the decade, placing it within the Bank of Israel’s price stability target.
But while the private sector is driving growth, government finances remain a major weakness.
Israel’s deficit is expected to reach 6% of GDP in 2026, making it the sixth-worst performer among the 53 A-rated and higher economies.
That is worse than France, Belgium and the United Kingdom, and close to the United States, where the deficit is forecast at around 6.3% of GDP.
Israel’s war expenditures explain much of the deterioration. But from a rating perspective, exceptional circumstances do not eliminate the need for long-term fiscal discipline.
And according to S&P’s forecasts, the improvement will be slow. The deficit is expected to decline to 4.7% of GDP in 2027, 4.3% in 2028 and 4% in 2029.
In other words, even after the war-related spending peak passes, Israel is not expected to return to a balanced fiscal trajectory.
The debt outlook tells a similar story.
S&P expects net government debt to decline only marginally during Israel’s strongest growth year: from 66.81% of GDP in 2026 to 66.74% in 2027.
That is effectively unchanged.
After that, debt is expected to rise again, reaching 67.5% of GDP in 2028 and 68% in 2029, exceeding the level recorded during the COVID-19 crisis in 2020.
This is the textbook definition of a structural deficit: debt is not necessarily spiraling out of control, but even an exceptionally strong economic scenario is not enough to put it on a sustained downward path.
The practical conclusion is straightforward.
Israel’s rating is unlikely to improve because of stronger growth, the country already receives S&P’s highest possible score for economic performance. Nor is the end of hostilities alone likely to change the picture, since the current forecast already assumes a gradual return to stability.
The determining factor will be government policy, particularly fiscal management.
A country cannot sustain a world-class private sector indefinitely while allowing public finances to deteriorate.
S&P’s assessment highlights a paradox at the heart of the Israeli economy: the country’s companies, entrepreneurs and exporters place it among the world’s strongest economies. But government policy is preventing that strength from translating into a higher sovereign rating.
The weakness is not in Israel’s battlefield performance or its high-tech sector. It is in the budget.
