Lapid’s 0% VAT plan is a disaster
I can no longer sit back quietly as Yair Lapid’s infantile politics and honor threaten our economy. Numerous journalists have already written about his swiss cheese proposal to reduce VAT on apartment purchases to 0%. However, what we have not taken into account is that not only does this populist proposal not accomplish the goals it has set out to accomplish but it threatens the economy as a whole.
While Lapid is well-intentioned in his quest to reduce housing prices, his proposal will accomplish exactly the opposite. TheMarker correctly reported yesterday what we all knew: The data does not support Lapid’s proposal. The way Lapid’s 0% VAT law is structured with a peg to average prices, the law will specifically not exempt from VAT the 3 and 4 bedroom apartments that young couple normally buy. Lapid was clearly not looking at the real underlying housing data when he made the proposal. He admitted as much when he said that they preferred speed the law through to accuracy of the proposed benefit. This is in addition to the assertion by leading economists that lowering the VAT rate to 0% will increase demand for apartments in our supply-constrained market. Lapid is tackling the wrong part of the problem.
Instead of tackling the supply side by reducing bureaucracy and getting more apartments approved and built faster, Lapid is greasing the wheels of demand through blunt subsidies and misguided tax breaks. If this reminds you of Alan Greenspan’s free money proposals that led to the US housing crash, you would be right.
However, this is not the worst part of the proposal. the reduction in VAT will take 4 Billion NIS in tax revenue away from the government. Our historical debt to GDP ratio has been 3%. We have been able to support this as an economy because Israel’s growth rate has been 3%. However, the war in Gaza will shave some fraction of a percent off of GDP growth. For argument’s sake lets say it is 0.4%. Add this to the fact that Government and Bank of Israel were already projecting only 2.8% growth and you will see that Lapid is taking us over a cliff. Just as growth will slow this year, Lapid will take the deficit to a high and create an 1%-1.5% gap between debt and GDP growth. In laymen’s terms, we are spending and not investing in growth. That is a recipe for disaster. When the international ratings agencies look at this, they will consider taking down Israel’s debt ratings which will make it more expensive to borrow money, increase our national interest payments, which will increase debt further and will harm the Economy measurably. Lapid’s proposal is reckless.
So why is he pursuing it? Because so far he has nothing to show for his promises to the middle class that he will improve their lot as finance minister. Because he wants to be popular and re-elected and he assesses that the PR value of a 0% tax rate for new houses will provide him value far before someone else pays for the long term economic damage. Since I am worried about my children who are now getting married and needing to buy houses, I am calling on everyone to join me and call on all MKs and Ministers to defeat Lapid’s proposal.