Flug blasts Lapid’s 0% VAT housing plan as ineffective

Flug said that Lapid’s plan would not only fail but possibly make the situation worse.

Karnit Flug 370 (photo credit: REUTERS)
Karnit Flug 370
(photo credit: REUTERS)
Bank of Israel Governor Karnit Flug, the government’s top economic adviser, derided Finance Minister Yair Lapid’s central plan for bringing down the price of housing on Monday, just hours before the Knesset was slated to take up the first reading of the bill.
Speaking at the Knesset Finance Committee, Flug said that Lapid’s plan to exempt some first-time home-buyers from paying the 18 percent value- added tax on the home would not only fail but possibly make the situation worse.
“I believe that the proposal is likely to raise prices in the short run, in light of the fact that what the housing market needs is an increase in supply,” Flug said.
Construction would have to add at least 40,000 new units a year – the pace of new household creation – in order to change the price trend. In the first quarter of 2014, housings starts dropped to 10,340, 16.1% lower than the same period a year earlier. Flug said the trend was worrying.
Lapid’s plan, she argued, also requires complex regulatory oversight that would be difficult to provide, does little to help weak populations, and creates a budgetary obligation that will be difficult to get rid of in the future. Much of the benefit may not even end up in the hands of the groups Lapid is trying to help.
“I am concerned that the benefit is likely to mainly go to the pockets of the contractors and not the households, perhaps also through informal arrangements between the buyers and contractors, and thus miss the target,” Flug said.
Lapid is unlikely to be swayed by the remarks. In the face of earlier criticism to the plan, including the resignation of the Finance Ministry’s chief economist over the issue, Lapid has said that the policy was not meant to please economists.
The plan could also slow down economic growth, according to Joseph Ephrati, the vice president of investment at Haskara insurance.
Since Lapid announced the plan in March, couples considering buying homes have postponed their plans in hopes of getting a hefty discount, which has led to a reduction in home sales. Home sales in May were 33% lower than in April and 45% lower than the previous May, he said.
“This decline in home sales is expected to affect industries such as the furniture and household equipment industries and ultimately affect growth,” he said.
If passed by the Knesset in all three readings, the bill will go into effect on September 1, alongside a flood of pent-up demand for new homes.
In her testimony Monday, Flug also urged the government to stick with its deficit targets when planning budgets in future years, in order to keep Israel on a path of debt reduction.
Lapid reportedly wants to increase the target for 2015 from a planned 2.5% of GDP to 3%, but has yet to present his proposal.
Lahav Harkov contributed to this report.