Treasury needs higher home prices to combat deficit

Home for sale  image: Shutterstock

Faced with a fiscal blowout, the Ministry of Finance will want to boost tax revenues from Israel's dormant real estate market.

Forget about lowering housing prices. The big story now at the Ministry of Finance in Jerusalem is the huge fiscal deficit, and in order to deal with it, the ministry needs prices to rise, as we shall shortly explain.

Let's start with the macro picture. Next year, the fiscal deficit is expected to reach at least 4% of GDP, nearly NIS 60 billion, unless the government takes steps to reduce it. A reasonable deficit is not a bad thing in a growing economy like that of Israel; the problem is the deviation from the target. In the past few years, the deficit target in Israel has been around NIS 40 billion. This means that the "hole", or the size of the deviation from the target, expected next year is approximately NIS 20 billion. Unless the next government comes up with serious plans for plugging this hole, Israel's credit rating will be at risk.

How you do you plug a fiscal hole? In three ways: cutting expenditure; expanding revenue; or a combination of the two. When the hole is of these dimensions, there is no avoiding painful steps such as tax hikes. It won't happen tomorrow morning: the transitional government has little ability and zero will to take unpopular action. One may wager that nothing will happen before the new government is sworn in after the September 17 election, which means that the big show will start in 2020. The professionals at the Ministry of Finance and the Israel Tax Authority have already prepared a long list of proposals and ideas for cuts and tax hikes, but in the end the decisions will be in the hands of two people: the next minister of finance and the next prime minister.

What measures in the real estate market could help the Ministry of Finance narrow the deficit? A rise in VAT of one percent or more is an obvious step, almost inevitable. This will be designed to increase tax revenues from all transactions in the economy, including real estate transactions. In order for revenues from VAT and real estate taxes (such as purchase tax) to be as high as possible, the Ministry of Finance has a clear interest in greater activity in a real estate market that has sunk into a sort of coma. The way to bring this about is actually by reducing purchase tax on investment homes from 8% (in the highest bracket) back to 6%, or even 5%. This step could bring back to the market the investors who abandoned it after Kahlon's tax hike, and boost transaction volumes. This additional demand will clearly have an immediate effect on prices, but, as we said at the beginning, the battle to reduce housing prices will now wait on one side. A price rise in no longer a bad thing as far as the Ministry of Finance is concerned. On the contrary: it means higher tax revenues.

The next big step that the Ministry of Finance would be delighted to take is cancellation or freezing of the Buyer Price housing program. This would help the state's coffers twice over: it would increase revenue from land sales (which doesn't reduce the deficit but does reduce the debt ratio); and it would mean fewer sales at reduced prices that are mostly exempt from real estate taxes.

What else could be done? The transfer of IDF bases to the Negev could be delayed (few in the Intelligence Corps or the technological units would be sorry about that), as could execution of the roof agreements with the local authorities. Everything is on the table, to gather dust until the next minister of finance comes along, sometime after the Jewish holiday season.

Published by Globes, Israel business news - en.globes.co.il - on June 11, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

Home for sale  image: Shutterstock
Home for sale image: Shutterstock
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