Chief Economist of Israeli Treasury Quits Over Lapid's Housing Plan

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Chief Economist Michael Sarel tendered his resignation on Wednesday in protest of Finance Minister Yair Lapid’s plan to cancel the value-added tax on new homes bought by first-time buyers.

“The finance minister’s proposal is faulty in my view in almost every possible way and will almost certainly not reduce home prices, as is its declared goal, or ease the problem of a shortage of homes relative to demand,” Sarel said in his letter of resignation to Lapid.

Sarel, the treasury’s most senior economist, said he was making a copy of the letter available to the public to “prevent anyone linking my name to this policy move.” His decision came a day after reports leaked of Lapid’s controversial plan to cancel the VAT in a bid to contain rising home prices.

Lapid issued a short statement in response, thanking Sarel for his services and expressing regret at his departure. Treasury officials told TheMarker the finance minister determines policy, not senior officials.

“Sarel’s views were heard, but the minster is the one who decides. Sarel has the right to draw conclusions and resign,” an official said on condition of anonymity.

The resignation is a blow to Lapid, who has had a stormy year on the job, battered by criticism over budget cutbacks and tax hikes he imposed to close a budget gap, and more recently by his failure to cool an overheated housing market.

The VAT plan was greeted with a torrent of criticism within hours of its leaking on Tuesday, but Sarel was the first treasury official to attack it publicly.

Sarel was appointed 19 months ago by Lapid’s predecessor, Yuval Steinitz. Under Lapid, he had become a major power center in the treasury. Although his formal title was director of economics and state revenues, he was paid like a ministry director general.

His very public resignation will almost certainly undermine confidence in Lapid’s abilities and complicate the already difficult task of preparing the 2015 budget.

Sarel, 51, married and a father of four, worked at the International Monetary Fund from 1994 to 2000 and did his first stint in the treasury from 2001 to 2006. He has a doctorate from Harvard University and a bachelor’s degree from The Hebrew University of Jerusalem in economics and computer science.

Sarel’s letter was otherwise complimentary of Lapid. “I want to praise you for your economic policy leadership that until now had been excellent both on a macro and micro level,” Sarel said. “I am proud to have been a partner under your leadership in this important work.”

But the economist warned that eliminating VAT on the purchase of new homes would increase demand and create new upward pressures on prices. Sarel said there had been other policies in the past on which had not agreed entirely with Lapid, but nevertheless stayed on saying that officials could not and should not resign over every policy dispute.

“However, my contention is that the present specific case is exceptional, has broad implications and does not allow me any other reasonable action,” Sarel wrote.

He then laid out in detail his objections to the plan, which would be limited to first-time buyers of houses valued at less than 1.6 million shekels ($460,000). It would deprive the government of some 2 billion shekels of tax revenue annually.

Among other things, he said it would distort the allocation of economic resources, generate calls for other VAT breaks and require vast resources to monitor abuse. He also criticized the lack of public debate on the plan.

Former treasury chief economist Michael Sarel.Credit: Michal Fattal
Finance Minister Yair Lapid.Credit: Olivier Fitoussi

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