Michael Noonan (Limerick East, Fine Gael)

I support the spirit of this amendment. We did some work on this area in the Fine Gael Party prior to the budget. The House knows that one of the conditions negotiated by the Government with the IMF and the European institutions is that the higher rate of VAT at 21% will be increased to 23% in two moves of a 1% increase on each occasion. When we examined this in our party we decided that it would be worth forgoing some of the yield from this by reducing the lower rate of VAT from its current level of 13.5% to 12%, a reduction of 1.5%. We did this because when one examines the activities to which the different rates apply, the 21% rate applies to practically everything other than the exceptions at the lower end. Certainly, the 21% rate includes a range of imported goods. Less activity in the purchase of imported goods, while it would impact adversely on the retail sector, would not have an adverse impact on manufacturing industry in this jurisdiction. On the other hand, the activities to which the lower rate of VAT applies includes, for example, the building industry.

Regardless of what is said about developers, Ireland's modern economy needs a building and development industry. The problem with the industry was that it is was responsible for approximately 20% of GDP, although a sustainable rate is probably 6% or 7%. There is no activity in the industry at present, yet people need houses, offices, hotels and replacement and renewal activity. There needs to be a viable building and development industry in the country.

If we are to get people back to work and provide jobs for all those who are skilled in the building trades but now seeking to emigrate, we can start in a small way. If the VAT rate were 12% rather than 13.5%, it might trigger some activity in the form of building extensions and insulating homes under the Government's energy schemes.

Deputies Brian Hayes and O'Shea referred to the hospitality industry, restaurants, bars and hairdressers, all of which pay VAT at the lower rate. The newspaper industry, which is under severe pressure from the alternative media, pays VAT at the lower rate.

While I welcome the idea of having an indepth analysis of the effect on job creation of a lower rate of VAT, we have done some work on this already. It is worth doing. The Minister will ask where the additional money will come from if one forgoes the yield by reducing the lower rate of VAT. One could analyse the additional activity that would be generated by lowering the rate. The net loss of revenue might be quite small if additional activity were generated in a growing economy. There might be a net gain if the adjustment were made. Mr. Charlie McCreevy was a great advocate of this practice. When he reduced capital gains tax to 20%, more tax revenue was being generated within 12 months than when the rate had been higher and more penal.

It is worthwhile considering ideas such as this. For the foreseeable future, Ireland will have only limited scope to become involved in demand management through large stimulus packages according to a Keynesian model. It is possible, however, to generate growth and create jobs by examining the other side of the economic balance. Instead of concentrating on demand stimulus and demand-side initiatives, it is always worth considering whether low-cost steps can be taken on the supply side that would generate economic activity and create jobs. A rebalancing of VAT rates is one such step. The retail sector will not welcome an increase in VAT from 21% to 23% because much of the sector is on its knees at present and, owing to the adverse weather conditions, it had a very bad Christmas period.

There is negotiation on the proposal and it is in the memorandum of understanding. It is one of the conditions for drawing down the bailout funds. We should determine whether we can tweak the facility to our advantage by using some of the yield to reduce the lower rate of VAT considering its job-creation and economic-growth potential.

See this speech in context