Brian Lenihan Jnr (Dublin West, Fianna Fail)

Deputy Noonan supports this amendment, which was proposed by the Labour Party. I do not propose to accept it as it is one I have examined as Minister for Finance. Deputy Morgan, whom I wish well in his retirement and who sparred very well with me in recent years, will know this issue has arisen before. I have considered it several times in the Department. The position on it is informative and will assist Deputies in formulating policies in this area. As Deputies are aware, labour-intensive services in Ireland are, in general, subject of the reduced VAT rate of 13.5%. The purpose of having a rate lower than 21% is precisely to stimulate activity in labour-intensive industries and stimulate job creation and retail demand.

The rate of 13.5% applies to hairdressing, small repair services, window cleaning, the repair and renovation of private dwellings and restaurant services, for example. The reduced VAT rate for labour-intensive services is available on the basis that Ireland applied a reduced rate to those services on 1 January 1991. One of the difficulties is that one cannot extend the list; one is confined to the existing services.

Prior to the recent adoption by the Council of Ministers of a proposal in May 2009 on labour-intensive services, the majority of other member states were dependent on an experimental scheme for reduced rates for labour-intensive services that was introduced under an EU VAT directive of 1999. In that regard, ECOFIN agreed that reduced rates for certain labour-intensive services, including restaurant services, should be a permanent option for member states under the VAT directive.

With regard to the proposal, it would be possible to further reduce the VAT rate applicable to labour-intensive services. I have examined this as Minister for Finance several times but noted it would result in a significant cost to the Exchequer. A 1% reduction in the reduced VAT rate – from 13.5% to 12.5%, for example - would cost €260 million in a full year. Given the current Exchequer deficit, reducing VAT rates would not help support the public finances.

The Fine Gael proposal on this subject at the time of the budget was that we should reduce the 13.5% rate but increase the 21% rate to compensate therefor. That would have a very detrimental effect on cross-Border trade, and that is why I resisted it.

An issue that arose in the negotiations surrounding the IMF-EU agreement concerned the question of VAT rates. There is no doubt that the European Union regards the VAT income or tax base as a crucial part of a prospective remedy for the Union. It is anxious, therefore, to increase the take from VAT in all the member states. One can see this in the Commission's analysis of the various member states' approaches. Our approach was taken in the discussions on the EU-IMF agreement. I took the view that, while we had to leave open the possibility of VAT increases in future years under the plan, it would be wise to defer it for the time being. For this reason, the VAT increases will occur in the later period of the plan. In this way, there will at least be some opportunity to harmonise the VAT arrangements in the Republic with those in Northern Ireland so that we do not create a disparity between the two jurisdictions leading to an unnatural loss of trade and custom.

I have never been against shopping in Northern Ireland. Rather, I have been against what I call predatory shopping where an advantage is given to one jurisdiction over the other because of tax arrangements. The plan gives us the flexibility to manage this process in our own way in the years ahead.

Reverting to the amendment, seeking an examination of a targeted reduction in VAT for labour intensive services imposes a further administrative burden on business and would add to pressure to extend such favourable treatment to all goods and services. The amendment advocates a cost benefit analysis, but any Minister for Finance can have such an analysis done within the Department. While I appreciate the spirit in which amendments to have cost benefit analyses done as a matter of statute law are tabled and I welcome that they have been tabled to have these subjects discussed, a Minister for Finance can ask his or her officials for their assessment of something. He or she could also ask the Revenue Commissioners for their assessment of how a measure would work in practice. Plenty of information is available and the Deputies should put it into the public domain if that is what they want.

The amendment is an interesting one and puts the focus on one of the crucial issues surrounding consumption taxes which I have pointed out for the past two years and which is not recognised sufficiently. The improved transportation arrangements between Northern Ireland and the State mean that access to the North is not just a matter for residents in Border counties. The largest conurbation in the country is now within 50 minutes of Border shopping. Any Minister for Finance must examine the risks of predatory loss of revenue through disparate tax rates with Northern Ireland. It is not just an issue for Donegal, Cavan or Louth as it was during previous decades of the State's existence. Rather, it is an issue for the bulk of the State, given our transportation arrangements and the further transportation arrangements, fully protected in the plan, that envisage the completion of works between Monaghan and Donegal to improve the north-west corridor. It is important that this issue be understood as a matter of public policy. This fundamental issue has crept up on us.

I am sure Deputy Morgan will recall our 2008 and early 2009 debates on what was then a significant loss of trade to Northern Ireland. Deputy Burton or Fine Gael suggested that a study be done. When that study was done, it was interesting to see that cheaper alcohol prices along with low predatory pricing on certain baby products and so on were the greatest inducements. We have undoubtedly tackled this issue and stabilised trade to some extent. There are wider issues of competitiveness, but we will not get into them this morning.

Although I do not have a strong objection to the Department conducting an analysis, it should not be required as a matter of statute, given the pressing range of duties the Department will need to perform in the next few months.

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