Michael Noonan (Limerick City, Fine Gael) | Oireachtas source

I thank Deputies Nolan, Ann Phelan and Griffin for giving me this opportunity to speak on the issue of the 9% VAT rate. The programme for Government included a proposal to reduce the 13.5% VAT rate by 1.5% until the end of 2013. However, as part of the Government jobs initiative, it subsequently was decided to introduce a more targeted VAT reduction measure by introducing the 9% VAT rate for the period from 1 July 2011 to 31 December 2013 in respect of tourism-related services, including hotel and holiday accommodation, various entertainment services, the use of sporting facilities, hairdressing services and various printed matter. The tourism sector is a key sector in the Irish economy and the measure was aimed at reducing costs during a very challenging time for the sector. The objective was to boost tourism and create additional jobs and the measure has been successful in this regard. The 9% measure was introduced in the Finance (No. 2) Act 2011 on a temporary basis and is due to expire on 31 December 2013, at which point the rate is due to revert to 13.5%.

As with all tax measures, the decision to reduce the VAT rate by four and a half percentage points came at a significant cost to the Exchequer and the measure was estimated to cost €120 million in 2011, €350 million in 2012 and in 2013 and €60 million in 2014. As the rate was introduced for a defined period, failure to revert from the 9% rate to 13.5% would come at a cost to the Exchequer. As I outlined to the Restaurants Association of Ireland directly on this subject, this additional cost would have to be found elsewhere and I invited the industry to bring forward proposals. The House will recall that the cost of the VAT reduction was offset by a 0.6% levy on pension funds.

With regard to the economic impact on the tourism sector due to the introduction of the 9% VAT rate, the most recent data available from the Central Statistics Office of economic growth broken down by sector relates to the year 2012, which shows that for the accommodation and food services sector there was a year on year growth, in gross value added, compared to 2011. Expenditure by overseas travellers to Ireland recorded an increase of 0.6% in 2012 compared with 2011. In addition, the first quarter of 2013 recorded an increase in expenditure of 12% compared with the same period last year. There is a clear impact in terms of employment in the accommodation and food service sector, which has increased by over 13% between the period from the second quarter in 2011 to the second quarter in 2013 - an increase of 15,000 jobs in the sector. In terms of the number of trips to Ireland for the period May to July 2013, the number of trips increased by 7.6% on the same period last year, while for the period January to July the number of trips to Ireland increased by 6%.

Since the introduction of the 9% VAT rate, a number of studies and reports have been undertaken and published as to its effectiveness and value for money. A research paper entitled "UK Tourists, the Great Recession and Irish Tourism Policy" by Richard Tol and Niamh Callaghan was published early in 2013 by the Economic and Social Review. This paper concludes that while the VAT rate reduction on tourism activity did increase visitor numbers, the financial benefit was far less than the cost to the Exchequer of the VAT reduction. A report undertaken by Deloitte on behalf of Fáilte Ireland published 1 July 2013, entitled "Analysis of the Impact of the VAT Reduction on Irish Tourism and Tourism Employment", concludes that the introduction of the 9% rate appears to have met its original aims of driving employment and stimulating activity in the sector, at a lower cost than originally estimated.

A commitment was made when the 9% VAT rate was introduced to evaluate the measure before the end of 2012 to determine its effectiveness in aiding the tourism industry. To this effect, my Department published a paper, as part of the medium-term fiscal statement in November 2012, entitled "Measuring the Impact of the Jobs Initiative: Was the VAT reduction passed on and were jobs created?" This evaluation concluded that the 9% rate appears to have had the desired effect both in terms of price pass-through to consumers and by contributing to an employment gain of 6,200 additional jobs in the second quarter of 2012 relative to the second quarter in 2011 in the accommodation and food services sector of the economy. As stated earlier, more recent CSO figures from the second quarter of 2013 show an increase of almost 15,000 persons employed in this sector since the second quarter of 2011.

It is clear that this measure was successful and the 9% rate produced growth in the sector and increased jobs. However, the revenues generated by the additional level of growth did not exceed the cost of the measure. In line with best international practice, the 9% VAT rate was introduced as a temporary measure and is due to expire at the end of December 2013, at which point it will revert to 13.5%. Reducing the VAT rate to the 9% rate would be very costly to the Exchequer and would require an increase in taxation or reduction in expenditure elsewhere. Any proposal to reduce the VAT rate from the 13.5% rate will be considered in the context of the budget.

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