Joe McHugh (Donegal North East, Fine Gael)
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Question 73: To ask the Tánaiste and Minister for Enterprise, Trade and Employment her views on the impact the reduction of VAT in Northern Ireland and the increase here will have on the retail and services sector in the Border counties; and if she will make a statement on the matter. [45007/08]

Jimmy Devins (Sligo-North Leitrim, Fianna Fail)
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While the United Kingdom VAT reduction will have some effect on price differentials between UK and Irish goods, the reduction in the value of sterling will have a greater impact on the price of goods in the North than the VAT differential. Moreover, as the British Government is increasing excise duties on alcohol, cigarettes, petrol and diesel to offset the 2.5% VAT reduction on these items, the UK budget change will not enhance the attractiveness of these items to cross-Border shoppers.

In addition, approximately half the value of goods and services purchased in the State are not subject to the standard VAT rate and therefore are unaffected by the recent budget changes in Ireland and the UK. For example, all Government services, local authorities, hospitals, schools and so on are exempt from VAT. The majority of foodstuffs, oral medicines, books and children's clothes and shoes come under the zero rate of VAT. Furthermore, the 13.5% reduced rate of VAT applies to housing, electricity, gas, domestic fuels, restaurant services and labour intensive services such as hairdressing and shoe repair.

The latest Central Statistics Office bulletin for October shows that consumer prices continue to fall, with overall annual inflation at 4%, down from 4.3% in September. This compares with an annual rate of 4.2% for the United Kingdom all-items retail price index. With regard to the retail sector, the Tánaiste and Minister for Enterprise, Trade and Employment requested Forfás in September to carry out an analysis of the relative cost of doing business in various locations in the Republic, Northern Ireland and Britain. The Minister has already commenced discussions with a cross-section of retailers on the preliminary findings of the study. We are committed to promoting competition and raising consumer awareness in order to drive competition for goods and services traded domestically. We are also tackling administrative burdens with a view to keeping costs for enterprises under control. Ireland's cost competitiveness is also supported by relatively low taxes on labour and enterprise.

With regard to services, both the services sector and the growing services element within manufacturing companies are vital to the next stage of our economic performance. We recently carried out an evaluation of the specific needs of the services sector. The report of the services strategy group, Catching the Wave: A Services Strategy for Ireland, was published on 12 September 2008. This report will guide the development of our services strategy into the future to exploit the opportunities available in this sector. A particular focus of the strategy is on locally traded services. It is increasingly recognised that local services are a significant source of wealth creation and employment in their own right, as well as providing essential underpinning for internationally trading business and for social and cultural development. My Department is working with the enterprise agencies and with other Departments to progress the implementation of the report's recommendations.

Joe McHugh (Donegal North East, Fine Gael)
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There is a broader issue in regard to competitiveness and costs. The Tánaiste referred in last night's Private Members' debate to a differential of 5% in price differences between North and South. Is this figure taken from a Forfás report that has not yet been published?

Mary Coughlan (Donegal South West, Fianna Fail)
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Yes.

Joe McHugh (Donegal North East, Fine Gael)
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Some of the difficulty in regard to the VAT differential is one of perception among consumers. People are heading for the Border in large numbers and they cannot get there quickly enough. I noticed a race between motorists and Tesco delivery lorries on the M1 one Thursday morning.

Arthur Morgan (Louth, Sinn Fein)
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Who was the winner?

Joe McHugh (Donegal North East, Fine Gael)
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The six Tesco lorries were obstructed by the number of motorists coming from the South. I heard recently that retailers in Derry cannot get fork-lift drivers to unload stock from the trucks quickly enough.

I have a simple mathematical question for the Minister and her Ministers of State. What is 21.5% of nothing?

Billy Kelleher (Cork North Central, Fianna Fail)
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Deputy McHugh will have to table a parliamentary question on that.

Joe McHugh (Donegal North East, Fine Gael)
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The reality is that 21.5% of nothing is nothing. The British Government has reduced the rate of VAT in an effort to get money into tills. That is what will get the economy moving again.

Brendan Howlin (Wexford, Labour)
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The Deputy should give way if he wants an answer to his question.

Joe McHugh (Donegal North East, Fine Gael)
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We must face up to that challenge. Retailers cutting their margins will not be enough to re-stimulate economic activity.

Brendan Howlin (Wexford, Labour)
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I ask the Deputy to resume his seat.

Joe McHugh (Donegal North East, Fine Gael)
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Neither the Minister nor her Ministers of State were able to answer that simple mathematical question.

Brendan Howlin (Wexford, Labour)
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That is a good Second Stage speech. I have called Deputy Morgan.

Arthur Morgan (Louth, Sinn Fein)
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Does the Minister of State agree that the harmonisation of revenue rates, including VAT, across the island would be the best solution to the difficulties presenting in terms of disparate VAT and corporate taxation levels? Does he agree further that an immediate 2% reduction in VAT would provide a stimulus to retailers, particularly on this side of the Border?

Willie Penrose (Longford-Westmeath, Labour)
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Does the Minister of State accept that the Forfás report will indicate that the cost of operating in this economy is 32% greater than what prevails in the United Kingdom? Does he agree it was a useful exercise on the part of the Joint Committee on Enterprise, Trade and Employment to call on the Commissioner for Energy Regulation not to increase the prices of oil, gas and electricity? Does he accept that it was an act of economic lunacy, given the economic meltdown we are facing, even to contemplate increasing the rate of VAT, with the associated serious impact for consumers?

Joe Costello (Dublin Central, Labour)
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This is particularly so in regard to the Border counties.

Willie Penrose (Longford-Westmeath, Labour)
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Surely it was the very opposite of what was required. It is time to reverse engines.

Jimmy Devins (Sligo-North Leitrim, Fianna Fail)
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There is a 5% differential in costs between the Republic and the North according to the preliminary results of the study to which I referred. I agree with Deputy McHugh's initial statement that there is a particular perception, even though the changes in certain sections of the VAT regime do not apply to everything. As I observed in my reply, more than 50% of the goods and services traded are not affected by the VAT changes. It is important to recognise that the depreciation of sterling against the euro is having a significant effect. Deputies can be assured that the Department is in constant negotiations with retailers, who have a duty of care to their customers both North and South.

Joe McHugh (Donegal North East, Fine Gael)
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The Government cannot blame retailers.

Jimmy Devins (Sligo-North Leitrim, Fianna Fail)
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I have given the facts.