Dáil debates

Wednesday, 25 September 2013

Topical Issue Debate

VAT Rate Reductions

2:50 pm

Photo of Derek NolanDerek Nolan (Galway West, Labour)
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One of the Government's early successes of which one can be proud - as I am - is the jobs initiative introduced in May 2011 comprising a €500 million stimulus package designed to get the economy moving again. At the time, it was accepted that it was limited and would have a targeted effect and it has done so. The measure particularly targeted at the tourism, hospitality and arts sector, which was to reduce the VAT rate on those products from 13.5% to 9%, had a strong effect in the hospitality and tourism sectors in particular. In many cases, it gave a lifeline and a breathing space to some businesses that were struggling in respect of their margin but it also allowed that sector to reduce its cost base in order that it could be more competitive abroad through a reduction in prices for hotels, and meals, in the arts and so on. The aim was to encourage more people to come to Ireland and support the tourism market, which is an export market. As a Galway Deputy, I am aware the city and county I represent are extremely tourism-dependent. In this context, numbers have increased both this year and last and I believe this job stimulus and the VAT rate have really contributed towards that increase.

Mr. Brendan O'Connor from the economics division of the Department of Finance has stated the 9% VAT rate has had the desired impact it was intended to have and as of the second quarter of 2012, had contributed to a minimum of 6,200 jobs. Both anecdotally and from other studies, one can discern that it has made an even greater contribution to job creation subsequently. There have been positive signs with regard to employment figures in the past year and there has been job creation which, after years of job losses, is to be welcomed. However, we still are at a very fragile state and the jobs in the tourism and hospitality sectors in Galway and nationwide are highly fragile and must be protected. Were the VAT rate to be increased from 9% to 13.5% at the end of the period in question, it would have a negative impact and would cost jobs. Having spoken to hoteliers and restaurateurs across my constituency, I know they simply will be obliged to let people go and that is not something that should be done if it can be avoided.

Photo of Ann PhelanAnn Phelan (Carlow-Kilkenny, Labour)
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I thank the Ceann Comhairle for the opportunity to discuss this important issue that is critical to the constituency I represent, namely, Carlow-Kilkenny, which also is highly dependent on the tourism sector. The introduction of the reduction in the VAT rate in July 2011 from 13.5% to 9% to boost tourism and stimulate employment in the tourism and hospitality sectors has had a significant impact on all local economies. Based on a survey I undertook in my constituency of Carlow-Kilkenny and based on the level of feedback I received on foot of my interaction with local businesses, the response has been overwhelmingly in favour of retaining the lower rate of VAT. This lower rate has helped businesses to remain open and continue trading. Moreover, in many cases it has helped to increase the workforce by creating jobs, and by increasing the general economic output in the tourism sector it has resulted in lower prices which, in turn, have been passed on to the consumer. It has renewed growth in the domestic and overseas tourism markets and has improved Ireland's international competitiveness in the sector. Figures from the Central Statistics Office indicate an 8% increase in employment in the hospitality sector in the past 12 months. I must state that while this issue may be more complicated from the perspective of the Department of Finance, it appears simple to me and this measure certainly is having the desired effect. People greatly welcome the reduction in the VAT rate locally. A recent report prepared by Fáilte Ireland indicates that domestic tourism figures have risen since 2011 as an increased number of Irish people have holidayed at home. In addition, while total overseas visitor numbers rose by 6% since 2010, more importantly, more than 650,000 domestic visitors were recorded by 2011.

Photo of Brendan GriffinBrendan Griffin (Kerry South, Fine Gael)
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I welcome the Minister and thank him for attending in person to reply to this particular issue. I also commend my colleagues on raising this matter. As my colleagues mentioned, I also come from a constituency that is heavily dependent on the tourism industry and this matter is important. I acknowledge there was a good season both in Kerry and nationwide this year and I wish to see that continue into the future. While there were other factors, such as The Gathering and the good weather, the VAT rate of 9% also has been a factor in the performance of the tourism industry over the past two years. I commend the Minister highly on introducing this measure in the first place and I acknowledge he did mention it was a temporary measure at the time. However, if I may use a footballing analogy, I would compare this with a team that was performing quite poorly until a blood substitute was brought on as a temporary measure. As the aforementioned blood substitute has grabbed the game by the scruff of the neck, he now deserves to be left on the field and perhaps even to start in the next game.

This is how I perceive the issue. If at all possible, the Minister should reconsider the figures or examine the figures that have been presented by organisations such as the Irish Tourist Industry Confederation, ITIC, and other players in the industry and find some way to try to continue with this measure that is creating and sustaining jobs. It is allowing tourism-related businesses to grow, to make capital investments and to build for the future, which is what is needed. I always cite this move by the Government as being one of the positive, pro-jobs and proactive measures that have been taken since it came to office and I seek its continuation. I heard recently that apparently, lapdancing clubs are availing of this measure and perhaps there is scope to remove certain areas from its application. However, I believe businesses that are supporting many jobs, such as hotels and restaurants, really need to be supported and I ask the Minister to do everything he can to try to retain the 9% rate for as long as possible.

Photo of Michael NoonanMichael Noonan (Minister, Department of Finance; Limerick City, Fine Gael)
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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.

3:00 pm

Photo of Derek NolanDerek Nolan (Galway West, Labour)
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There is a great deal in what the Minister said about the economic analyses, but all the analyses stated that jobs were created. I believe that is true. With the 9% rate we have created a stimulus for a sector that was doing very poorly and have created, as a result, a far more attractive tourism sector which is attracting people into the country because of our cost base. If the 9% rate created jobs, the corollary is that increasing the 9% rate will cost jobs. That is what the opposite of what is said in the studies means. We cannot exclude that.

Among the businesses I talked to in Galway yesterday, a major employer in the city told me that with rates, insurance and water as fixed costs, the only way he could pass on the increased rate would be through losing jobs. The increase in numbers has meant that he is paying more VAT due to the lower rate than he was when the higher rate was in place. It is generating business and he is paying more VAT. We must be very careful before we act on this. Certainly, a slashed increase from 9% to 13.5% would have a devastating impact on this sector.

Photo of Ann PhelanAnn Phelan (Carlow-Kilkenny, Labour)
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I understand the constraints on the Minister, but I agree with my colleague that a return to the 13.5% rate will have a devastating effect at this stage. It is tantalising to see the growth in the sector. Throughout the summer I walked down High Street in Kilkenny and saw the number of people who were able to go into the local restaurants. The restaurants will not be thanked for having to pass on higher prices to consumers. Given our current economic situation, there is a certain confidence level here and if we return to the 13.5% rate, we will strike at the heart of that confidence. The businesses are beginning to gain confidence and it would be a retrograde step to return to the other rate. As one of the businesses said:

There is no consumer confidence in the marketplace and in its absence struggling ... businesses, regardless of how many people they employ, are not going to be thanked by the public for price increases. They are going to lose out and suffer further, maybe even closing. While the Government has no responsibility for helping me maintain a business, it does have a responsibility to create the environment in which we can create jobs.

Photo of Brendan GriffinBrendan Griffin (Kerry South, Fine Gael)
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I again urge the Minister to see if there is any way to continue with this rate. It is very worthwhile. It has worked and is a beacon for other sectors of the economy. Seeing tourism-related and labour-intensive industries growing jobs gives hope to other areas, for example, construction, which accounts for 100,000 or one-quarter of the people on the live register. They could potentially benefit from something like this. I accept that something must pay for it, but there are other innovative ways of raising the revenue to do that. I was told recently that the €1 levy on wine has yielded €45 million in the first eight months of this year and will yield perhaps €70 million in the full 12 months. Consider other measures. A 1 cent levy on text messaging would apparently yield €120 million based on current usage patterns. If we had put a small levy on windfalls, such as EuroMillions jackpots, it would have yielded €20 million this year. There are choices to be made and I urge the Minister to explore every avenue to try to keep this rate in place to maintain and possibly create more jobs.

Photo of Michael NoonanMichael Noonan (Minister, Department of Finance; Limerick City, Fine Gael)
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There is a misunderstanding about what the position is. The reduction was introduced as a temporary measure to pump-prime the industry. If Deputies ask me to leave the rate as it is, that means 13.5% from 1 January next year. Leaving it as it is means it reverts automatically to the higher rate because it was reduced for a temporary period. That is the reason it is so difficult to do it. It is not a question of leaving it as it is, but of making an independent decision now to cut the 13.5% to 9% for next year. That costs a great deal of money. I introduced it without being requested to do so by the industry. I was not lobbied to do it but I considered it a classic pump-priming exercise to create jobs and activity. It has done that.

It requires a new decision to keep the rate at 9%, and that costs a lot of money. Members will appreciate that the budget situation is quite tight and that getting that money from another sector or from another set of people to continue to provide the low VAT rate in this sector is a problem. However, no decision has been taken yet. The law provides that it automatically reverts to the higher rate with effect from 1 January next, and to change that requires a decision. Of course we will consider the Deputies' submissions and comments. The three of them represent constituencies that have very strong tourism industries.

The idea of pump-priming is that where something is weak, one gives it a break to make it stronger. However, when it is strong it should fend for itself. I do not agree with the argument that if the rate returns, jobs will be lost again. The point of pump-priming is that sectors should be strong enough to walk alone.

On Deputy Griffin's last point about other sectors of the economy, in parallel with the bailout programme we have another programme which deals with the economy on a sector-by-sector basis.

If the Deputies examine the two most recent Finance Acts, they will encounter a series of measures geared towards repairing the damaged sectors of the economy and reinforcing the stronger ones. We will continue to use that approach. I will consider what the Deputies said in the context of the budget preparations, which have just commenced and which will conclude in the House on 15 October.