Pat Carey (Dublin North West, Fianna Fail)

Section 72 gives effect to the budget increase of 0.5% in the standard rate of VAT from 1 December. The budget introduced a general package of revenue-raising measures to fund key public services, one of which was increasing the standard VAT rate. Already we borrow more than 10% of all day-to-day spending on public services before capital spending. This is unsustainable and we faced difficult choices in introducing corrective measures. The estimated €227 million that will accrue in a full year from the VAT increase will go some way towards funding necessary public services.

Some of the goods and services that will be affected by the increase in the standard rate are alcohol, cigarettes, cars, petrol, electrical equipment, furniture, telecommunications, cosmetics, confectionary, soft drinks and adult clothing and footwear. The effect of the 0.5% increase in the standard rate is that the price of goods and services that applies at this rate will increase by 0.41%. This equates to an increase of 8 cent on a good costing €20 or 41 cent on a good costing €100. Approximately half the value of goods and services purchased in the State is not subject to the standard rate of VAT and is unaffected by the change in the standard rate. All Government and local authority services are outside the scope of VAT, while hospitals, schools etc. are exempt from VAT. The zero rate of VAT applies to the majority of foodstuffs, oral medicine, books, and children's clothes and shoes. In addition housing, electricity, gas, domestic fuels, restaurant services and labour-intensive services such as hairdressing and shoe repair qualify for the reduced 13.5% reduced VAT rate.

As part of a fiscal stimulus package the British Government reduced its standard VAT rate from 17.5% to 15% on a temporary basis with effect from 1 December 2008 to 31 December 2009. The Minister has no plans to make a similar reduction in the standard VAT rate in Ireland or to reduce the rate to the UK level of 15%. Our starting point is different from the UK's. We already have a low-taxation economy especially in the area of direct taxation, both income and corporation taxes, which has a direct impact on all employment in the State. This lower starting position for direct taxation makes it more difficult to reduce taxes further. Each percentage point reduction in our standard VAT rate would cost approximately €450 million in a full year. For Ireland to reduce the standard VAT rate by 2.5 percentage points to 19% would cost approximately €1.125 billion in a full year. For Ireland to reduce the standard VAT rate to the UK level of 15%, which would mean a reduction in the standard VAT rate of 6.5 percentage points, would cost almost €3 billion in a full year, which is equivalent to approximately 2.5 times the amount of revenues to be raised in the full year through the new income levy.

Although the reduction in the UK standard VAT rate will have an impact on the price differential between North and South for some goods, the Minister points out that the UK has increased excise on alcohol, cigarettes, petrol and diesel to offset the 2.5% reduction in VAT on these items. Consequently, there will be no reduction in the price of these products in Northern Ireland as a result of the reduction of the UK VAT rate to 15%. Furthermore, as I have already stated, around half the value of goods and services purchased in the State is not subject to the standard rate of VAT and consequently is not affected by the recent changes made to the standard rates in Ireland and the UK.

The VAT rate is not the only factor in the price differential north and south of the Border. The weakening of sterling has had and is having a far more significant impact on relative prices than any VAT changes. As Ireland is a small, open economy, many of our standard rated goods are imported and cutting the VAT rate would benefit the economies from which we import more than our own. In other words, while it would help the consumer, it would not be the most effective way of helping our own economy.

The European Commission recently put forward a proposal for a common EU stimulus package. The Minister welcomes the Commission's plans as an important signal to EU consumers and business that member states and the Commission are working to boost demand and support business in these difficult times. However, the Commission's plan also recognises that not all member states are in a position to contribute an additional fiscal stimulus. Ireland is facing very challenging times and our scope to inject an additional fiscal stimulus to that already being provided is extremely limited. The Commission mentions temporary reductions in VAT as one option among a menu of options. At a recent EU meeting, it was clear that most member states are unlikely to pursue the approach of temporary reductions in VAT. I do not see it as an appropriate option for Ireland.

There are other means of stimulating the economy outside the VAT system. The Government is providing a long-term fiscal stimulus through capital investment of approximately 5% of GNP, which is twice the EU average. The Taoiseach yesterday announced the Government's framework for sustainable economic renewal. This fiscal stimulus will not only support jobs in the short term but will also add to our long-term productive capacity. Irish taxation policy has given us a significant competitive advantage over the past 15 years. We ensured that we had the lowest levels of direct taxation on income, and therefore we have had marginally higher indirect taxation. That model of taxation has worked well for our economy and will be even more important now in leading us back to the path of economic growth. For those reasons I do not propose to accept the recommendation.

The problem with Visa payments was mentioned. Certainly there was a problem last Saturday, but I understand that is more to do with IT capacity than anything else. Senator Quinn mentioned Ikea. He knows I have more than a passing interest in its fortunes. I hope the store will be able to open on the projected date in line with the planning permission which was granted to it, and I look forward to the creation of 550 jobs.