Seanad debates

Thursday, 22 March 2012

Finance Bill 2012 (Certified Money Bill): Committee and Remaining Stages


2:00 am

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

Section 87 confirms the increase in the standard rate of VAT from 21% to 23% with effect from 1 January 2012. The standard VAT rate was increased in the budget to focus revenue raising on indirect taxation, which has a less adverse impact on economic activity and employment than income tax. The VAT increase is also in line with commitments made in the programme for Government and by the previous Government in the EU-IMF programme.

The VAT increase should not disproportionately affect those who are less well off. The increase in the standard rate of VAT will have no impact on the price of basic food, domestic fuels, children's clothes and shoes or oral medicines because these products are zero rated for VAT nor will it impact on hotel and restaurant services, housing and construction or labour intensive services, which are at the lower rate of VAT. The 2% increase applies to a list of goods, many of which were referred to by Senator Reilly. The Senator talked about interference in cross-Border trade because of the VAT increase, but this is not correct. There has been much analysis of what impacts on cross-Border trade and a two percentage point change in the rate of VAT does not. An analysis of rates of VAT in Ireland and the United Kingdom in the past 20 years or so shows that the differential has always been approximately 3.5% to 4%. There is a lower differential now than there was historically. It is approximately 0.25% or 0.5% lower. There is always cross-Border trade. If people live near the Border, it is reasonable that they will cross it, especially now that the North is a peaceful community again. The figure for cross-Border trade is approximately 15%. The big driver is the currency differential when the exchange rate of the euro and sterling changes dramatically. It drives it in both directions, depending on which is strong and weak. It is not driven by VAT - a VAT increase of two percentage points will not drive cross-Border trade.

Senator David Cullinane described walking down the streets of Waterford and seeing all the "for sale" and "to let" signs. This is true of all towns and villages because the economy has shrunk by approximately 20%. While it is not an exact match, if the economy crashes and GDP reduces by almost 20%, it is purely a statistical fact that some 20% of small traders are likely to go out of business. If GDP goes down, that is where it will hit, although the impact is sometimes delayed. When he walks down the street in Waterford, the Senator will also see that the retailers still open for business have signs in their windows indicating discounts of 20% or 25% and permanent sales. The discounts run at between 20% and 30%. It is not reasonable to argue, therefore, that a VAT increase of two percentage points will affect trade when the discounts are of that order. The VAT increase is marginal when it comes to expenditure patterns. For reasons we all know, people do not have the money to spend, which is driving the decline in retail sales.

The choice of the Government to increase VAT and not touch income tax has been a bigger driver of positivity and a protection for retailers because people - if they are still at work - have the same incomes and take-home pay as they had before Christmas. If we had gone the other way and increased income tax, there would have been a bigger decline in retail sales. We all hope retail sales will recover - at long last they are stabilising and there is a slight pick-up. Bookings for the tourist season seem strong, even though it is early in the year and we hope things will continue to improve. The adjustments we are making are not random. We have analysed the position carefully and the two percentage point change in VAT is the tax increase which has least impact when compared with an increase in income tax, in particular.

Many Senators spoke about the jobs programme announced last May and asked how many jobs had been created and so on, but that is to misunderstand the economy. It would be possible to answer these questions if we were in a command and control economy such as those with which we were familiar in eastern Europe before the Berlin Wall came down. There a factory manager was able to outline how many he or she was supposed to employ before Christmas and how many more he or she was to take on before the spring. I have reviewed the live register figures. In the first nine months of 2011 - from 1 January to 1 October - some 120,000 people left the live register to go back to work. That gives an idea of the flux in the labour market. I do not have the figure for the entire year, but it was probably approximately 140,000. If 140,000 people left the live register not because they had emigrated but to go back to work, it shows there is movement in the labour market. That is what is going on all the time. In the last quarter of the year the labour force survey recorded that 1.86 million people were at work in Ireland, an increase of 10,000 in the quarter. It is not possible to say this was as a result of a particular initiative, but we must keep trying. We have reasonably good figures for employment in the hospitality sector. Those involved in that sector attribute the 6,000 increase in the sector to a reduction in VAT from 13.5% to 9%, which was targeted for that purpose.

People looking at the figures should not be despondent. One of the country's big strengths is that so many are still at work. Some 1.86 million are still at work based on the last set of figures. I remember coming out of recession in the 1980s. In 1985 and 1986 the number at work was 930,000 - approximately half the current number. As long as we have enough people at work who are working creatively and producing the goods and services others need and who are paying their taxes because they are at work, we have a strong economy and the potential to work our way out of this recession and get through it. Every measure we take is geared to advancing the cause further. Of course, we make mistakes - who does not? However, the decision to increase VAT was not a mistake because the alternative was to increase income tax. Maintaining rates of income tax and PRSI at their 2011 levels and reducing the impact of the universal social charge by removing 330,000 people from its ambit represented better tax management in the interests of the economy and employment. However, these are all choices to be made. Some Senators are arguing the case as if there was an option not to increase any tax. That option is not available. This is a series of choices and the Government needs to make decisions.


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