Fergus O'Dowd (Louth, Fine Gael)
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Question 64: To ask the Minister for Finance the action he will take, in view of the significant price and VAT difference in Border areas and the consequent loss of business and employment in Border counties as a result, to address this situation; and if he will make a statement on the matter. [44526/08]

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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As part of a fiscal stimulus package, the UK Government reduced their standard VAT rate from 17.5% to 15% on a temporary basis with effect from 1 December 2008 to 31 December 2009. There are 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%.

It must be recognised that 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 is more difficult to reduce taxes further.

Already we are borrowing over 10% of all day to day spending on public services (before capital spending). This is unsustainable and we faced difficult choices in bringing forward corrective measures. In the recent Budget, the Government introduced a general package of revenue-raising measures to fund key public services in this regard, one measure of which was increasing the standard VAT rate by 0.5%.

Each 1 percentage point reduction in our standard VAT rate would cost around €450 million in a full year. For Ireland to reduce the standard VAT rate by 2.5 percentage points would cost around €1,125 million 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. This is equivalent to around two and a half times the amount of revenues to be raised in a full year through the new income levy.

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, confectionery, soft drinks and adult clothing and footwear. The effect of the 0.5% increase in the standard rate is that goods and services that apply at this rate will increase by around0.41%. In other words, it means an increase of 8 cent on an item costing €20, or 41 cent on an item costing €100.

It should be noted that around half the value of good 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 and schools etc., are exempt from VAT. The majority of foodstuffs, oral medicines, books and children's clothes and shoes are at 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.

Although the reduction in the UK standard VAT rate will have an impact on the price differential on some goods between the North and the South, I would point out that the UK have increased excise on alcohol, cigarettes, petrol and diesel to offset the 2.5% reduction in VAT on those items. Consequently there will be no reduction in the price of those products in Northern Ireland as a result of the reduction in the UK VAT rate to 15%.

As a small open economy, many of our standard rated goods are imported, and cutting the VAT rate could benefit the economies from which we import more than our own. In other words, while, it might help the consumer, it would not be the most effective way of helping our own economy.

There are other means of stimulating the economy, outside of the VAT system. The Government is providing a long term fiscal stimulus through capital investment of approximately 5% of GNP, which is twice the average in the EU. 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 have ensured that we have had the lowest levels of direct taxation on income, 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. According to the latest OECD data relating to 2007, Ireland has the lowest tax wedge in the EU for single, married one-income and married two-income couples on average earnings. A low tax wedge makes it easier for employers to employ staff. After the Budget changes, we are still one of the lowest taxed economies in the EU.