Richard Bruton (Dublin North Central, Fine Gael)
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Question 12: To ask the Minister for Finance if he has assessed the impact on retail sales here and on VAT receipts of the differential of 6.5 points on VAT in the North and in the UK. [45210/08]

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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The Budget increase of 0.5% in the standard VAT rate is estimated to yield the Exchequer €208 million in 2009 and €227 million in a full year.

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. I have 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 is not possible to estimate the effect on Exchequer revenues of tax changes in other Member States. In any case, I would point out that the weakening of sterling has had a far more significant impact on relative prices than any VAT changes in this regard.

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. The estimated €227m that will accrue in a full year from the VAT increase will go some way towards funding necessary public services.

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, this 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 the price of goods and services, which apply 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.

It must be also be recognised that around half the value of goods and services purchased in the State are not subject to the standard rate of VAT and therefore are unaffected by the change in the standard rate. All Government services, local authorities, hospitals and schools etc., are exempt from VAT. The zero rate of VAT applies to the majority of foodstuffs, oral medicines, 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, are applicable at the 13.5% reduced rate of VAT.

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 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 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 of low direct taxation 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.