Dinny McGinley (Donegal South West, Fine Gael)
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Question 393: To ask the Minister for Finance if his attention has been drawn to the increase in the number of customers from the Republic of Ireland who are now purchasing in Northern Ireland; the serious implication for traders in the Republic of Ireland and particularly in border counties such as Donegal; the measures he proposes to implement to save these border businesses from going into liquidation; and if he will make a statement on the matter. [39219/09]

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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With regard to the VAT differential between Ireland and the UK, given the current Exchequer deficit position, the policy decision of increasing the standard VAT rate in Budget 2009 continues to be necessary in order to support the public finances. We are borrowing to fund day to day public services which is unsustainable as future generations will be required to pay higher taxes unless we correct our public finances.

Although the UK cut its standard rate of VAT from 17.5% to 15% on a temporary basis from 1 December 2008 to the end of 2009, at the same time they increased excise duty on alcohol, cigarettes, petrol and diesel in order to offset the 2.5% reduction in VAT on these items. Consequently there was no reduction in the price of these products in Northern Ireland as a result of the reduction in the UK VAT.

The VAT rate is not the only factor in the price differential between North and South of the border. The weakening of sterling has had a far more significant impact on relative prices than any VAT changes. Furthermore, as a small open economy, many of our goods and services are imported, especially in the case of those at the standard rate. Cutting the VAT rates 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.

It is argued that reducing VAT rates would create some buoyancy and encourage additional consumer spending. However, it should be noted that with the notable exception of the UK, EU Member States have generally not opted for VAT rate cuts as a way to boost consumer spending. In contrast some Member States have increased VAT rates, curtailed the scope of exemptions and of reduced rates, to help cover the budgetary shortfall generated by the slump. Indeed it is understood that some Member States are now considering increasing their VAT rate as a part of the ongoing response to the general fiscal crisis.

There are other means of stimulating the economy, outside of the VAT system. The government is funding capital investment of €7.3bn or 5% of GNP in 2009, a significant sum in times of constrained resources. This funding will be targeted at economically valuable infrastructure which will enhance our long term productive capacity and support employment.