Why Keep the VAT at 9%

VAT at 9% is good and here’s 9 reasons why:

  1. 33,600 direct jobs have been created in the restaurant and tourism industry since the VAT reduction in July 2011.
  2. An additional 15,456 indirect jobs have been created elsewhere in the economy due to a multiplier effect.
  3. The restaurant sector employs 72,000 people (1 in 4 tourism jobs) and contributes a total of €4 billion to the Irish economy each year.
  4. Employer and employee payroll taxes resulting from these 33,600 jobs totals to €160 million.
  5. The creation of 49,056 direct and indirect jobs has resulted in savings to the exchequer of €672 million to the Social Welfare bill.  49,056 jobs equates to 49,056 off the live register, 49,056 paying PAYE, PRSI and 49,056 spending in the Irish economy.
  6. Restaurants throughout the country have passed on the reduction in VAT to consumers
  7. Improved value for money perception across all overseas visitors as well as Irish consumers.
  8. VAT MUST be retained into 2018 and beyond in order to remain competitive. By European standards, Ireland is at the higher end of the VAT rate, with countries such as Portugal at 6%, France and Germany at 7% and Greece at 6.5%.
  9. Renewed growth in overseas tourism numbers and earnings. Overseas visits to Ireland grew by almost 47.3% in the period from Q2 2011 to Q4 2016.

 

Brexit – The implications for the Irish Tourism and Hospitality Industry

The recent decision by the UK electorate to leave the EU poses considerable challenges to Ireland and every sector of the economy. From an Irish economic and political perspective, there is much to worry about in relation to Brexit:

  • The impact on the UK economy 
  • The impact of sterling and hence on the competitiveness of the Irish export relationship with the UK
  • The future trading relationship that would be negotiated between the UK and the EU
  • The border with Northern Ireland
  • The implications for the all-island energy market
  • The future of UK corporation tax policy (already the Chancellor has spoken about a 15% Corporation Tax Rate)
  • Ireland could also lose a strong and sensible ally around the EU table, particularly in the face of strong Franco-German axis
  • Benefits from the FDI front are not sufficient to offset the potential negatives

 

Sterling

Sterling has lost 23% of its value against the euro since November 2015, and has shed 11% since the Brexit vote. This currency move will damage the competitiveness of Irish exports to the UK and will make Ireland a lot less attractive for UK tourists.

Given how important the UK economy is to Ireland, a sharp slowdown or recession there, would damage Ireland. It is estimated that for every 1% that the UK activity declines, Irish economic growth would decline by about 0.3%. The number of UK tourists travelling abroad would also be damaged by a UK recession.

 

The Accommodation & Food Services Sector

Brexit has already generated considerable uncertainty for Ireland and clearly has the potential for considerably more uncertainty over the next couple of years. The Accommodation & Food Services Sector would clearly be very vulnerable to a UK recession and ongoing sterling weakness and vulnerability.

Given the intense uncertainty around how the Brexit process may develop and its economic implications for Ireland and the UK, there are no certainties. The risks to Irish tourism from a shark slowdown in the UK economy and weaker sterling are clear.

Against the background of intense uncertainty for the Irish economy in general and The Accommodation & Food Services Sector in particular, it would not make sense to increase the VAT rate applying to the sector, given the extra vulnerability that has arisen from the Brexit vote.

 

Competitiveness

It is widely recognized that generating sustainable broad based export-led growth is essential in rebuilding a sustainable Irish economic model. To achieve this objective, cost competitiveness is an essential ingredient.

For a service export like tourism, international competitiveness is absolutely crucial to success. If the tourism product is not competitive, foreign visitors will be diverted to other cheaper markets, and domestic tourists will have a stronger incentive to go overseas.

  • Ireland’s international competitiveness deteriorated significantly between 2000 and 2008 as all of the costs of doing business were allowed escalate in a very damaging way.
  • From 2009 onwards, there was a significant improvement, helped by the weakness of the euro against sterling and the dollar, but also an improvement in the costs of doing business as the economy contracted.

Over the past year there has been some deterioration again.

  • The Real Harmonised Competitiveness Indicator (Real HCI) increased by 3.7% between April 2015 and April 2016.
  • The Nominal Harmonised Competitiveness Indicator (Nominal HCI) increased by 4.9% over the same period.

Exchange rate movements have made a significant contribution to this deterioration in competitiveness. For example, since March 2015 the euro has appreciated by 5.8% against the dollar and since July 2015 it has appreciated by 20% against sterling. However, there is also clear evidence that many of the costs of doing business are increasing in line with the economy.

 

Cost of doing Business in Ireland

The Costs of Doing Business in Ireland 2016 report does give some cause for concern in relation to the recent trends in business costs. Its key findings include:

  • Ireland remains an expensive location in which to do business with a price profile, which can be described as ‘high cost, rising slowly’;
  • In the year to Q3 2015, Irish labour costs grew by 2.1%, compared with growth of 1.9% in the EU-28 and 1.2% in the euro area;
  • In 2016, Ireland had the 2nd highest monthly minimum wage and the 5th highest in PPP terms of 18 countries considered;
  • Ireland is the 6th most expensive location in the euro area for prime retail rents. Rents increased by 22% in 2015;
  • Commercial rate increase as a proportion of total Local Authority revenue from 24% in 2002 to 38% in 2015/ Over the same period, the proportion received from Central Government fell from 46% to 29%;
  • Industrial electricity prices for SME energy users are 6% higher in Ireland than the euro area, making Ireland the 6th most expensive location. Between 2010 and 2015, Irish prices for SMEs increased by over 20%

‘Costs of Doing Business in Ireland 2016’, National Competitiveness Council, April 2016.