Time for change to Ire­land’s VAT

The Repub­lic’s special 9% VAT rate for tourism-re­lated busi­nesses is past its sell-by date, says Dan O’brien

Belfast Telegraph - Business Telegraph - - Nijobfinder.co.uk - Dan O’brien is chief econ­o­mist at the In­sti­tute of In­ter­na­tional and Euro­pean Af­fairs

Half-a-bil­lion euro is a lot of money. That is how much the Repub­lic’s De­part­ment of Fi­nance es­ti­mates a six-year-old tax break for the hos­pi­tal­ity sec­tor costs an­nu­ally. The de-facto sub­sidy is likely to have cost close to €3bn (£2.7bn) to date.

The ra­tio­nale for giv­ing the sec­tor a pref­er­en­tial rate of value added tax in 2011 was rea­son­able in many ways. The econ­omy was then at a low ebb. The hos­pi­tal­ity sec­tor was suf­fer­ing. Although it em­ployed around 115,000 peo­ple at the time, it had lost 20,000 jobs in net terms over the pre­vi­ous three years. Many of those em­ployed in the in­dus­try had/ have low skills lev­els, a group that was par­tic­u­larly badly hit by the re­ces­sion. Giv­ing this in­dus­try a boost made a lot of sense, par­tic­u­larly as the sec­tor was and is so ge­o­graph­i­cally broad based.

But giv­ing one in­dus­try pref­er­en­tial treat­ment does not come with­out costs and com­plex­i­ties. The cost in cash terms, as men­tioned above, is high. The ‘op­por- tu­nity cost’ — what could be done with the money not col­lected in VAT — is also sig­nif­i­cant, par­tic­u­larly given do­mes­tic and EU rules lim­it­ing the amount the govern­ment can in­crease spend­ing by with­out rais­ing ad­di­tional taxes to fund it. End­ing the tax break for the sec­tor would sig­nif­i­cantly ex­pand the fis­cal space in Bud­get 2018, which will be un­veiled in just four weeks’ time.

An­other is­sue around pref­er­en­tial treat­ment, such as the hos­pi­tal­ity sec­tor’s VAT break, is mea­sur­ing how much good it ac­tu­ally does. In truth, there is no per­fect way of mea­sur­ing the ben­e­fits of tax breaks. How­ever, cost/ben­e­fit analy­ses give a good in­di­ca­tion. As has hap­pened too of­ten in Ir­ish bud­getary his­tory, this tax break has not been sub­ject to any such anal­y­sis by the De­part­ment of Fi­nance in al­most half a decade. Its re­newal each year since ap­pears to have more to do with lob­by­ing than any rig­or­ous assess­ment of whether it is good value for money, and for the wider econ­omy.

The re­duc­tion of VAT in 2011 — from 13.5% to 9% — was de­signed to boost the sec­tor by al­low­ing busi­nesses to lower prices, thus giv­ing the in­dus­try a com­pet­i­tive­ness gain.

The study by the De­part­ment of Fi­nance to­wards the end of 2012 found that there was “clear ev­i­dence” of the re­duc­tion be­ing passed on to con­sumers by restau­rants, cin­e­mas, mu­se­ums and art gal­leries in the first year that the re­duced rate was ap­plied. It did not find such clear ev­i­dence that providers of ac­com­mo­da­tion passed on the cut.

Over­all, the study con­cluded that “close to half of the VAT re­duc­tion has been passed through to con­sumer prices”. Put an­other way, busi­ness own­ers trousered the other half.

If the mea­sure had a mixed start, price de­vel­op­ments since then sug­gest the gains to con­sumers have been over­whelmed by gen­eral inflation.

Start with the cost of a bed. The Central Sta­tis­tics Of­fice’s de­tailed inflation fig­ures show that prices for ‘ac­com­mo­da­tion ser­vices’ for tourists and trav­ellers have soared. To be pre­cise, as of last month, ac­com­mo­da­tion prices — cov­er­ing ho­tels, guest houses, B&BS and the like — were up a whop­ping 32% on July of 2012.

In­creases in the food in­dus­try have been much more mod­est. Prices in restau­rants (ex­clud­ing al­co­hol and other beverages) in­creased by 7% in the five years to last month.

This has hap­pened de­spite over­all inflation in the econ­omy over the past five years be­ing non-ex­is­tent, food prices fall­ing and wage growth run­ning at his­tor­i­cally low lev­els. Th­ese de­vel­op­ments mean that the higher prices be­ing charged are mostly adding to prof­its, par­tic­u­larly in the ac­com­mo­da­tion sec­tor. While it is great that busi­nesses are mak­ing more money, it is not cred­i­ble for those in that in­dus­try to claim that they need pref­er­en­tial tax breaks which other busi­nesses don’t get, in­clud­ing those in in­dus­tries that are strug­gling.

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