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
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.