Editor’s Note
New finance minister Michael McGrath should show he isn’t a poodle for the Department of Finance mandarins by reversing his predecessor Paschal Donohoe’s decision to raise the Value Added Tax rate on hospitality and tourism services from 9% to 13.5% from the beginning of March 2023. The state finances have no need for the extra tax revenue, as the Exchequer took in €5bn more in taxation than the government spent last year.
Even with the reduced 9% VAT rate pertaining, in 2022 VAT receipts increased by 20% year-on-year, along with a 15% increase in Income Tax receipts and a whopping 50% surge in the Corporation Tax yield. Overall, the tax burden on Ireland’s economy increased by 22% last year to €83bn, yet still the Department of Finance insists on squeezing taxpayers who can least afford it.
Hospitality is a sector where micro firms and SMEs are prevalent. Such ventures are the backbone of the tourism economy, which is what rural Ireland relies on in the areas bypassed by multinationals and co-ops. In 2011, after the economy was decimated by the property crash, Enda Kenny and Michael Noonan spurred hospitality enterprise by introducing a ‘Second Reduced VAT Rate’ of 9%. As might be expected, lowering the tax rate worked — with less of a tax grab by the state, entrepreneurs had more funds to keep prices competitive and expand employment.
Ireland’s standard VAT rate of 23% is sixth highest in the EU and the reduced VAT rate of 13.5% is fourth highest. As a result, according to Eurostat, Irish consumers pay 36% more than the eurozone average for consumer goods and services. With inflation still rampant, employers face escalating pay demands, which will inevitably damage employment numbers. As was the case in the past, VAT can be a key policy lever for government, and McGrath should be looking at ways to push down consumer prices, not drive them up.
Department of Finance officials want to eliminate the 9% VAT rate as a recession anomaly, though no such enthusiasm is apparent for reducing the 23% VAT rate back to the 21% level in force from 1991 to when Noonan raised it in 2012. Taxes on income and spending are much too high in Ireland, as evidenced by the huge surplus in the annual state budget. Far from hiking VAT on hospitality, McGrath should mandate a 9% VAT rate across the services sector and cut some slack to beleaguered owners of micro and small enterprises.