Dan O’Brien ‘Tourism doesn’t need a tax break’
TWO things about tourism: it’s one of the country’s great home-grown business successes; and it no longer needs the temporary tax break it was given seven years ago.
Let’s focus first on the news everyone will be happy to hear.
Record numbers of visitors flocked to Ireland in the first half of the year, according to numbers highlighted this week by the body charged with promoting tourism.
The boom in tourism is visible almost everywhere across the country. Places that have long been attractive are thronged – and in some cases over-thronged. Many other places that have not been on the traditional tourist trail are getting in on the act. So are people who, in the past, might not have been able to benefit from the cash spent by tourists.
While there are downsides to the Airbnb phenomenon at a time of a housing shortage in a few urban centres, it has also allowed people to boost their incomes by sweating what is for many folk their only significant asset.
The boom is happening in large part thanks to good economic times in all the big source countries and regions for tourism.
The arrival figures showed that visitors to Ireland from continental Europe hit record numbers in the first half of this year, jumping by more than a tenth on the first six months of 2017.
That reflects continued economic strength across the euro area and the fact that the joblessness rate is close to the lowest it has been since the turn of the century.
Just this week, economic growth figures showed that the continental economy bounced back in the spring and early summer after a soft patch in the winter. Indicators point to continued solid growth into the second half of the year.
Visitors from the other side of the Atlantic also hit record highs this year, with growth getting into double figures compared with the same period last year. Again, that’s thanks to a strengthening economy and lots of new jobs, along with a strong dollar, which gives Americans a bigger bang for their buck when they travel abroad.
Brits have not been so lucky in that regard. Brexit has clobbered sterling. The weakness of the pound makes staycations in Blighty relatively more attractive to holidaying in pricey euroland.
This factor resulted in a slump in UK visitor arrival figures last year. But as the exchange rate has been more stable this year, trips from across the water in the first half of this year rose, if only marginally.
That so many countries are enjoying good economic times is confounding in many ways. Despite Brexit, the UK recorded a 43-year low last month in its unemployment rate, and its economy is still shrugging off Brexit uncertainty for the most part.
However, as much as the political temperature in the US might have risen, as that country becomes ever more polarised, it is not stopping consumers from spending. Nor is there much sign yet that anti-trade measures taken by the Trump administration, with fears of more to come, are stopping businesses from investing.
On this side of the Atlantic, the European economy is taking fears of a trade war in its stride, as it is Brexit, a rogue government in Italy and banking sector vulnerabilities.
This column has noted previously an apparent decoupling of politics and economics in the rich world.
All the political instabilities and uncertainties in recent years are showing up much less in the economic data than one might have expected in the past. Let’s hope it stays that way, for everyone’s sake, including the tourism sector.
NOTHING better reflects the boom that sector is enjoying than the number of jobs it has created.
As of the first months of this year, a new record of 172,000 people were employed in the accommodation and food services sector. That is up 50pc on seven years earlier – a much bigger increase than even the muchtalked-about tech sector – when the then government agreed to give the hospitality industry a VAT break.
That tax break was supposed to be temporary in order to help the industry recover from the deep slump it was in at the time.
While it is likely to have been of some help in the early days, the main driver of growth in tourism is a good product combined with strong economic growth in the countries from which most visitors originate. Alas, many in the industry have convinced themselves that the tax break was responsible for the recovery in their businesses and are as convinced that reversing it – involving an increase in VAT from 9pc to 13.5pc – would send them back to the doldrums of 2011. This is simply wrong.
While no business wants to be subject to higher taxes, there is no economic case for maintaining a special and supposedly temporary break introduced seven years ago. Accommodation prices in July this year were 32pc higher than the same month in 2011, despite overall price inflation over that period being non-existent and low wage increases. If tourists have flooded to Ireland in spite of much higher accommodation prices, a 4.5 percentage point VAT increase, even if fully passed on to visitors, is not going to have much of an impact.
Of all the many ways governments have of extracting cash from individuals and businesses, VAT-type taxes are considered to be among the least damaging to growth.
With the VAT break costing hundreds of millions of euro annually and billions needed to ease infrastructure bottlenecks, it is well past time this temporary tax break was ended.
Many in the industry have convinced themselves that the tax break was responsible for the recovery in their businesses and are as convinced that reversing it – involving an increase in VAT from 9pc to 13.5pc – would send them back to the doldrums of 2011. This is simply wrong