Central Bank boss says he’s ‘sceptical’ on VAT rate cut

CUTTING VAT rates is not an effective means of support for businesses and direct assistance is more helpful, according to Central Bank of Ireland governor Gabriel Makhlouf.

His comments come as businesses in sectors such as tourism and hospitality call for a reduction in the VAT rate to help bolster firms as part of a package of Government responses to the Covid pandemic.

After the 13.5pc VAT rate was cut to 9pc for a swathe of businesses following the financial crash, it was credited with helping create tens of thousands of jobs and saving ventures that would have otherwise failed. But the direct benefit to consumers was arguably marginal.

“Most measures need to be temporary,” Mr Makhlouf told RTÉ Radio yesterday.

“They need to be targeted and they need to be temporary.

“I’m always very sceptical about the value of a reduction in VAT.

“I tend to be sceptical about using tax as a measure to provide support from Government. It may have its place, but I think it’s much better to look at providing direct support because it enables you to target a support much more effectively and efficiently.”

The Central Bank governor said the economy is now in a stronger position than it was when it entered the last recession and that, for now, borrowing additional funds is not an issue.

“What matters is that whatever is done is done in a targeted way,” he said of the Government’s stimulus plan that is due to be unveiled next week.

“Affordability right now is not an issue.”

“The Government debt ratios – its debt to GDP ratios et cetera – have gone up, but that was warranted and it was necessary and currently it’s affordable.

“So I think that shouldn’t be a constraint right now. What is

Focused: Gabriel Makhlouf important is that the Government focuses on protecting the productive capacity of the economy. “What we don’t want to see are viable businesses, in particular, becoming insolvent. Some businesses will fail. That’s certainly the case. “But we want to make sure that policy avoids what economists call scarring effects – long-term unemployment, viable businesses fail[ing],” he said. Mr Makhlouf added that sectors which rely on person-to-person contact have been most affected by the pandemic, such as tourism, accommodation, retail, pubs and bars. “That’s where the particular pressure is,” he said. “But one can’t pretend that it’s going to be straightforward. Everything that we’re actually dealing with right now is characterised by uncertainty.” Mr Makhlouf also insisted that it’s up to individual banks whether to charge distressed mortgage holders interest on their home loans while they’re availing of payment breaks. “The decision at the end of the day whether or not to charge interest is a commercial one for them to make in the context of their operations,” he said. He urged distressed borrowers to engage early with lenders if they think they won’t be able to meet their mortgage repayments. He said the Central Bank “absolutely” wants to avoid another arrears crisis.