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Continuation of 9% VAT rate for tourism sector

The Irish SME Association (ISME) has renewed calls for an extension to the 9% VAT rate to the whole services sector and pointed to the benefits for employment and social contributions.

According to Neil McDonnell, CEO of ISME: “The desire within the SME sector to set the reduced VAT rate at 9% was recently described in the media as the “tourism industry’s interminable campaign.” Far from it. There is very wide support for fixing Ireland’s reduced VAT rate at 9% across the services sector. Such a measure would be good for employment, good for consumers, and best of all for the Exchequer who would reap the benefits of higher employment levels, income taxes and social contributions. This is not economic theory; it is established fact.”

According to ISME, there isn’t a “correct” rate of VAT, in Ireland or in any other country. A perusal of Ireland’s standard VAT rate shows it was at a low of 16.37% in 1972 and reached a high of 35% from 1983 to 1984. The reduced rate ranged from 5.26% in 1972 to 23% from 1983 to 1984. The “Second Reduced Rate” of 9% was introduced in July 2011, in the teeth of the Great Recession, and it delivered in spades for Ireland in maintaining and growing employment in the hospitality sector. While the Department of Finance appears keen to eliminate the 9% rate as an anomaly introduced in the Great Recession, no such enthusiasm is apparent on reducing the 23% VAT rate, despite the fact that Ireland had a standard rate of VAT of 21% for the 21 years from 1991 to 2012.

Neil McDonnell added: “Worse than the notion that the 9% VAT rate is tax expenditure or a gift to the hospitality industry is the idea that it has cost the Exchequer €900m since its retention last year. This represents very selective accounting. Firstly, we should remember that when the 9% rate was introduced in 2011, it was funded not by the Exchequer, but by private sector pension savers via the pension levy. As the then Finance Minister Michael Noonan told the Dáil in 2014, “Without the Pension Levy, there would have been no VAT reduction.” This expropriation of citizens’ pension savings has yet to be made good by the Exchequer. Secondly, the “cost” of the 9% VAT rate must be balanced in the Exchequer ledger against the increased employment, reduced social protection, larger wages, and higher consumer spending, PAYE, PRSI and USC it has generated over the period it has been in operation. In purely accounting terms, the 9% is likely to be a revenue-positive initiative by Government.

Both Ireland’s standard and reduced rates are high by EU standards. Our standard rate is sixth highest in the EU, and our reduced rate is fourth highest. This might be acceptable if Ireland’s consumer prices were otherwise more affordable, but they are not. Ireland has persistently been the second-most expensive country in the eurozone for many years after Denmark, but since 2021 we have overtaken the Danes to have the most expensive consumer prices. According to Eurostat, Irish consumers pay 36% more than the eurozone average for consumer goods and services. Only Norway, Iceland and Switzerland, all non-EU members, suffer higher consumer prices in Europe as a whole.

With a significant element of core inflation likely to continue in Ireland in 2023, and possibly into 2024, Government should be looking at ways to push down consumer prices, not drive them up. Not alone should the 9% rate for hospitality be permanently extended, we should lower our reduced rate from 13.5% to 9% for all services, including grooming services and housing. At this rate, our reduced rate would be in line with EU norms. We should also permanently reduce our 23% VAT rate to our historical 21%.

As a peripheral island economy with no EU border, we should aspire to lowering rather than increasing consumer prices. Consumer inflation is the key driver of wage demands, and workers cannot be blamed for seeking higher wages to meet ever-higher consumer prices. VAT is a key policy lever for Government which should be exercised now.”