Department of Finance officials clearly laid out a case for abolishing the 9 per cent VAT rate for the hospitality industry to Minister for Finance Michael McGrath before the Government’s surprise decision last month to extend the measure by a further six months to the end of August, according to a briefing paper on the matter.
The estimated cost of the extension is €300 million. An economic assessment by officials of the special rate, which was introduced in the middle of the Covid-19 crisis in November 2020 and extended on a number of occasions since, said there was “no economic case for extension of the temporary 9 per cent rate”, and that it should be restored to 13.5 per cent.
Mr McGrath issued the paper to Sinn Féin finance spokesman Pearse Doherty this week on foot of requests for the assessment.
“The original rationale was to provide targeted, timely and temporary support to those areas of the economy which were most deeply impacted by the pandemic public health restrictions,” the paper said of the lower rate that mainly applies to the accommodation, food services, arts, entertainment and recreation sectors.
However, the paper highlighted that job numbers in the sectors covered by the reduced rate “grew faster than almost all other sectors” as the economy rebounded in recent years to “full employment”. The Irish unemployment rate stood at 4.3 per cent in February, compared with 21 per cent in November 2020, including individuals on pandemic jobless payments.
It added that Central Statics Office figures have shown that output in the accommodation and food services sectors, which covers most of the 9 per cent rate activities, has almost returned to pre-pandemic levels.
“Many – though not all – households have accumulated enormous ‘excess savings’ during the pandemic, somewhere in the region €20 billion to €25 billion. This will support demand for contact-intensive services in the years to come, as they continue to release pent-up demand,” it said. “Against this backdrop, it is important to manage demand as not to overheat the economy.”
The paper also argued that the low rate was “regressive”. It highlighted that a previous analysis by officials had found that it “disproportionately benefits better-off households as it primarily covers discretionary expenditure such as meals at restaurants or stays in hotels”.
The hospitality sector had previously benefited from a 9 per cent rate between 2011, at the height of the financial crisis, and the end of 2018.
It had been widely expected that the reduced rate would be abolished when the Government unveiled a cost-of-living package last month, in spite of intensive lobbying by the hospitality industry. The package also saw the Cabinet sign off on lower VAT rates on electricity and gas bills being extended until the end of October, as well as a bonus payment for social welfare recipients.
Mr McGrath had also indicated in the lead-up to the package that the special rate would come to an end last month. Taoiseach Leo Varadkar said the measure will not be extended beyond August.
A spokeswoman for the department said the extension was “to give businesses a transition period to adapt to the changing economic and policy environment” and that the commitment to increase the rate from September shows the Government accepted the economic assessment.