Government measures to improve staff working conditions, as well as its 13.5 per cent VAT rate for the hospitality sector, have led to a “commercial crisis” in the food services sector, which will have substantial knock-on effects for tourism, a new report has warned.
The report by Anthony Foley, an emeritus associate professor of economics at Dublin City University business school, was commissioned by the coalition of tourism and hospitality groups.
The report said the food services sector was “facing, and undergoing, significant downsizing, including closures, reduction in opening hours and days, and more limited menus… This is bad for the Irish tourism product.”
The report said the “large deterioration” in the sector’s commercial model had been caused by high inflation, the increase in VAT and “large increases in employment-related costs which are driven by Government policy changes”.
Mr Foley pointed to a report the Department of Enterprise on the impact of “proposed measures to improve working conditions”, which found that a small hospitality business could see a “policy-driven increase” in its payroll costs of 6.6 per cent this year.
“This projected increase is closer to 19.4 per cent by 2026,” the department said. “In overall terms, this equates to an increase of 14.5 per cent and 36.7 per cent by 2024 and 2026, respectively when the full impact of the transition to a living wage is accounted for.”
Mr Foley’s report meanwhile found that the average margin for hospitality food services has dropped to an estimated post-Covid level of 1.9 per cent of turnover compared with 7.2 per cent in 2019.
On VAT, Mr Foley said net tax receipts for the sector amounted to €1.86 billion in 2023 compared with €1.16 billion in 2018, when the VAT rate was previously at 9 per cent.
As a result of the higher 13.5 per cent VAT rate, he said it was now estimated the annual tax take from the sector would increase to €2.33 billion this year, some €1.17 billion higher than in 2018.
[ Food sector sees largest jobs decline amid mounting concern over closuresOpens in new window ]
“A possible negative scenario of the eventual impact of the deterioration of the food services sector is a decrease of €733 million in international tourism expenditure and a decline of €312 million in domestic tourism,” he said.
“International visitors would decline by 625,000 and domestic trips would decline by 1.43 million. Employment would decrease by over 21,000. Tax revenue relative to the 2023 total of €1.744 billion could drop by €174 million.”
The coalition of tourism and hospitality groups is made up of the Irish Tourism Industry Confederation, the Restaurants Association of Ireland, the Vintners Federation of Ireland, the Irish Hotels Federation and the Licensed Vintners Association.
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