Noonan needs to keep tourism sector’s VAT rate break under review

Members of the Irish hotel industry gathered at the Slieve Russell hotel in Cavan over the past two days for their annual conference with “Strength in Resilience” as their theme.

The timing was important, with the Government set to publish its tourism policy statement in the coming weeks – with the broad aim of boosting visitor numbers to 10 million a year and revenue to €5 billion annually by 2025.

The Irish Hotels Federation (IHF) is pushing for the special 9 per cent VAT rate, introduced in 2011, to be retained. To help make the case, a report by economist Alan Ahearne on the role of the reduced rate in restoring competitiveness in our tourism industry was published at the conference.

The Government reduced the VAT rate for tourism services from 13.5 per cent in mid-2011, with the move funded by a pernicious 0.6 per cent levy on private pension funds. It was initially meant to be a temporary measure to boost employment but has been retained each year since.

In terms of creating jobs, it seems to have had the desired effect. In his budget speech last October, Minister for Finance Michael Noonan said "there are now an extra 23,000 employed in the sector since mid-2011".

Ahearne’s report puts the figure at 30,000, accounting for more than one in every three net new jobs created in Ireland over the past four years.

Either way, tourism has been to the forefront in our economic recovery.

Ahearne said the benefits of the VAT reduction have “exceeded expectations” while the cost to the exchequer has been “markedly lower” than initially expected.

“The measure has proved to be a highly cost-effective way of boosting competitiveness and employment,” he added. Many hoteliers now want the VAT rate made permanent feature rather than renewed each year.

Competitiveness

In a statement to The Irish Times yesterday, the IHF said it was "important in terms of competitiveness and should be viewed as a long-term measure having brought our rate more in line with our European competitors".

The IHF also wants a 30 per cent reduction in local authority rates and the reversal of €25 million of cuts by the State in tourism marketing funding over the past three years, and has warned against the proposed introduction of calorie labelling on menus and the reintroduction of the joint labour committee system.

It’s a long shopping list.

Should the reduced VAT rate become permanent when it is evident the industry is back on its feet when the Government is still struggling to balance the books?

In January 2010 the then Fianna Fáil-led administration, with Ahearne as an adviser, introduced a scrappage scheme for the car industry to encourage motorists to trade in bangers for new models. It was in place for just 18 months.

The tourism VAT reduction was designed to aid competitiveness and generate employment. Ahearne’s report says the additional revenue generated by the VAT reduction is being “recycled in the industry on an ongoing basis”, not just to boost employment but to aid investment in maintenance, refurbishment, renovation and innovation in what are capital- intensive businesses.

It could also be argued it has helped to bolster profit margins. I paid €6.60 for a pint of Heineken in the Horseshoe Bar of the Shelbourne Hotel in Dublin recently, which doesn’t strike me as terribly competitive.

Hairdressers

The 9 per cent VAT

rate also applies to hairdressers yet mine has neither dropped his rates nor employed any extra staff over the past four years. It’s still the same two blokes who worked there in 2011.

Hotel room rates are also on the rise. Judging by his budget speech last year, Noonan is alive to these issues.

“In the light of reports of rising prices in this sector, it is incumbent on the industry to ensure that this relief continues to be passed through fully to the consumer. Let me be very clear, the taxpayer cannot be the only stakeholder keeping costs down in the sector. If prices begin to rise, the case for retaining the measure diminishes,” he said.

Ahearne’s report concludes that the “stimulus from the reduced rate of VAT remains hugely important to the viability and prospects for growth for the industry”.

That’s fine but Noonan is right to keep it under review. An independent cost-benefit analysis on behalf of the department might be in order to determine if this tax break should be retained or if it has served its purpose.