Cantillon: Is it too soon to ditch the “tourist” VAT rate?

There is a lot of speculation about what Minister for Finance Michael Noonan could do with the so-called "tourist VAT rate" in budget 2014. As part of its job-creation package announced in July 2011, the Government cut the rates in the hospitality sector and other businesses to 9 per cent from 13.5 per cent.

It paid for this through a levy on pension savings that is now due to come to an end, prompting speculation that the same thing could happen with the tourist VAT rate. Organisations such as the Restaurants Association of Ireland and Irish Hotels Federation are lobbying furiously to ensure there is no change.

One point of which the Government must surely be conscious is whether the businesses involved passed on the savings to their customers or simply pocketed them, defeating the purpose of the reduction. Many suspected that this would happen, but there is evidence it didn’t.

McDonald's Restaurants of Ireland announced price cuts in July 2011 on the back of the rate cut, running from 10 cent on individual items to 25 cent off meals. The company says movements since then have been tied to commodity prices, which means they have increased by less than the overall consumer price index (CPI). This chimes with a July report commissioned by Fáilte Ireland from Deloitte into the impact of the VAT change on prices and employment.

Taking actual cost increases into account, which were below the CPI, and the impact of the VAT change, Deloitte found that consumers are saving 2.9 per cent on takeaway prices. The rate cut should have resulted in a 3.96 per cent saving on the bill, but it indicates the buyer is enjoying the lion’s share of the benefit.

The story was the same across the other sectors, including cinemas, hairdressing, accommodation, dining out and newspapers. The report stated that buyers and sellers shared the benefits, and that the businesses did pass reductions on to their customers. Deloitte also said it could take up to two years for the full benefit of a VAT rate cut to feed through to consumers. And it argued that the rate cut “unquestionably” helped to improve employment in the hospitality industry, supporting close to 7,000 extra jobs.