Tourism no longer needs the low VAT rate to prosper

You haven't heard them much of late. Perhaps they are simply too busy managing the weight of work coming their way in this rare Irish summer but budget season is starting. And that means it cannot be long before the tourism industry is once again making the case for retention of the reduced VAT rate of 9 per cent for the industry.

The reduced rate was introduced in 2011 to stimulate the hospitality sector sector – crucial to economic wellbeing particularly outside of Dublin – at a time when it was on its knees.

But that's seven years ago. Hotels are now charging rates for rooms that are at or close to those prevailing in the final hedonistic days of the Celtic Tiger – especially in Dublin. And times are good for most of the rest of the hospitality sector too.

Meanwhile, Minister for Finance Paschal Donohoe is juggling competing bids for money from what is an increasingly tight fiscal space. He has about €800 million to play with. Given the agreed two-to-one ratio in favour of spending increases over tax cuts, that gives him just €266 million to allocate to tax cuts.

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In the background, the State is battling a housing crisis that threatens to become a major election issue. A reduced rate for residential construction is seen as one element of a concerted drive to address it. But, on its own, that would cost €270 million in a full year.

Expensive

One way to boost the Budget 2019 pot is to increase taxes elsewhere. Even before last year's budget, the Department of Finance reckoned that restoring VAT to the normal 13.5 per cent mark in the sector would yield an estimated €491 million in revenue for the exchequer.

At that time, it found the 9 per cent tax on hotel rooms was among the lowest in Europe, and that hotel prices in Dublin were the 10th most expensive in the world out of countries surveyed. They’ve risen since then.

The clinching argument last year – when Finance wanted the normal rate restored – was Brexit. But hospitality is far from alone in being vulnerable to whatever may emerge on that front.

There is simply no justifiable argument for retaining a reduced VAT rate on hotel rooms at least, whatever about other elements of the hospitality sector. And there’s an argument that the Minister could help himself by making that clear now and heading off another intensive lobbying campaign by the sector.