The case for pegging the Vat hospitality rate at 9%

If the success of a government is to be gauged by what is happening on the labour market, then the current administration and its immediate predecessor should be judged as successfulm, writes Jim Power.

The case for pegging the Vat hospitality rate at 9%

The economy is now on the verge of the highest level of employment ever achieved and the unemployment level continues to decline. Data released this week showed that the level of unemployment declined by 38,200 in the 12-month period to July and the unemployment rate remained unchanged at just 5.1% of the labour force.

Since the lowest point of the labour market in early 2012, the number of people unemployed has declined by 235,300 from 355,800 to 120,500 and the unemployment rate has come down from over 15% of the labour force. These figures demonstrate clearly just how flexible the Irish labour market is and just how willing and able businesses are to create employment once the environment is favourable. The 9% Vat rate is a good example.

This week the Department of Finance published its assessment of the 9% special rate of Vat in the hospitality sector. Its main conclusions are that the policy has achieved its objectives and that it is no longer relevant in the current and forecasted economic environment. Furthermore, it argues for an ending to the favourable rate on the basis that hotels and restaurants, in particular, have experienced a loss of competitiveness and rising prices relative to comparable sectors and that the majority of sectors impacted are now enjoying healthy profit margins.

It also estimates that the reduced rate has cost approximately €2.6 billion since its introduction

The lower rate was introduced in July 2011 at a time of crisis in the economy, and its main objective was to help the competitiveness of Ireland’s tourism sector, in particular, to ensure that firstly, as many ailing businesses as possible survived and secondly to boost employment. Between the second quarter of 2011 and the first quarter of 2018, the number of people working in the accommodation and food services sector increased by 54,400, taking total employment from 117,300 to 171,700 on a seasonally adjusted basis.

The sector accounted for 7.7% of total employment in the economy. On the back of this direct employment growth, I estimate that another 25,000 indirect jobs were supported.

The direct jobs created would have resulted in payroll taxes of an estimated €280 million accruing to the exchequer and possible savings of over €1bn in social welfare expenditure if it is assumed that the bulk of the jobs created took people off the live register. In estimating the total cost of the 9% Vat rate it would be appropriate to include payroll tax revenues collected and social welfare expenditure saved. In addition, those extra workers employed would have spent their earnings in the economy and made a further contribution to the exchequer.

Personally, I think it would be mad to increase the Vat rate at a time of such uncertainty for the tourism sector in particular

In the first six months of the year, 4.87 million overseas visitors came into the country, which is 6.7% ahead of the same period in 2017. Visitor numbers from Britain increased by 2.2% and accounted for 36.7% of total overseas visitor numbers. However, this is down from almost 41% in 2016. The crucial UK market is under pressure from sterling weakness, but luckily the overall tourism performance is being held up by very strong growth in visitor numbers from elsewhere. It is worth remembering that the sterling/euro exchange rate averaged 72.63 pence in 2015; 81.92 pence in 2016; 87.64 pence in 2017; and 88.1 pence so far in 2018. This represents a significant deterioration in the terms of trade over the past four years.

It is also worth bearing in mind that the health of the hotel and restaurant sector in Dublin does not reflect business conditions in many rural areas. It is also worth remembering the costs of doing business are rising and labour costs, in particular, look set to become a massive issue for the hospitality sector.

As an aside, the reaction of the trade union movement to the Department of Finance report puzzles me. I would have thought that trade unions would support employment creation measures but then again, I never professed to understand trade unions.

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