The European Commission has called on the Government to install “systematic” reviews of all its reduced rates for Vat, such as its low level of tax on hotels and restaurants, and has warned again on the State relying too much on corporate taxes.
In its country report on Ireland, the commission highlighted the growing number of demands on the public purse at a time when the economic recovery faces potential threats from abroad. It said that though economic prospects “remain bright”, the risks of Brexit and from the potential overhaul of international tax regimes could undermine decisions by multinationals to invest in the country.
On the reduced levels of Vat, the commission said there was no “systematic process for evaluating the costs and benefits of reduced Vat rates”.
It acknowledged a report published by the Department of Finance before the budget in October that found that increasing the 9% Vat rate on hotels and restaurants back up to the standard reduced rate of 13.5% would bring in €626m in additional revenue.
“Despite this, and the fact that hotels and restaurants are performing strongly, the Government has decided to keep the reduced Vat rate as a buffer for the sector against the weakness in sterling, which increases the cost of holidaying in Ireland for British tourists,” the report said.
The commission said it was concerned about the Government financing permanent increases in spending from corporate taxes.
The country’s public finances face risks from the legacy of the financial crash too. At over three times of GDP, private debt remains high despite evidence that firms and households are paying back debt, it said. Sovereign debt, at 78.6% of GDP, also remains at an elevated level, it said, and public finances remain vulnerable despite the proposal to set up a so-called rainy-day fund.
Non-performing loans held by banks have also fallen, but at 14.7% of all loans remains the highest in the eurozone, it said.
Noting the sharp rise in rents, it said it will take time before new housing comes on stream to help ease shortages. The Government’s ‘help to buy’ incentives for first-time buyers may also push up prices and do little to boost the supply of new homes, it said. However, property prices “do not appear to be overvalued”.
It highlighted a number of special challenges facing the economy, including the Government increasing total spending.
Planning for infrastructure is not efficient and regulatory barriers are slowing building projects.
Increased costs as the population ages raise questions about “sustainability” of healthcare, it said, and not enough has been done to boost primary-care centres “as a gatekeeper for Ireland’s overburdened hospitals”.
The huge number of multinationals and their influence on GDP levels “increase Ireland’s exposure to changes in international tax regimes”.
There are few links between multinationals and Irish indigenous firms, while low levels of public research and development are hindering Irish SMEs, the report said.
Overall, the report found that Ireland could face risks from a further fall in sterling but could also tap the “upside potential” from Brexit by luring more investments. Longer term, the effects of Brexit remain “uncertain” on agri-food firms, in particular, it said.
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