VAT hike will not rake in expected cash, say analysts

DOUBT was cast on the Government’s ability to rake in cash from the hike in the VAT rate, given the downturn in the global economy.

Small business groups hit out, saying the hike from 21% to 23% is “short-sighted” and will not bring in the revenues forecast. ISME said the increase would have a “devastating impact” on businesses already struggling to survive.

Bloxham chief economist Alan McQuaid said that VAT intake was now €464 million, or 4.6%, below target so far in 2011 and, based on these figures, he said one had to question the wisdom of increasing the top rate of VAT.

“With consumer spending so weak, it is hard to see the Government raising the extra €670m in revenue it hopes to from this measure,” he said.

However, consumers could be encouraged to spend in the run-up to Christmas, given the Government’s decision to delay the implementation of the VAT hike.

Finance Minister Michael Noonan said the Government would increase the country’s sales tax from 21% to 23% in January. He said it would not exceed the 23% level in the lifetime of the Government.

Chambers Ireland chief executive Ian Talbot said the increased VAT rate being implemented in January rather than now gives a “window” for consumers to spend over the next four weeks.

Mr Noonan defended the VAT hike, saying 20 out of the 27 EU states had increased VAT in the past four years and that further increases were being considered by several states. He said most food, children’s clothes, oral medicines and other goods and services would remain at zero VAT.

The 9% rate introduced in the jobs initiative for certain services and the 13.5% rate that applies to home heating oil, residential housing, general repairs and maintenance will remain the same.

Mr Noonan said that after the increase he announced yesterday, the differential between the VAT rate in the North and the Republic would be 3%.

“I do not expect an increase in cross-border shopping as a result of the VAT increase,” he said.

The Northern Ireland Independent Retail Trade Association disagreed, saying the hike would lead to some increase in the numbers of shoppers coming north, particularly to border towns.

However, Ernst & Young tax partner Jarlath O’Keefe said the increase should not in itself cause a “stampede of shoppers” to the North.

“Recent research has indicated that the gap in the actual net price of items between retailers in the North and South has reduced. This, coupled with the current less favourable exchange rates, might be enough to deter shoppers from heading North in large numbers,” he said.

Goodbody Stockbrokers also said the VAT hike would have further negative impacts on spending in Ireland in 2012. It is forecasting a decline in consumption of about 1% in 2012, following a 2% decline this year.

Fianna Fáil Seanad spokesman on Social Protection, Paschal Mooney, said Mr Noonan was being “disingenuous” for insinuating that the VAT hike would not hit poor families.

“A cursory glance at some of the items that will increase in price as a result of this anti-business move show how out of touch Fine Gael and Labour backbenchers are becoming. It includes: Toilet roll, toothpaste, towels, soap, shampoo, detergents, pet food, children’s toys, exam papers, cooking foil, fruit juices, spectacles, false teeth, and even coffins.

“Which of these does the Government consider a luxury? This decision will stretch already limited budgets forcing families to shop elsewhere, which will have a disastrous impact on our towns and villages.”