Noonan hints Vat rate may not return to 13.5%

Finance Minister Michael Noonan has given the strongest signal yet that the low rate of Vat for pubs, restaurants, and the hospitality sector will be partially maintained.

The 9% rate was introduced as a temporary measure to boost the sector, but following the creation of 15,000 jobs, Mr Noonan has been under pressure not to reinstate the 13.5% rate.

He had previously insisted that keeping the lower rate would cost €350m, which would have to be found through other taxes.

However, after exchequer figures this week showed greater than expected revenue from a pension levy, imposed to pay for job creation, Mr Noonan said the €350m could be recovered by “not quite going to 13%”.

He told the Dáil: “We would recover the money by putting the Vat up to something less than the 13.5%.”

Mr Noonan has been under pressure from a number of Fine Gael backbenchers and lobbying from the hospitality sector, who claim each 1% increase in the Vat rate could cost 4,000 jobs.

He also revealed in the Dáil that the scale of spending cuts and tax increases in the budget will be greater than what the troika is demanding.

He said it was prudent to provide a “buffer” by imposing cuts greater than what are needed because “we are being watched” by the markets.

Under the terms of the bailout, the Government has to reach a deficit target — the difference between spending and what is taken in through taxes — of 5.1% of GDP next year.

However, Mr Noonan said he would like to go beyond the 5.1% to “somewhere in the high fours”.

Labour previously said that the Government should not go beyond what is required because people need a break from austerity.

It is now believed that Labour will accept a debt to GDP ratio of 4.8% because this can be done while also keeping the sum of the budget adjustment to below €3.1bn.

The Economic Management Council, made up of the Taoiseach, Tánaiste, Mr Noonan, and Public Expenditure Minister Brendan Howlin, is close to agreeing a final figure.

A compromise is centred on the basis that Fine Gael can achieve an adjustment which brings the deficit below 5.1% of GDP and Labour can achieve an adjustment less than the €3.1bn originally planned.

Mr Noonan told the Dáil he wanted to “beat” the 5.1% target because “that will convince the markets that we are people its reasonable to lend money to” when Ireland exits its bailout programme.

He said: “If we just cut it to 5.1 [percent] and bring that in as a deficit, there is a risk of drift. As the year goes by, any storm that blows up, you could come out on the wrong side.”

Mr Noonan said a number-crunching exercise has still not determined what size of adjustment would be needed to bring the deficit to below 5.1%.

However, he said that each decimal point change equals €160m more in cuts and taxes, so “if the 5.1% goes down one point, that’s €160m”.

Sinn Féin finance spokesman Pearse Doherty said the decision to seek more cuts meant that it was Mr Noonan’s way and not Labour’s way.