Thursday, 11 December 2008
Dáil Eireann Debate
3. Deputy Kieran O’Donnell asked the Minister for Finance if he has assessed the impact on retail sales and VAT receipts of the differential of 6.5 points in VAT with Northern Ireland and the UK. [45546/08]
Deputy Brian Lenihan: The budget increase of 0.5% in the standard VAT rate is estimated to yield the Exchequer €208 million in 2009 and €227 million in a full year. As part of a fiscal stimulus package, the UK Government reduced its standard VAT rate from 17.5% to 15% on a temporary basis with effect from 1 December 2008 to 31 December 2009. I have no plans to make a similar reduction in the standard VAT rate in Ireland or to reduce the rate to the UK level of 15%. It is not possible to estimate the effect on Exchequer revenues of tax changes in other member states. The weakening of sterling has had a far more significant impact on relative prices than any VAT changes.
It must be recognised that our starting point is different from the United Kingdom’s. We already have a low taxation economy, especially in the area of direct taxation, both income and corporation taxes, which has a direct impact on all employment in the State. This lower starting position for direct taxation makes it is more difficult to reduce taxes further. Already we are borrowing over 10% of all day-to-day spending on public services before capital spending. This is unsustainable and we faced difficult choices in bringing forward corrective measures. The estimated €227 million that will accrue in a full year from the VAT increase will go some way towards funding necessary public services.
Each one percentage point reduction in our standard VAT rate would cost around €450 million in a full year. For Ireland to reduce the standard VAT rate by 2.5 percentage points would cost around €1.125 billion in a full year. For Ireland to reduce the standard VAT rate to the UK level of 15% which would mean a reduction in the standard VAT rate of 6.5 percentage points would cost almost €3 billion in a full year. This is equivalent to approximately two and a half times the amount of revenues to be raised in a full year through the new income levy.
Some of the goods and services that will be affected by the increase in the standard rate are alcohol, cigarettes, cars, petrol, electrical equipment, furniture, telecommunications, cosmetics, confectionery, soft drinks and adult clothing and footwear. The effect of the 0.5% increase in the standard rate is that the price of goods and services which apply at this rate will increase by 0.41%. This equates to an increase of 8 cent on a good costing €20, or 41 cent on a good costing €100.
It must be also be recognised that around half the value of goods and services purchased in the State are not subject to the standard rate of VAT and, therefore, are unaffected by the change in the standard rate. All Government services, local authorities, hospitals and schools etc., are exempt from VAT. The zero rate of VAT applies to the majority of foodstuffs, oral medicines, books and children’s clothes and shoes. In addition, housing, electricity, gas, domestic fuels, restaurant services and labour intensive services such as hairdressing and shoe repair are applicable at the 13.5% reduced rate of VAT.
Although the reduction in the UK standard VAT rate will have an impact on the price differential on some goods between the North and South, the United Kingdom has increased excise on alcohol, cigarettes, petrol and diesel to offset the 2.5% reduction in VAT on these items. Consequently, there will be no reduction in the price of these products in Northern Ireland as a result of the reduction in the UK VAT rate to 15%. As a small open economy, many of our standard rated goods are imported and cutting the VAT rate could benefit the economies from which we import more than our own. In other words, while it might help the consumer, it would not be the most effective way of helping our the economy.
There are other means of stimulating the economy, outside of the VAT system. The Government is providing a long-term fiscal stimulus through capital investment of approximately 5% of GNP, twice the EU average. This fiscal stimulus will not only support jobs in the short term but will also add to our long-term productive capacity.
Irish taxation policy of low direct taxation has given us a significant competitive advantage in the past 15 years. We have ensured we have had the lowest levels of direct taxation on income; therefore, we have had marginally higher indirect taxation. That model of taxation has worked well for the economy and will be even more important in leading us back to the path of economic growth.
Deputy Kieran O’Donnell: On Committee Stage of the Finance Bill yesterday the Minister gave a commitment to produce a report on the impact of the VAT differential on retail sales and VAT receipts. Does that commitment still stand? When will the report will be ready, and will it consider the impact in terms of jobs and revenue to the Exchequer? Furthermore, the Minister should reverse the 0.5% increase in VAT, for administrative reasons and also in view of its cost to the economy.
In the last year sterling has fallen by more than 25% against the euro. However, retailers are telling me that the decrease in the cost of the goods they are selling is of the order of 10%. Why? Clearly, wholesalers are not passing on the price reductions. I looked at three products today: the Financial Times, OK magazine and Hello magazine, which are relevant to most people. The Financial Times has a UK cover price of £1.80 sterling. It should therefore cost €2.03, but it costs €2.50. Thus, it is overpriced by 23%. OK magazine is 53% overpriced; it is £2.95 in the UK, so it should cost €3.33 here, but it costs €5.11. Hello magazine is £2.00 in the UK but costs €3.47 here, although it should be €2.25. This means it is overpriced by 54%.
Deputy Kieran O’Donnell: What I want to impress upon the Minister is that the Government should ask the National Consumer Agency and the Competition Authority to look into this issue as a matter of urgency. Consumers are taking matters into their own hands. They are deciding they are paying too much and going directly to Northern Ireland. This is costing the Exchequer money and it is costing jobs.
Deputy Brian Lenihan: If I could finish my reply, I intend to obtain an accurate account of this. For this reason I have asked the Revenue Commissioners, in conjunction with the Central Statistics Office, to examine the losses to the Exchequer arising from cross-Border shopping.
Deputy Brian Lenihan: I am not in a position to advise the Deputy of that today. He will appreciate that I gave the commitment yesterday evening. I will be in a position to communicate with the Deputy about that matter in the coming days.
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