To ask the Minister for Finance the action he will take, in view of the significant price and VAT difference in border areas and the consequent loss of business and employment in border counties as a result, to address this situation; and if he will make a statement on the matter.

                                                                                                                                             - Fergus O’Dowd.

Ref No: 44526/08

                                   REPLY

Minister for Finance ( Mr Lenihan) :

As  part  of  a  fiscal  stimulus  package, the UK Government reduced their standard VAT rate from 17.5% to 15% on a temporary basis with effect from 1 December  2008  to  31 December 2009.  There are 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  must  be recognised that our starting point is different from the UK’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.  In the recent Budget,  the  Government  introduced  a  general package of revenue-raising measures  to  fund key public services in this regard, one measure of which was increasing the standard VAT rate by 0.5%.

Each  1  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 million 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 around  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  goods  and  services that apply at this rate will increase  by  around 0.41%.  In other words, it means an increase of 8 cent on an item costing €20, or 41 cent on an item costing €100.

It  should  be  noted  that  around  half  the  value  of good and services purchased  in  the  State  are  not  subject  to  the standard VAT rate and therefore  are  unaffected  by the recent Budget changes in Ireland and the UK.  For example, all Government services, local authorities, hospitals and schools  etc.,  are  exempt  from  VAT.   The  majority of foodstuffs, oral medicines,  books  and children’s clothes and shoes are at the zero rate of VAT.   Furthermore,  the  13.5%  reduced  rate  of  VAT applies to housing, electricity, gas, domestic fuels, restaurant services, and labour intensive services such as hairdressing and shoe repair.

Although  the  reduction in the UK standard VAT rate will have an impact on the  price  differential  on  some goods between the North and the South, I would  point  out that the UK have increased excise on alcohol, cigarettes, petrol  and  diesel  to  offset  the  2.5% reduction in VAT on those items. Consequently  there  will be no reduction in the price of those 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 own 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, which is twice the average in  the  EU.  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 has given us a significant competitive advantage over the  past  15 years.  We have ensured that 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 our economy and will be  even  more  important  now  in  leading us back to the path of economic growth.   According  to  the latest OECD data relating to 2007, Ireland has the  lowest  tax wedge in the EU for single, married one-income and married two-income  couples  on  average earnings.  A low tax wedge makes it easier for employers to employ staff.   After the Budget changes, we are still one of the lowest taxed economies in the EU.

To  ask  the  Tánaiste and Minister for Enterprise, Trade and Employment the  action  she  will  take,  in  view of the significant price and VAT difference  in  border  areas  and  the  consequent loss of business and employment  in  border  counties as a result, to address this situation; and if she will make a statement on the matter.

                                                           - Fergus O’Dowd.

   Ref No: 44525/08

                                 R E P L Y

Tánaiste   and  Minister  for  Enterprise,  Trade  and  Employment  (Ms. Coughlan)

As I said last week in response to a similar PQ, the fiscal positions of both  countries are very different. In this regard it should be borne in mind that Ireland already has a low tax economy by comparison with other competing  economies,  especially in the area of direct taxation on both business  and  labour,  which  has  a direct impact on all companies and workers  in  the State.  This lower starting position for taxation makes it more difficult to reduce taxes further.

 As  we  are  all  aware, we are running a significant budget deficit for this  year.   Suggestions  by  some  commentators  that  Ireland  should replicate  UK  fiscal  policy  by  reducing our standard VAT rate by 2.5 percentage  points  would cost in excess of €1.1 billion in a full year.  Reducing  the  standard  rate  to the same level as that in the UK (15%) would  cost almost €3 billion per annum. In this regard, it is important to  bear  in mind that any policy to reduce VAT in the hope that it will boost  spending  has  to be assessed with caution as much of its benefit would likely flow out of the State given the openness of our economy.

My  department  does  not  have  programmes  or policies to specifically support  the retail sector.  In response to ongoing concerns in relation to  the level of price differences north and south of the border, I have arranged  to  meet  with  Retail  Ireland  to  seek  explanations on the differences.

However  my  development  Agencies are actively supporting firms in the border region.  To further strengthen Irish businesses and employment in border region, Enterprise Ireland will continue to drive improvements in innovation,  competitiveness,  productivity and management capability in Irish companies.  There are currently 2 full time enterprise development programmes   ongoing  in  the  border  region.  This  involves  business incubation  and  training  for 25 entrepreneurs.  Enterprise Ireland has also  run 4 Enterprise Start Programmes in the region during 2008.  This is  a  part  time  support  programme  to  facilitate people who wish to develop and grow an early stage business idea.

To  assist  companies  with  innovation  and  R&D,   The  Institutes  of Technology  in  the  border region have been approved €2,485,773 in 2008 for  a  total  of  18 specific projects. Furthermore, up to August 2008, there  were  a  total of 112 innovation vouchers approved to SMEs in theborder region.

With  regard  to  smaller  enterprises, the County Enterprise Boards are working  to  stimulate  economic  activity  and to promote an enterprise culture  at  local  level.   In  2007 Cavan, Donegal, Leitrim, Louth and Monaghan  CEBs  paid over €1.5m in grant aid to 111 clients and assisted in the creation of 243 net jobs in these counties.  In 2007 2,525 people participated in training through the border CEBs.

Wednesday December 03 2008

DROGHEDA Chamber of Commerce’s campaign to drop VAT has drawn countrywide attention, with president Patricia Rooney featuring on both national TV and radio.

The chamber website is urging everyone to email and postcard the Minister for Finance Brian Lenihan and the Minister for Trade Enterprise and Employment Mary Coughlan to cut VAT and help the retailers on the border counties and the entire country to stem the flow north.

In a statement the chamber states: ‘We call for the minister to reduce the rate to 15% in the Republic immediately and until further notice, this will stimulate the economy and help to stem the flow north to shop and save jobs’.

A letter to the minster further highlights the issues impacting on all concerned.

‘Last Monday, December 1st, we in this part of the island of Ireland increased our VAT rate from 21% to 21.5% while the Northern Ireland economy sees a reduction from the present 17.5% rate to 15% and ignoring all the other negative factors which mitigate against us for a moment we are disadvantaged to the tune of 45% on the VAT issue alone.

‘The Belfast City Council and the City and County Councils all over Northern Ireland are four square behind their business sector and have organised a Republic wide advertising campaign to attract the southern shoppers into their stores and hotels and restaurants with even more incentives.

‘Free parking in the car parks under their control, media coverage of what is available and where, extending opening hours are all being advertised. They are helping to save and support employment for their residents and it is being done largely at our expense’.

The chamber website is www.dropthevat.com and they are encouraging everyone to register their support by signing a petition on the site.

 “There is no point having a high VAT rate when nothing is moving.”

I got a call from one of my good friends this week, asking me if I wanted to take a slot in a large van going up to Newry next Sunday to do the Christmas shopping.

He has three other people already who are chipping in and the van will no doubt be filled to the brim with toys for the kids, presents for loved ones, booze, food and God knows what else. I have scary visions of a  Ford Transit shunting down the M1, wheels buckling under the weight.

Does my friend feel unpatriotic for giving the queen his money? Not in the slightest, he says.

“Being patriotic is all well and good,” he says.

“But I’m tired of being ripped off, and with the VAT difference now, we’ll save a fortune.”

It’s hard to argue against him and it seems thousands of other people from the south share his lack of patriotism.

Last week, Alastair Darling in  a Keynesian attempt to stimulate the flagging British economy slashed the rate of VAT from 17.5 per cent to 15 per cent, with effect from December 1.

In stark contrast, our embattled Finance Minister Brian Lenihan announced in his Budget a 0.5 per cent increase in VAT, to 21.5 per cent.

The Lenihan levy on VAT is the worst thing he could have done to an already brittle economy. It was anti-business, it was anti-consumer, it was downright stupid.

I was in the Dail the day he announced his Budget and I thought then as I do now that the VAT increase would do more damage than good.

The proof of that is in the increasing number of people flocking over the border to shop in the North.

He has to act because if he doesn’t, thousands of people working in the Irish retail sector will be out on the street without a job.

He has to make it attractive for people like me and my friend to do our shopping in Nutgrove not in Newry.

But Lenihan is in a tight bind. He is faced with an economy on its knees, tax revenues are falling through the floor, and he hasn’t got much room to manoeuvre.

Above all else he’s not an economist but a lawyer, as he said himself.

Lenihan also has to tackle consumer confidence which remains in a major slump.

The latest consumer index figures released last Friday show confidence down at 44 compared to the last peak of 106.2 in early 2006.

People are scared out of their wits to spend their money.

They don’t believe things are going to improve any time soon and many fear that their job won’t be there in six months time.

But the figures speak for themselves. The VAT take at the end of last month was just over €11bn, down over €1bn at the same stage the previous year.

While the cost of reducing VAT by 1 per cent is about €450m, Lenihan is going to have to bite the bullet and reduce it or consign thousands of Irish workers to the dole queue.

What he should do is scrap the pay deal and use the €650m he’d save on the public sector pay rise to cover the cost of reducing the VAT rate.

The political opposition are also calling for the VAT hike to be reversed.

Labour’s finance spokeswoman,  Joan Burton, said: “He (Lenihan) should drop the half per cent and should go even further. It’s sending out the wrong message to the public, and to the small businesses who are on their knees.”

The VAT increase is another major headache for the small business sector in Ireland.

Already crippled by needless government bureaucracy, high energy costs and high labour costs, they were dealt with another whammy in the form of higher commercial rates announced last week.

Patricia Callan of the Small Firms Association has called for the Government to implement a small business strategy to ensure some protection for firms and said VAT is one of the issues that needs to be addressed.

Lenihan, sooner or later, will have to bite the bullet and look at the VAT issue again.

As long as our VAT remains as it is, he is handing millions worth of business into the hands of northern traders.

A VAT decrease will help restore some consumer confidence, as will the continuing drops in interest rates and oil prices, and it will get people back in the shops and get them spending.

As long as he refrains from acting, he will continue to kill Irish businesses, and the spectre of weekly trips to Newry will become the norm not the exception.

For me, if Lenihan acts sensibly by slashing VAT and giving consumers and businesses a helping hand, I’ll happily do my shopping in Dublin.

If he doesn’t, you know where I’m going next weekend.

 Reported in the Sunday Independet - November 30 2008

The North’s First Minister Peter Robinson has said businesses north of the Border had every right to try and entice shoppers from the Republic.

“Let’s be clear, this is swings and roundabouts. There have been many occasions where this has worked in the other direction, it worked in terms of fuel and aggregates when that very clearly damaged the prospects of businesses on our side of the border,” Mr Robinson added.

He said: “Some in the South have said it is unpatriotic to shop in Northern Ireland, but in the spirit of North-South co-operation, I am happy to offer a warm welcome to all of our visitors from the South.”

“In truth, it is good for us all. Northern Ireland gets a significant economic boost, and people in the Republic might save enough on their shopping to help pay their higher taxes and their health bills.”

Mr Robinson pointed to different prices for fuel as an example of retailers in the Republic benefiting.

“It worked in terms of fuel aggregates when very clearly it damaged the prospects of businesses on our side of the border. I encourage people to come to Northern Ireland and am delighted that they built all those good roads so that people could come up quickly to Northern Ireland,” he said.

Deputy First Minister Martin McGuinness said residents in the Border counties had always proved themselves adept at locating the best deal.

“We all know that human nature clearly tells us that over the course of many years people in the border areas and indeed people wider afield will travel almost anywhere to get a good bargain,” said the Sinn Féin deputy leader.

An already steady flow north by shoppers in the Republic is likely to be boosted by recent VAT changes. From December 1st, the VAT rate in the North will drop to 15 per cent, a fall of 2.5 per cent while the VAT rate in the State was increased by 0.5 per cent to 21.5 per cent in the Budget.

Yesterday businesses in Drogheda, Co Louth started a campaign to urge the Government to reduce the rate of value added tax (VAT) to 15 per cent to help them compete with retailers north of the Border.

The Drogheda and District Chamber of Commerce is leading the call for the reduction in VAT, claiming it will stimulate the economy and help stem the flow of shoppers to Northern Ireland.

In an open letter to Minister for Finance Brian Lenihan and Tánaiste Mary Coughlan yesterday, the chamber called on them to “act urgently” to assist the commercial and retail sectors in the State to “stem the flow of income and sales North to the jurisdiction of the UK government”.

“On Monday next, December 1st, we in this part of the island of Ireland increase our VAT rate from 21 per cent to 21.5 per cent while the Northern Ireland economy sees a reduction from the present 17.5 per cent rate to 15 per cent, ignoring all the other negative factors which mitigate against us,” wrote chamber president Patricia Rooney.

Ms Rooney said Belfast City Council and other authorities all over Northern Ireland are “four-square behind their business sector and have organised a Republic-wide advertising campaign to attract the southern shoppers into their stores and hotels and restaurants with even more incentives”.

The chamber will launched a website yesterday to promote its ‘Drop the VAT’ campaign.

Superquinn said on Wednesday the retail sector faced substantial job losses after Christmas due to the number of shoppers opting to travel to the North.

The National Consumer Agency has found a margin of up to 30 per cent in food prices on either side of the Border.

© 2008 irishtimes.com

VAT: Commission proposes categories of services to which Member States may apply a reduced rate

The European Commission today made a proposal to change the VAT Directive 2006/112/EC so as to provide Member States with the flexibility to apply reduced VAT rates for some specific services on a permanent basis.

Read full release eu-article

Situation at 1st July 2008 is detailed here:   vat_rates_en-in-the-eu.pdf

http://www.kpmg.co.uk/news/detail.cfm?pr=3255

Click on any of the pictures above.

Businesses in Drogheda, Co Louth have begun a campaign to urge the Government to reduce the rate of value added tax (VAT) to 15 per cent to help them compete with retailers north of the Border.

The Drogheda and District Chamber of Commerce is leading the call for the reduction in VAT, claiming it will stimulate the economy and help stem the flow of shoppers to Northern Ireland.

In an open letter to Minister for Finance Brian Lenihan and Tanaiste Mary Coughlan today, the chamber called on them to “act urgently” to assist the commercial and retail sectors in the State to “stem the flow of income and sales North to the jurisdiction of the UK government”.

“On Monday next, December 1st, we in this part of the island of Ireland increase our VAT

rate from 21 per cent to 21.5 per cent while the Northern Ireland economy sees a reduction from the present 17.5 per cent rate to 15 per cent, ignoring all the other negative factors which mitigate against us,” wrote chamber president Patricia Rooney.

Ms Rooney said Belfast City Council and other authorities all over Northern Ireland are “four-square behind their business sector and have organised a Republic-wide advertising campaign to attract the southern shoppers into their stores and hotels and restaurants with even more incentives”.

“They are helping to save and support employment for their residents and it is being done largely at our expense. Sainsbury’s supermarket in Newry is their leading store across the entire UK for turnover and this is almost exclusively because of southern shoppers.”

Ms Rooney also said the landmark Boyne bridge, which is tolled, was discouraging shoppers from entering Drogheda.

“The local Borough Council in Drogheda have been proactive and supported the retailers here announcing a free parking facility in all their owned car parks from December 4th until December 24th for four hours each day 11am to 3pm, which is most welcome but not nearly enough to assist us.”

The chamber president urged the Government to take an immediate initiative to help save jobs in the area due to the flow of business to the North.

“If we keep those jobs we avoid the additional burden on the public coffers to provide social welfare to those who will lose their jobs otherwise when many of those businesses collapse from the strain they are under,” she wrote.

The chamber will launch a website today to promote its ‘Drop the VAT’ campaign.

Superquinn also said yesterday the retail sector faced substantial job losses after Christmas due to the number of shoppers opting to travel to the North.

© 2008 irishtimes.com