Read the Minister for Finance Brian Lenihans comments when asked what 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.

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.