VAT: Hikes ‘will inevitably damage consumer spending ’
THE 2pc increase in VAT by the end of the Government’s four-year plan will damage consumer spending further and risks driving shoppers north of the Border.
The rate will increase by 1pc in 2013 and in 2014, bringing it to 23pc, and raising €620m for the Exchequer.
But consumers are already afraid to spend due to the economic climate.
Retail sales fell in both September and October, the latest figures show.
The falls would have been even bigger without the motoring sector, which has been showing increases this year due to the car scrappage scheme.
Only three out of 13 categories showed monthly increases last month – department stores, clothing and footwear, and electrical goods.
Retailers and small business groups welcomed the fact the hike is not immediate, but warned that damage to consumer spending was inevitable.
The Government last tried to increase VAT in 2008. Then it was a 0.5pc increase to 21.5pc, but due to lost cross-border trade Finance Minister Brian Lenihan had to do a U-turn last year.
However, the UK is also due to raise its rate to 20pc from January. That will stem the flow of shoppers to the North – in the short-term at least.
Retail Ireland, which represents 3,000 stores from Tesco to Spar, said the increase would be a negative for the industry.
“While we welcome the fact that the national recovery plan includes a section on the retail sector we do not, however, support the proposed two consecutive 1pc increases in the VAT rate proposed for 2013 and 2014,” said Retail Ireland director Turloch Denihan yesterday.
“This will work against the prospect of a recovery in consumer spending.”
He also said the extension of the VAT base to include any items that were not currently zero base was not productive. Chambers Ireland said that while the increase was disappointing, plans for a hike of the northern rate should balance it out.
However, small business group ISME warned that the VAT rate in the North would have to be monitored in the future.
“Any serious differential will only encourage further cross-border shopping, which has caused inestimable damage already to the retail sector south of the Border,” said chief executive Mark Fielding.
Before the VAT rate was decreased in 2009 back to 21pc, 250,000 households from the Republic were regularly doing their shopping north of the Border, although the differential in the rates was 6pc at the time.
It is estimated cross-border shopping cost the Exchequer over €800m in 2009.
Off-licence sales there rose 30pc last year, while off-sales in the Republic were down 7pc.
Mr Denihan added that the plan indicated there would be a hike in excise duty next year with details included in the December Budget.
“We believe that any increase in excise on alcohol would stimulate cross-border shopping,” he warned.