VAT hike was a mistake, admits Lenihan
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FINANCE Minister Brian Lenihan has admitted that his decision to increase the higher VAT rate contributed to the boom in cross-border shopping.
However, a new report will reveal that the biggest reason for the estimated €700m in lost trade to the North was the drop in the value of sterling in relation to the euro.
There is a zero VAT rate on food here and in the North, but the 30pc drop in the value of sterling meant that shoppers were able to get supermarket staples at substantially reduced prices.
Mr Lenihan admitted at a private business dinner last week that increasing the top rate of VAT by 0.5pc to 21.5pc was a mistake.
"If I have one act of contrition -- I should not have interfered with the VAT rates. It was a mistake and the wrong thing to do," he said.
Although Mr Lenihan went on to say that €700m had been lost in revenue to the North, his department has pointed out that the sterling differential rather than the VAT increase was the main cause of this.
A spokesman said that shoppers were already flooding across the Border to take advantage of the currency difference even before the VAT increase had been announced in last October's Budget.
This contention will be backed up by a report prepared by the Central Statistics Office and Revenue for Mr Lenihan, which is due to be published shortly. However, the spokesman said Mr Lenihan was admitting that his VAT increase sent the "wrong signal" to the public.
It was followed by the British Government's decision to cut the UK VAT rate from 17.5pc to 15pc last November, which further fuelled the cross-border shopping trade.
Labour Senator Alan Kelly said that Mr Lenihan's admission was a case of "stating the obvious". "It should have been plain to anyone with a titter of wit that increasing VAT, particularly at a time when the euro was strengthening significantly against sterling, would provide a further incentive for shoppers to take their business across the border," he said.
Reduction
He called on Mr Lenihan to reverse the decision in next month's emergency Budget, while retailers demanded a "targeted reduction" in VAT rates.
Retail Ireland director Torlach Denihan said that retail sales fell by the largest annual drop ever recorded last year, meaning that 25,000 retail staff would lose their jobs this year.
"Government should consider a targeted reduction in VAT for a specific period to stimulate retail sales," he said.
Mr Denihan called for a reduction in taxes on alcohol. He said alcohol was the single biggest common factor in cross-border shopping: "Our excise rate is 40pc higher on spirits and 23pc higher on wine."
Anti-alcohol abuse campaigners have welcomed the reduction in sales as our average consumption levels are still among the highest in the world.
- Michael Brennan and Sarah Stack
