Saturday 17 February 2018

Maeve Dineen: Sales figures show Noonan's VAT gamble has yet to pay off

The June retail sales figures, which showed a sharp decline in both the value and volume of retail sales, served as an unwelcome reminder of the continued weakness of the domestic economy.

Last month, the value of retail sales fell by 1.3pc while the volume of sales was down by 0.7pc. When motor sales -- which are traditionally very volatile -- were excluded, the fall was even steeper with the value of non-motor sales falling by 2.1pc and the volume dropping by 1.5pc.

Of course, it would be dangerous to read too much into one month's figures. Retail sales traditionally drop in January and July, even in good times, due to the winter and summer sales as retailers slash prices to shift surplus seasonal inventory.

However, that excuse won't wash for June. One possible excuse that has been wheeled out is the appalling weather we endured last month. According to this line of reasoning, shoppers were put off by June's unseasonably cold and wet weather from buying their summer kit.

Unfortunately, this is at best only a partial explanation. In December's Budget, the Government gambled on increasing the standard rate of VAT by 2pc to 23pc. The Government hoped that the VAT hike would raise €670m in extra revenue in 2012, two-thirds of the €1bn increase projected for this year.

By raising VAT, the Government was able to avoid making other politically unpalatable choices such as increasing income tax rates, cutting public sector pay or reducing social welfare rates.

By raising the standard VAT rate, Finance Minister Michael Noonan ran the risk of further worsening the downturn in the retail sector, where the value of sales had already fallen by 17pc from its 2007 peak with over 50,000 jobs being lost.

In the months immediately following the Budget, it seemed as if Mr Noonan's VAT gamble had paid off with retail sales rising strongly in March and May. Of course, it helped that we enjoyed excellent spring weather, and the decline in the value of the euro against sterling reduced the attractiveness of cross-border shopping.

Now the dreadful June retail sales figures have brought us back down to earth with a bump. These will almost certainly be followed by a further sales decline in July as the impact of the summer sales makes itself felt.

The poor June retail sales figures confirm the weakness of the domestic economy, with the most recent CSO figures showing that GNP contracted by a further 1.1pc in the first quarter of 2012. Barring a once-off blip, the June retail sales figures almost certainly point to a further shrinkage in GNP, basically the domestic economy, in the second quarter.

That's not going to change until employment levels begin to rise. Unfortunately, the jobless rate now stands at 14.7pc, more than one in seven of all workers.

Until those who are still at work begin to lose the fear that they too might lose their jobs, and some of those who are jobless find employment, shoppers are going to keep a firm grip on their purses and wallets.

This could have potentially serious consequences for Mr Noonan's budgetary arithmetic. If shoppers stay at home, then the budget day target of an extra €670m revenue from VAT may not be achieved. As he starts work on his December 2012 Budget, Mr Noonan may find himself struggling to plug a hole caused by all of those empty shopping centres and deserted main streets.

Irish Independent

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