Business Irish

Wednesday 22 January 2020

Richard Curran: Regional hospitality rate fairest answer as booming Dublin cashes in on Vat cut

The question for Finance Minister Paschal Donohoe is whether half a billion a year extra in the state coffers outweighs extra job numbers in hospitality.
The question for Finance Minister Paschal Donohoe is whether half a billion a year extra in the state coffers outweighs extra job numbers in hospitality.
Richard Curran

Richard Curran

The Irish hospitality industry is booming - especially in Dublin. With record tourist numbers, higher wages and employment levels, people are spending more money dining out or visiting the capital city.

The picture isn't radically different around the rest of the country even if the growth is a little more subdued in places.

So where does that leave Finance Minister Paschal Donohoe at the forthcoming budget? There doesn't appear to be an obvious reason to intervene in a sector that is delivering jobs and growth around the country.

However, when it comes to retaining the special 9pc Vat rate for the hospitality sector, there may be over half a billion reasons to consider taking the rate back to up to pre-recession levels.

The Revenue Commissioners have estimated that reverting to the old rate of 13.5pc would raise an extra €527m in a full year for the Exchequer.

The 9pc Vat rate was introduced in 2011 as a mechanism to enable prices in the sector to remain low while incentivising the industry to create jobs.

Since then things have gone incredibly well in the wider industry. Visitor numbers hit record highs of over nine million a year. Profitability in the hotel sector has returned in some places, and rocketed in others.

Room rates in Dublin surpassed their 2006 peak prices back in 2016. One industry expert described the Dublin hotel scene as enjoying "unprecedented growth over the last five years" with average room rates up €47 and occupancy levels up 12 percentage points.

Together they have contributed to an average rise in hotel profit per room in the capital of €12,000.

The Finance Minister has warned before that unless he was convinced that consumer prices remained low or competitive, the rate would be brought back up.

The issue here is who benefits from the low rate? The wider industry benefits by creating more jobs, which in turn create more taxes, while investors and owners enjoy more profitability.

However, a study conducted by Indecon economic consultants for Fáilte Ireland found that while the reduction in Vat lowered prices for tourists, compared to what they would have been, it didn't cut them by the full amount of the Vat change.

This means businesses have been pocketing some of the subsidy that has been handed to them.

The industry also points to the 38,400 jobs created since the Vat reduction was introduced in 2011. Again, the question is how many of them would have been created anyway through the growth in visitor numbers and the improvements in the economy.

According to Indecon's estimates, around 4,800 of those new jobs across restaurants, hotels and other hospitality activities were attributable to the Vat cut.

In Dublin, this translates into 1,100 jobs, while in the north west it was around 400 jobs.

The question for Paschal Donohoe becomes whether half a billion a year extra in the State coffers outweighs those job numbers.

Unfortunately for Mr Donohoe, the answer isn't quite so straightforward.

There is a definite gap in the performance of the sector in Dublin, and a couple of other hotspots, compared to the rest of the country.

Hotels in the capital have practically all moved to a demand-led room pricing mechanism. It's a bit like Ryanair for rooms.

If you want a room in Dublin on a quiet weekday, there is good value to be had.

If you want a room when there are a couple of big events on and demand is high, you will get financially screwed.

As someone who stays in hotels regularly in Dublin, a hotel that charges €130 for bed and breakfast can hike that up to €200 when demand is high.

This doesn't happen to the same extent outside Dublin. Last week I stayed at a very nice hotel in the Midlands, in July, for just €95 for B&B.

There are other factors pointing towards the benefits of the reduced Vat rate benefiting investors in Dublin more than elsewhere.

The reduced Vat rate applies to restaurants, hotels, tourist services etc. Take restaurants in Dublin. There are reports now that key money for restaurants in desirable areas has become so expensive that it is driving out smaller operators and only attracting bigger businesses.

Go into any restaurant in Dublin and is everybody in the place a tourist? Not exactly.

Hotels in the capital are making hay while the sun shines. City centre hotels will face increased competition in the future. There are plans for a further 4,000 hotel rooms in Dublin over the next five years, with 3,100 of those set for the city centre. How many will be built by a handful of big players? Quite a few.

Aiden Murphy of Crowe Horwath told a conference last autumn that just to maintain demand, the market will have to grow by 15pc and means selling an extra 845,000 rooms by 2021.

Tourism numbers are expected to grow but there is no way of knowing for sure how the wider global economy and other risk factors will play out. So hotels may be jacking up prices now, especially when there is heavy demand, because they don't know what they will be able to charge in just three or four years from now.

He said that existing city-centre hotels will have to react to new competition and implement a regular room price strategy to compete within the expanded market. The problem is that by charging high prices now they may have blown it for themselves. Even those who work within the wider industry have warned hotels against spiking prices when big events are taking place, saying it would harm the reputation of the hotel sector.

Imagine phoning up a restaurant to book a table and being told that because everywhere is busy tonight, they are putting up all of the prices on their menu.

Research has shown that while Dublin was hit with a post-Brexit referendum lull in British visitors, it has already bounced back from that. According to Fáilte Ireland research from April of this year, the British market has picked up significantly and its performance is now positive on balance.

A national survey of top visitor attractions by Fáilte Ireland shows that five of the top 10 are in Dublin. The survey also asked industry practitioners what concerned them most.

Back in April the number one concern was the weather, after a very difficult winter and spring. But the second-biggest concern, for 44pc of them, was how more tourists are using Dublin and other cities as a touring base rather than staying locally.

One in four said a perception of poor value for money in Ireland was a cause of concern. One in four also pointed to congestion in the key tourist areas as an issue.

If Dublin hoteliers are unduly bagging a fortune from a state subsidy, should the subsidy be taken away for the whole country?

It is difficult to tinker around with regional Vat rates. It is also difficult to do anything that will increase costs to consumers in an important sector.

There are currently nine other EU countries with the same or a lower Vat rate on accommodation. Putting it back up will make us less competitive. For restaurants there are only three EU countries with lower Vat on dining than Ireland.

However, if punters have a drink with their meal, they are paying the second-highest excise duties in the EU, with only Finland charging more.

One option for the minister is to take some of that €500m by raising the Vat rate above 9pc but not all the way to 13.5pc.

This could be a bit of a fudge but is probably the most likely outcome in October. My money is on 10pc.

He has to ask himself if the lower Vat rate is still a boost to employment and competitiveness in the sector or whether it is a mechanism for profiteering.

The problem here is that it isn't simply one or the other. A regional rate is the fairest answer, but only if it can be done.

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