Noonan has ignored effect of VAT rise on spending
FINANCE Minister Michael Noonan has admitted that his forecast that the two per cent VAT increase will bring in an extra €670m does not take into account that consumers may then spend less or shop in the North.
The Government's estimate is based on spending patterns remaining unchanged.
But an analysis of previous changes to the VAT rate and their subsequent impact on spending shows that Mr Noonan's targets may be hopelessly optimistic.
In the past, the amount people spent on goods and services went down when VAT was increased and rose when it was cut.
Between January 1, 2001, and February 28, 2002, the then finance minister Charlie McCreevy cut the standard rate of VAT to 20 per cent.
He said the decrease would "cost £159m in 2001 and £191m in a full year" and that the measure was designed to reinforce the government's commitment to countering inflation.
"I am announcing a cut in the standard rate of VAT of one percentage point, reducing it to 20 per cent from January 1, 2001," Mr McCreevy said.
The one per cent cut actually boosted spending and total VAT receipts increased from €7.5bn in 2000 to €7.9bn in 2001.
By contrast, when VAT rates were increased to 21.5 per cent by the late Brian Lenihan towards the end of 2008, the published budget estimates forecast that the measure would bring in "an extra €208m in 2009 and €227m in a full year".
That didn't happen.
Instead, total VAT receipts fell from €13.4bn in 2008 to €10.6bn in 2009 -- a drop of no less than 21 per cent.
Last week, Mr Noonan confirmed to Fianna Fail's finance spokesman Michael McGrath that his estimate of the yield from a two per cent increase in the top rate of VAT -- which will come into force in January -- took no account of the reduced consumer demand that may arise.
"I am informed by the Revenue Commissioners that the revenue that would be raised from a two per cent increase in the standard rate of VAT is estimated at €670m in a full year," said Mr Noonan.
"This estimate does not take into account any behavioural change on the part of taxpayers as a consequence of such a measure."
Mr McGrath said that the minister's admission was "quite incredible".
"If you speak with retailers in any town, village or city in Ireland, they will tell you that a two per cent increase in VAT will lead to less consumer demand.
"In the border counties, retailers are adamant that the VAT increase will encourage more consumers to shop across the Border. It will depress consumer demand and cost jobs."
Last week the Irish Tax Institute said that a one-income family on the average industrial wage had taken a financial hit of €423 a month since the first of four austerity budgets began just over three years ago.
That is the equivalent of a 16 per cent reduction in monthly take-home pay.
Families where there are two average income earners have seen their monthly income reduced by €613 a month, while a one-income family on a salary of €55,000 has seen a reduction of €564 a month in income.
The reductions are a result of steep increases in income tax, other taxes and reduced benefits and do not factor in reduced tax relief on medical bills and increased health-insurance costs as a result of the insurance levy.
"In just over three years, we have seen dramatic increases in income tax and five new taxes, including the income levy, which morphed into the universal social charge, the pension levy, the non-principal private residence charge and carbon tax," said the Irish Tax Institute's president, Bernard Doherty.
He added: "The capacity for people to bear more pain is running out as we approach an overall tipping point in terms of the money that can be taken from them in tax.
"We welcome the minister's commitment not to touch income taxes, which would damage employment and the economy. However, there is no doubt that €1.6bn in tax adjustments next year would still be felt by Irish taxpayers at an individual level."