Wednesday 23 January 2019

Three billion reasons why the tourism industry should lose subsidy overnight

There is no longer any justification for the hospitality sector's huge tax break. It should be scrapped in the forthcoming Budget

BOOM-TIME: The tourism sector is one of the economy’s great indigenous success stories, so why is it still receiving a €500m tax break every year?
BOOM-TIME: The tourism sector is one of the economy’s great indigenous success stories, so why is it still receiving a €500m tax break every year?
Dan O'Brien

Dan O'Brien

Half-a-billion euro is a lot of money. That is how much the Department of Finance estimates a six-year-old tax break for the hospitality sector costs annually. The de-facto subsidy is likely to have cost close to €3bn to date.

The rationale for giving the sector a preferential rate of value added tax in 2011 was reasonable in many ways. The economy was then at a low ebb. The hospitality sector was suffering. Although it employed around 115,000 people at the time, it had lost 20,000 jobs in net terms over the previous three years. Many of those employed in the industry had/have low skills levels, a group that was particularly badly hit by the recession. Giving this industry a boost made sense, particularly as the sector was and is so geographically broad based.

But giving one industry preferential treatment does not come without costs and complexities. The cost in cash terms, as mentioned above, is high. The 'opportunity cost' - what could be done with the money not collected in VAT - is also significant, particularly given domestic and EU rules limiting the amount the Government can increase spending by without raising additional taxes to fund it. Ending the tax break for the sector would significantly expand the fiscal space in Budget 2018, which will be unveiled in just eight weeks' time.

Another issue around preferential treatment, such as the hospitality sector's VAT break, is measuring how much good it actually does. In truth, there is no perfect way of measuring the benefits of tax breaks. However, cost/benefit analyses give a good indication. As has happened too often in Irish budgetary history, this tax break has not been subject to any such analysis by the Department of Finance in almost half a decade. Its renewal each year since appears to have more to do with lobbying than any rigorous assessment of whether it is good value for money, and for the wider economy.

The reduction of VAT in 2011 - from 13.5pc to 9pc - was designed to boost the sector by allowing businesses to lower prices, thus giving the industry a competitiveness gain. The study by the Department of Finance towards the end of 2012 found that there was "clear evidence" of the VAT reduction being passed on to consumers by restaurants, cinemas, museums and art galleries in the first year that the reduced rate was applied. It did not find such clear evidence that providers of accommodation passed on the cut.

Overall, the study concluded that "close to half of the VAT reduction has been passed through to consumer prices". Put another way, business owners trousered the other half.

If the measure had a mixed start, price developments since then suggest the gains to consumers have been overwhelmed by general inflation.

Start with the cost of a bed. The CSO's detailed inflation figures show that prices for 'accommodation services' for tourists and travellers have soared. To be precise, as of last month, accommodation prices - covering hotels, guest houses, B&Bs and the like - were up a whopping 32pc on July of 2012.

Increases in the food industry have been much more modest. Prices in restaurants (excluding alcohol and other beverages) increased by 7pc in the five years to last month.

This has happened despite overall inflation in the economy over the past five years being non-existent, food prices falling and wage growth running at historically low levels. These developments mean that the higher prices being charged are mostly adding to profits, particularly in the accommodation sector. While it is great that businesses are making more money, it is not credible for those in that industry to claim that they need preferential tax breaks which other businesses don't get, including those in industries that are struggling.

If the sector were experiencing hard times, there might be a case to extend the tax break. But it is not. In fact, it is booming. And that is the most important argument to end the preferential treatment.

As usual, the jobs figures provide the best and most important measure for assessing what is happening in a sector. The latest figures show record numbers employed in the 'accommodation and food services' sector. As of the first quarter of this year, 155,000 people were at work in the sector, 30pc up on five years ago and well ahead of pre-crash levels.

That is happening thanks to a stronger domestic economy, but more so because of the boom in foreign visitor numbers. Again, they are at record levels. The first half of 2017 saw arrivals grow by 4pc on the same period in 2016. This was remarkable given that the numbers of UK arrivals fell owing to the big fall in the value of sterling vis-a-vis the euro over the same period.

The tourism sector is one of the economy's great indigenous success stories - Ireland attracts more foreign visitors per capita than do the great continental destinations of Spain and France. Calling for an end to preferential VAT treatment for the industry is not in any way a criticism of it, much less an attack on it, lest anyone in the sector thinks (or suggests) that that is the case. Rather, at a time of extreme budgetary pressures, it is a call for the end of a tax break that was designed to assist (temporarily) a troubled industry through a difficult time.

The tax break is now in its seventh year, and looking less and less temporary. The reason for its introduction has long since disappeared. Inertia and special pleading should not deter the Government from normalising a great and thriving industry's tax position.

***

It should be acknowledged here that the reduction in VAT in 2011 covered a few non-tourism sectors, including newspapers. It would be inappropriate for someone who writes for a newspaper to take a position on what the VAT rate for newspapers should be.

Twitter: @danobrien20

Sunday Independent

Today's news headlines, directly to your inbox every morning.

Don't Miss