Sunday 15 September 2019

Dan O'Brien: 'Ending the tax break didn't ruin the tourism industry after all - it's still in blooming health'

'The expansion of the middle-classes in developing countries has created a huge new source of bag-dragging tourists. China is the most important country in this respect and its citizens are now the biggest global spenders on international travel.' Stock picture
'The expansion of the middle-classes in developing countries has created a huge new source of bag-dragging tourists. China is the most important country in this respect and its citizens are now the biggest global spenders on international travel.' Stock picture
Dan O'Brien

Dan O'Brien

Exactly two years ago, this column highlighted the great success that is the Irish tourism industry. It also called on the Government to end a tax break for the sector - introduced on a temporary basis in 2011 when the industry was on its knees - because the measure had achieved its purpose.

The call did not go down well with those who lobby on behalf of the tourism industry, and they mobilised to lobby the Government to maintain their Value Added Tax break. They claimed ending it would be calamitous for the industry. They got their way that year.

They were not so successful in 2018. In last year's Budget, the VAT rate for the sector went back to 13.5pc from the lower 'temporary' rate over the 2011-18 period.

As the tourism season peaks, now is a good time to ask if the end of the VAT break has been calamitous for the industry and, more generally, how this hugely important sector is doing?

Let's start with feet on the ground and bodies in hotel beds. This year looks set to be yet another record-breaking year for the numbers of people visiting Ireland from abroad. The latest data from the State's statisticians shows visitor numbers in the first six months went over five million for the first time, representing an increase of 4pc compared with the same period last year. The annual total for 2019 looks set to be the highest ever.

Not much sign there that the ending of the VAT break at the beginning of the year has done to tourism what vested interests claimed it would do.

Do things vary depending on where visitors come from? Britain remains the single largest country of origin for visitors. There was the most marginal of increases in arrivals in the first half of 2019, marking another year of sluggish growth since the Brexit referendum in 2016. The Brexit fiasco has weakened the British currency, making foreign holidays pricier for Britons. With sterling under renewed pressure now, as a no-deal Brexit looms, there could be worse to come.

That, however, is about the only blot on the tourism landscape. Visitors from other parts of the world are flocking to Ireland. Americans are leading the way. Visitor numbers from North America jumped by almost a 10th in the first half of the year, compared with the same period last year. There was a similar-sized increase in visitors from beyond the western world.

The big increase in Americans and non-westerners is good news for restaurateurs, hoteliers and others in the sector because they are the biggest spenders. Average spend per visitor in 2018 was €728 for North Americans and €888 for non-westerners. That compares with a paltry €261 spent by the average British visitor.

What is driving the surge in tourists coming across the Atlantic? Strong economic growth and a strong dollar are the main reasons.

The prospects for this crucial market - plus the Irish and world economy - depend to a considerable extent on the actions of one of our recent visitors, US President Donald Trump. But with the US economy still growing strongly, Americans look set to continue crossing the pond in their millions over the rest of 2019 at least.

The big increases in non-western visitors is explained by structural as well as cyclical factors. The expansion of the middle-classes in developing countries has created a huge new source of bag-dragging tourists.

China is the most important country in this respect and its citizens are now the biggest global spenders on international travel bar none. This is to be seen in the number of Chinese tourists coming to Ireland in recent years. Around 100,000 arrived last year and numbers continue to grow rapidly. New direct air routes to the likes of Hong Kong and Beijing have helped a lot in this regard.

This success should of course be seen in the context of a global tourism boom and favourable economic conditions in key markets. But a good deal of the credit must go to the industry itself and the various bodies which promote it, including those aforementioned lobbyists.

Tourism ranks as one of the main indigenous economic success stories. As a share of population, Ireland welcomes the fifth highest number of tourists in the OECD (only Iceland, Austria, Greece and Estonia are ahead). That is more than the holiday heavyweights of France, Italy and Spain.

Initiatives such as the Wild Atlantic Way, the Ancient East and Hidden Heartlands have evidently worked - all doubtless helped by the fact Ireland is an interesting and pleasant place to be, something some of its often grumbling residents may take for granted.

The results of the industry's success is evident not only in the number of visitors coming here, but also in the number of people it employs.

In the first quarter of this year there were 175,000 people working in accommodation and food services sectors, a record high for that time of year.

As with the visitor arrival numbers, the jobs numbers for the sector are not pointing to any negative impact as a result of the ending of the VAT break at the beginning of the year.

What of its impact on the Government's coffers?

According to the mandarins' estimates, about €3bn in revenue was forgone over the 2011-18 period as a result of the tax break. That is a lot of money for a country whose Government owes more than €200bn. Continuing to lose out on that sort of revenue when the tourism industry is booming would be bonkers.

Budget 2019 suggested that ending the tax break would raise €466m this year alone. Though it is still too early to say whether that projection will be accurate, there has been a 5pc rise in total VAT receipts so far this year. That will go a small way towards easing the country's big budgetary pressures.

The VAT break saga adds to a mountain of evidence internationally which says that it is always more difficult to remove a tax break or subsidy than to introduce one. Once a vested interest gets something, it fights tooth and nail to keep it, regardless of how it affects others who have to pick up the tab.

This Government will not go down in history as one willing to stand up to those who can make the most noise, but in this instance it deserves credit for belatedly doing the right thing in the last budget.

Irish Independent

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