- Economist Mojdeh Khandanian argues hotels restaurants have ‘scope to absorb higher VAT rate’
- No evidence of extra jobs created by lower rate
- IHF strongly contest the findings
- Budget day is October 9
Ireland’s lower VAT rate for tourism has become a “significant dead weight” on the economy and increasing it now will not harm tourism, according to a report produced by Mojdeh Khandanian in the Economic Division of the Department of Finance .
The rate was cut from 13.5pc in 2011 to help boost the industry and to keep people in work. The report questioned industry claims on the numbers of jobs created by the reduced VAT rate: It is difficult to attribute ongoing employment gains specifically to the 9pc VAT rate (and likewise employment falls prior to July 2011 to a higher VAT rate). The Revenue Commissioners’ own analysis finds evidence of a short-run impact of the 9pc VAT rate on employment gains, however, there is no possibility to distinguish this from wider economic developments thereafter. The vast majority of services sub-sectors did not experience a reduced VAT rate in 2011, yet both ‘9pc activities’ services and ‘other services’ experienced steady employment growth in recent times.
Whilst the 9pc rate may have been a factor, along with currency and tourism developments, the main driver is likely to have been rising demand driven by growth in disposable income.
The available evidence suggests that the majority share of 9pc rate sectors, in particular, hotels and restaurants, have scope to absorb a higher VAT rate via the healthy profit margins within these sectors. Nonetheless, as is evident by the positive economic outlook, the income channel of demand is likely to ensure that economic activity within the 9pc rate sectors remains strong.
Minister for Finance Paschal Donohoe said he would not be giving his view in relation to the matter as it would be an indication in relation to any announcement he intended to make on Budget day. He said any decision in relation to the matter would be made by him on Budget day in October.
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