PICTURE THIS – YOU’RE a politician.

“Hey, hey!” says you. “Don’t threaten me with a good time!”

But wait – it gets better.

Because you’re a senior politician. A cabinet minister. You have a say in how the government spends billions of euros every year.

With that in mind, how should you make decisions?

1: Make evidence-based calls using the best data available

2: Make vibes-based calls using personal testimony / lobbying

3: A mix – evidence a fair bit of the time, but vibes when it suits

If you chose Number 3 – congratulations, you have what it takes to be a minister!

You see, the government recently made a ‘solemn commitment’ to cut the VAT rate for the hospitality sector.

The move would cost the state at least €550 million in foregone tax revenue, if only applied to food businesses. As it means losing out on a lot of tax money, you would think the government would have a good reason for the move.

But as we’ll discover – the rationale seems murky at best.

Billions at stake — but based on what evidence?

Let’s take a look.

First of all, a quick reminder on what the hospitality VAT rate is.

A VAT rate of 13.5% applies to businesses working in ‘hospitality’ – restaurants, cafes, hotels, etc.

Restaurants say they’re in crisis — but the numbers tell a different story.

However, for much of the last decade or so, the rate was set at a lower 9%.

This lower rate was introduced after the financial crisis, to help businesses lower prices.

The state collects VAT on all products sold by hospitality firms.

If the rate is lowered from 13.5% to 9%, in theory this means profitable companies can lower their prices without impacting their bottom line.

So, this would make the services sold by hospitality businesses more affordable. Then, people would be more likely to, say, eat out in a restaurant.

In turn, this would get people more confident about spending money, at a time when the economy desperately needed a boost.

As explored previously, that original idea has now been lost.

More recently, the lower VAT rate has essentially functioned as a support to the sector.

For example, during Covid the rate was dropped as many restaurants could not operate. Instead of lowering prices, the idea was the lower rate would boost the profits of struggling businesses.

The rate was increased from 9% back to the normal 13.5% in 2023 as the economy returned to normal.

But last week, Tánaiste Simon Harris made a ‘solemn promise’ to once again reduce the VAT rate for the hospitality sector.

He acknowledged the move would cost the state a “significant amount of money”.

However, he argued “it’s not about a tax cut for businesses”.

“It’s about recognising that in every town and every village there are small businesses creating employment that want to be able to keep going and need to be supported,” he said.

So the Tánaiste argued that hospitality firms are struggling and need financial support from the state.

Where did he get that idea?

Restaurants are closing — or are they?

The most obvious source for the claim is lobbying from the likes of the Restaurants Association of Ireland (RAI).

Ever since the hospitality VAT rate was put back to 13.5% in 2022, the RAI has waged an exceptionally effective campaign to bring it back down to 9%.

It has also made it clear the lower VAT rate won’t be used to lower prices. Food businesses will take the extra money from paying less tax.

At the core of the RAI’s argument is its claim that a slew of restaurants across Ireland are closing due to high trading costs. It argues lowering VAT will reduce costs and help these firms survive.

The key evidence it provides for this claim is closure statistics, which the RAI compiles itself. For the last year and a half or so, this survey has claimed about 600 restaurants are closing every year in Ireland.

This statistics has been the basis for countless articles about the ‘crisis’ facing Irish hospitality.

See examples here, here, here, here… you get the idea.

What almost all of these share in common is citing the RAI figures. It’s something I’ve done myself.

But we should consider – do these figures reflect reality?

As noted previously, the RAI only tracks restaurant closures – not openings.

It’s a shortcoming the group has previously acknowledged, saying: “We don’t have all the data”. But that caveat rarely appears in media reporting.

In fact, the most recent data from the CSO (Central Statistics Office) found that openings were very strong in the sector.

While the figures are from 2022 and possibly Covid-influenced, they certainly give no indication of a crisis.

This leads onto the next point – you would expect huge numbers of food businesses closing to lead to a drop in the number of people employed in the sector.

But that’s not happening.

But employment in this sector rose by 7% over the last year to 186,000.

By most metrics, the sector looks fine. More than that – it looks like it’s doing well.

What the numbers actually say

The CSO tracks the number of people employed per industry. ‘Accommodation and food services’ is the one which is relevant for hospitality food businesses – the type the RAI claims are closing en masse.

For instance, in November the CSO reported ‘Accommodation & Food Services’ recorded the largest increase in hours worked of any sector in the country.

This simply doesn’t match up with the claims of a supposed closure crisis.

We even have a perfect, recent reference point for a closure crisis in the industry. In 2020, employment in ‘Accommodation & Food Services’ plunged to 139,000. There’s no question that was a disaster, and the lower VAT rate was needed. But the same evidence is not there right now.

The Department of Finance has also staunchly opposed reducing the hospitality VAT rate. It pointed out that 14 EU countries have a VAT rate of 12% or higher on food services – meaning Ireland’s current 13.5% rate is fairly typical.

The OECD, an intergovernmental group of wealthy countries, also recently pointed out that reducing hospitality VAT will likely ‘disproportionately benefit’ people on higher incomes.

What cutting VAT really means

Finally, it’s worth considering the impact reducing the VAT rate will have more broadly.

Reducing the rate and foregoing €550 million per year means the government has less money to spend in other areas.

Cutting the VAT rate to 9% would make it much less likely for the government to adjust income tax bands for inflation – meaning workers will lose more money in tax.

This is exactly what the Department of Finance has warned against, saying the lower VAT rate will mean an “enormous fiscal transfer of taxpayer’s money to the sector, which the evidence available at present does not support.”
Given all of this – what is the evidence for reducing hospitality VAT?

The Journal asked representatives for Simon Harris the studies or data he cited to decide on cutting the VAT rate.

In response, a spokesperson said: “The Programme for Government commits to bring forward measures to support SMEs. In particular, the retail and hospitality sectors, acknowledging the increased cost pressures on these sectors.”

Asked again what evidence the Tánaiste’s decision was based on, there was no response.

Now, look – we all know most restaurants and cafes operate on fine margins. That’s not in question.

What is in doubt is whether this very specific measure – which will cost taxpayers a lot of money – is needed.

To date, the government has not provided good evidence to indicate why it is choosing to forgo hundreds of millions of euros.

When politicians are playing with so much taxpayer money, the least they can do is explain their decisions.

So far, the government has completely failed to do that.