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How is it fair that the tourism industry still gets a subsidy of half a billion euros?

The landscape has changed since the VAT rate was cut for the hospitality sector in 2011, writes Eamon Murphy.

Eamon Murphy

BACK IN 2011, in the midst of a financial crisis and with falling visitor numbers, there was a case to be made for assisting the hospitality and tourism industry.

The reduced VAT rate of 9% which was introduced helped to contribute to a recovery in the sector, with an estimated 60,000 jobs created over six years and anecdotal evidence supporting the claim that it helped many businesses survive those troubled times.

However, the landscape has changed. While originally costing the government a (not insignificant) couple of hundred million euros or so annually, the Department of Finance now estimates that €500m is being foregone every year in order to maintain this preferential rate.

Many people, when they think of VAT breaks for the tourism and hospitality sector, perhaps imagine giving a break to small B&Bs and cafes along the Wild Atlantic Way. But the nature of the tourist industry in Ireland, with its turnover highly concentrated in hotel chains and big hotels in Ireland’s largest cities and towns, means that it is these businesses that derive the greatest benefit from this policy measure.

With hotel room-rates hitting exorbitant levels in the midst of another tourism boom, subsidising these businesses is no longer justifiable.

There are better ways to target this

The 9% rate is quite a blunt instrument. If you apply a single VAT rate to an entire economic sector, it’s very difficult to efficiently target the organisations you really want to see benefiting. With the argument that Dublin and other cities need such support sounding increasingly hollow, we would argue that this half a billion euros could be better spent supporting tourism infrastructure in the parts of Ireland with a greater dependence on visitors to drive the local economy but that are genuinely in need of assistance.

There are examples of highly successful greenways being built over the last few years in counties as distant and different from each other as Waterford, Louth and Mayo. It should also not be forgotten that while it is near-impossible nowadays to run a business efficiently without a good internet connection, rural Ireland is still waiting on the roll out of a decent broadband network. Just think what half a billion euros every year could do in these and other areas.

There is also the question of what kind of employment government wishes to incentivise. Social Justice Ireland believes that government should aim to generate the kind of jobs that allow workers to achieve a decent standard of living.

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What kind of country do we want? 

Most people, if looking at a very profitable industry where employee numbers had increased by 50% in the last six years, would expect businesses in the sector to pay their employees reasonably well. Yet the accommodation and food services industry has easily the highest concentration of minimum wage employment in the economy, at one-third of its workforce. Around half of all employees in the sector earned less than the Living Wage in 2017.

The Average Hourly Earnings of those workers over the last 10 years has increased by well below the national average over that time, leaving it the lowest paid sector in the entire economy. Not only that, but the average number of paid hours per week for workers in the sector has fallen by more than 10% in the last decade, and only one other economic sector now has less paid hours per worker. This raises further questions about the ability of these workers to achieve a socially acceptable standard of living.

While headline employment trends have been extremely positive for the last five years, too much of the decrease in unemployment has been driven by low-paid or precarious work. If low-cost and highly profitable enterprises like Ikea, Aldi and Lidl can commit to paying their workers the Living Wage, it’s unacceptable that the most profitable hotel chains in the country should continue to avoid doing similarly whilst receiving a huge subsidy from taxpayers.

Budgets are all about choices, and in Budget 2019 Paschal Donohoe will decide whether this €500m is being well-spent, or if there are more efficient ways of achieving the goals of boosting tourism, incentivising employment and assisting rural development. To those looking at the evidence, the choice is clear.

Eamon Murphy is an Economic and Social Research Analyst with Social Justice Ireland. Social Justice Ireland Social Justice Ireland is a politically independent think tank that advances the lives of people and communities by providing social analysis for effective policy development.

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Eamon Murphy

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