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Aaron McKenna: The 9% VAT rate proves it - lowering taxes creates jobs

“It is disingenuous of government to claim that it was a temporary measure… and getting rid of it is a kick in the head to anyone who has invested in the hospitality industry.”

Image: VAT rate via Shutterstock

THE GOVERNMENT HAILED the introduction of the 9 per cent reduced VAT rate in 2011 as a job stimulation effort that would kickstart the hospitality sector, help bring more tourists to Ireland and allow people to open their wallets and see their euro go further. The measure worked. According to Michael Noonan himself the VAT reduction has helped create 15,000 jobs.

The government was new and exciting back in 2011 when the measure was introduced. They wanted to show a win, and this was their centrepiece: The big bang moment when they cut a tax to stimulate jobs and growth. The same government is now pondering Budget 2014, however, and they are reminded that there is a tasty €360 million in revenue to be had from raising the tax back up again.

It’s a strange one: If cutting the tax was supposed to create jobs, what precisely will raising it up accomplish…? The one thing Ireland has learned over the past five years is that you cannot tax your way out of a recession. The VAT cut was just about the only major step any government took to try and stimulate growth through tax cuts, and look at the results.

The state’s own tourism quango, Bord Fáilte, commissioned a report from Deloitte to quantify the impact of the VAT cut. Their research has shown that not alone did the VAT cut create jobs, it actually cost the government coffers less money than they had expected it would because – surprise, surprise – the lower prices led to more people going out, which delivered more revenue in total.

The results

Activity in the sector increased by about 16 per cent in the year following the tax cut. The government had expected that in a full year the VAT cut would cost €350 million. The first 12 months, in actual fact, saw the Exchequer down only €107 million, less than what the government mandarins thought it would cost in just the second half of 2011 after its introduction.

The VAT cut helped to contribute to a €158m increase in tourism spending in Ireland, with the overseas perception of value for money in Ireland improving due to both the VAT cut and other price reductions going on at the time. About 25 per cent of that €158m goes straight into the government coffers in various taxes and charges.

The Deloitte report reckons that 75 cents in every euro of the tax cut was passed along to consumers.
Bear in mind that input costs in the hospitality sector have also been increasing during this time, so that’s good going. The other 25 cents goes towards helping pay for the running of the business. No business, no employment, so every penny of that tax cut helped stimulate or support jobs.

The additional 15,000 jobs Michael Noonan reckons the tax cut created will have saved in welfare and raised in taxes about €82.5m a year for the Exchequer. So far that puts the tax cut €243m a year
cheaper than expected, and raising €122m in extra revenues for the state. Give or take and thinking
about double accounting, that suggests that the tax cut has quite possibly delivered a net gain to the
Exchequer versus the amount of money it would have raised had the tax remained the same.

They have departments that need to avoid cutting

Now, however, the government mandarins and PR spin doctors don’t care about any of that. They have departments that need to avoid cutting and quangos to keep open. They have local and European elections in nine months’ time. They have a general election a little while after that. It’s easy to blame job losses on somebody else, but they always get the blame for spending cuts.

So the €360m they reckon can be raised for the Exchequer by jacking the tax back up is a tasty sum. The government, which in 2013 is spending the grand total of 2 per cent less than it did in 2007, wants its money more than it wants verifiably positive economic performance. That has been the entire ethos of the recession – Since 2008 we have had an economy on its knees, further kicked in the head time and time again by a state that just can’t wean itself off the injections of private sector money it can demand at will.

Michael Noonan says that the VAT cut was simply a “pump-priming” exercise. That was not what they were saying in 2011, when the message was that the VAT cut had to show that it worked for consumers and job creation to be kept. Well, 15,000 jobs later I think it has proven that. It is disingenuous of government to claim that it was a temporary measure. It is a kick in the head to anyone who has invested in the hospitality industry, helping create those 15,000 new jobs, on the basis of current economic performance.

The mandarins of Dublin 2 don’t live in the real world

This is a classic example of the greedy little sticky fingers of government reaching into the till of businesses the minute they show any sign of success. We know that raising taxes kills business, particularly in the sensitive sectors of retail and hospitality. But the government must have its money!

The mandarins of Dublin 2 don’t live in the real world. Their salaries and pensions are guaranteed. What they don’t want to see are cuts necessitated by a lack of new taxes. After all, the private sector and ordinary individuals clearly have loads of money if they can afford to be eating out a bit more often than they used to.

The lesson we ought to be taking from the 9 per cent VAT rate is that tax cuts work. We know for a fact that tax increases kill jobs. What the 2011 measure proved is that the right tax cuts can create jobs.

What we ought to be doing is prodding the pudgy prodigy that is government to diet a little harder so that it can deliver a cut to the top and far more widely applied 23 per cent rate of VAT. Imagine what jobs we could create if that was dropped?

Zombie economy

We would be through this recession a lot faster if the governments since 2008 had adopted a pro-growth tax cutting strategy rather than constantly hitting families and businesses for more and more.

Yes, the spending cuts would have been harsher. We probably would have had a few more strikes by now. But we would have emerged faster for having taken the difficult choices.

Instead we have a zombie economy and with more tax increases on the way, from the first full year of property taxes in 2014 and water charges coming along and perhaps now a VAT increase. Meanwhile, government spending has reduced by two per cent. Two.

A 4.5 per cent drop in the lower rate of VAT has created 15,000 jobs. The mere two per cent reduction in government spending has cost hundreds of thousands of jobs. The right strategy seems obvious.

Aaron McKenna is a businessman and a columnist for TheJournal.ie. He is also involved in activism in his local area. You can find out more about him at aaronmckenna.com or follow him on Twitter @aaronmckenna. To read more columns by Aaron click here.

Poll: Do you think the 9% VAT rate for the hotel and tourism industry should remain?>
Noonan: VAT rate for restaurants likely to rise>

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