ALL GOVERNMENT PROMISES are solemn. But some are more solemn than others. 

What other explanation is there for the government’s stubborn insistence on pushing ahead with a planned VAT cut for the hospitality sector?

After the 2024 general election, the government said it would reduce the hospitality VAT rate. Apparently, this is now a ‘solemn’ promise, which must be delivered at any cost. But there have been plenty of other broken government promises. 

Like funding for eating disorder treatment. 

Or housing delivery targets. 

Or sticking to (self-imposed) budget rules. 

Maybe they weren’t solemn enough to be followed through on.

Now, every government has broken promises. It’s inevitable. But given that – why is the government dead set on sticking to its hospitality VAT promise in particular?

Hundreds of millions

The measure will cost the state several hundred million euros per year in foregone tax revenue. This could range from a high of almost €900 million if applied to all hospitality businesses, including hotels, to somewhere around €600 million if it’s more restricted to just food businesses.

No matter how it’s sliced, it’ll be an enormous amount of money. 

The government plans to make just €1.5 billion available for tax cuts in Budget 2026. The hospitality VAT cut will likely eat up about half of that amount if it goes ahead as planned. According to (anonymous, almost always anonymous) politicians briefing the media, the measure looks to be a done deal.

Various (also anonymous) sources have also made it clear that this means there won’t be any money left over to adjust personal tax rates.

So workers can look forward to an effective tax rise. 

Why?

Because of inflation.

Prices rise every year. Salaries (should) rise to keep up. In line with pay, tax bands have to rise too. If they don’t, people will pay more in tax.

A quick example we covered previously. Say a typical salary is €50,000, and people pay the top rate of income tax on earnings above €44,000.

Keeping things simple, let’s say general inflation is 5% in a year. Then, wages generally also rise by 5% a year. So now a typical salary is €50,000, plus 5% (€2,500), which gives €52,500.

Even though your wage goes up, your buying power stays the same – the €52,500 typical salary now only buys as much stuff as the €50,000 did the year before.

However! Instead of rising by 5% as well, the €44,000 tax band is unchanged. 

This means the person on €52,500 pays about an extra €1,000 in tax. 

This is despite the €52,500 salary only having the same buying power as the €50,000 one the year before.

Economists often refer to this as a ‘stealth tax’, and it means the worker will be worse off.

Watchdog

A report from the Irish Fiscal Advisory Council, the government spending watchdog, pointed out during the week that the money about to be used on the VAT cut could “increase the standard rate income tax bands by €3,000” to €47,000.

What does that mean? It means anyone earning above the higher rate (ie, €47,000 or more) would get an extra €600 a year.

And as discussed, raising the tax bands isn’t even really a tax break. 

Unless the tax bands increase faster than inflation, workers are really no better off.

Inflation is currently about 2%. So unless the higher rate tax band is raised by at least 2% (from €44,000 to €44,800), Irish workers will be worse off next year.

And this isn’t linking together two unrelated topics – there’s a limited pool of money available for tax breaks. 

Anonymous government sources have pointed this out themselves. 

Now, all of this would be one thing if the hospitality VAT cut was a worthy cause.

But almost every analyst who’s assessed it has said, or at least suggested, that it’s likely a poor use of money.

Economists.

The Department of Finance.

And just this week, the Irish Fiscal Advisory Council. The organisation found there is low ‘pass-through’ for VAT cuts.

What this means in simple terms, is that when VAT is reduced, businesses don’t tend to ‘pass through’ the saving and lower prices for consumers. 

Instead, they tend to pocket the extra cash.

Now, to be fair. The hospitality sector has been open from the start that this is the plan.

Its lobbyists have repeatedly stated that the VAT cut will go straight to the bottom line. They claim this is needed due to rising business costs causing a closure crisis of small firms, particularly in the restaurants sector.

This is also the government’s reasoning for cutting the VAT rate – to prevent closures and ‘support jobs’.

The problem – as has been discussed, many, many times, there is simply no hard evidence of an Irish restaurant closure crisis.

Last month, the Restaurants Association of Ireland released a report arguing for the merits of the VAT cut. Even the author of that report has conceded that “the RAI figures aren’t proof of a disastrous performance, relative to what would be the historic norm”.

On top of that – a chunk of the money used for the VAT cut will go directly to the bottom line of large chain restaurants, like McDonalds and Supermacs. Many of these businesses are massively profitable, paying out millions in dividends to their owners, and clearly don’t need a tax break. 

Yet they’re about to get one anyway.

There was some reporting during the week implying that ministers had just realised this, and were frantically ‘scrambling’ around Leinster House, trying to figure out how to avoid giving a handout to large chain restaurants.

First – excluding chains would likely be extremely difficult, because franchisees are independent businesses. For example, if you say ‘only businesses with revenue under €5 million get the VAT cut’. 

Well, each McDonald’s franchise is a separate corporate entity. Almost all likely have less than €5 million revenue, so they’d all qualify, and the multinational would still benefit. Plenty of chains run this way.

Second – the implication that ministers only recently learned that McDonalds will benefit from the VAT cut is laughable.

Ministers and department officials are well aware of which businesses will be eligible for the measure. Any claims otherwise should be treated with extreme skepticism.

Finally – the tax break comes at a time when the government is repeatedly being warned it is spending too much already and narrowing the tax base. 

Cutting the hospitality VAT rate will make Ireland even more reliant on unstable corporate tax windfalls from multinationals, which the US is actively trying to win back.

Farcical process 

To wrap this up – I’ve written on the hospitality VAT rate plenty over the last few months.

I’ve asked government departments and industry lobby groups for hard evidence to prove a hospitality closure crisis, and justify a VAT cut. It hasn’t been supplied.

The government is now apparently planning to publish data supporting the move *after* the budget. When it will be far too late to make a change – once the VAT rate is cut, hospitality lobbyists will battle to the death to make sure the move is never reversed.

The process is farcical, and the opposite of making transparent, evidence-based decisions which voters should expect.

Workers facing higher taxes next year would do well to keep the whole episode in mind.