Vol. 519 No. 5
29 Mr. Noonan asked the Minister for Finance the reduction in the CPI which would result from a reduction of 2% in the standard rate of VAT; the consideration, if any, he has made to a reduction in this regard; and if he will make a statement on the matter. [14314/00]
It is estimated that a 2% reduction in the standard rate of VAT, if fully passed on in retail prices, would reduce the consumer price index by 0.8%. Such a reduction would cost in the order of £370 million in a full year.
I considered all relevant options in relation to indirect taxation before the last budget, including the option of changes in VAT rates and I will examine these options further in the run up to the next budget. I am not convinced that cutting VAT is the appropriate strategy for combating inflation. My priority has been to cut direct tax rates to encourage the supply of labour, capital and enterprise and in this way expand the productive base of the economy and our ability to meet the demand side pressure on resources on an ongoing basis.
Why does the Minister appear to imply that a reduction in the rate of VAT might not be passed on in the form of lower prices?
In the run-up to any budget I would consider changes to all forms of taxation, including indirect taxation. It was suggested that consideration should have been given to reducing the rate of VAT by 1% in the last budget – Deputy Noonan may have made the suggestion – to compensate for increases in the price of tobacco and other products.
It is my view that in buoyant economic conditions when people have a great deal of disposable income, retailers would be tempted to retain the profits from a 1% reduction in the rate of VAT. Given that the market is so buoyant, customers are not necessarily as price sensitive as they would be if the economic situation was different. Furthermore, some of those who advocate reductions in excise and VAT rates as a solution to inflation also state that there is too much demand in the economy. Reducing the rate of VAT or excise duties, which leads to increased demand in the economy, would have no effect other than creating a distorted blip on the CPI.
I am not stating that I will not consider these areas in the run-up to the budget in December. However, I find it difficult to believe that in times of buoyant economic conditions it would be appropriate to reduce the rate of VAT to reduce the consumer price index. These matters will be considered before the introduction of the budget. I am merely laying down my markers at this stage.
I also wish to lay down a marker. In The Sunday Business Post last weekend, anonymous officials, I presume attached to the Minister's Department, were quoted as being critical of the Opposition. Is it a new departure that unnamed civil servants should become involved in what is essentially a political debate?
I would be extremely concerned if a civil servant in my Department had spoken to a media correspondent about such matters. I have no evidence that any person did so. I am aware of the article to which the Deputy refers but I did not read it because there were many other articles in last Sunday's newspapers which occupied my attention. I agree with Deputy Noonan that it is not the job of civil servants, regardless of who is in Government, to criticise proposals offered by Opposition Members. I am satisfied that no civil servant in my Department would ever do so. No one contacted my Department about the article in question, but if the Deputy can supply evidence to the contrary I will examine it. I take a very dim view of such behaviour because it is not the responsibility of civil servants to criticise proposals from any side of the House, regardless of how they feel about them.
I do not mind the criticism, which was aimed more at Deputy McDowell than myself.
Deputy McDowell has more friends in the Department than Deputy Noonan.
I would prefer if they went on the record so that we would know who to put in the front line when we return to Government.
That is a good point.
That concludes Priority Questions.
