Vol. 407 No. 2
12 Mr. Bell asked the Minister for Finance if his Department have costed the financial difference in cross-Border trade if custom and excise and taxes were equalised between (1) Ireland and the United Kingdom and (2) Ireland and other EC countries; the extra revenue which would accrue, if this were implemented by way of (a) extra employment, (b) reductions in social welfare payments and (c) extra VAT paid in this country; and if he will make a statement on the matter.
I should emphasise, at the outset, that it is not envisaged that the removal of fiscal controls at frontiers, a key element of the Community's Single Market programme, will necessitate the full equalisation of indirect tax rates across the Community. What is required rather, is a sufficient approximation of rates to ensure that unacceptable distortions of trade and diversions of revenue do not arise.
In practical terms, of course, there will be only limited scope for differences between neighbouring member states with land frontiers. The Government have recognised the need in our situation, especially given the lengthy land frontier with Northern Ireland, to attain, in time for the advent of the single market, a close approximation of rates with those expected to obtain in the United Kingdom. Substantial progress was made in this regard in the 1990 and 1991 budgets, in relation to both VAT and excises, and the recent UK budget also helped. The incentives to shop in Northern Ireland have thus been reduced very considerably or eliminated altogether for many items.
The difference in the respective standard rates of VAT between the two parts of the island has been narrowed to 3.5 percentage points from ten percentage points in 1989. This should have an impact across a wide range of consumer purchases such as household durables, TVs, videos and other electrical goods, toys and confectionary. Price differences on excisable goods which have given rise to cross-Border shopping in the past have also been considerably reduced. For example, the difference for a gallon of premium petrol which was about 60 pence in 1989 is now about 30 pence. Furthermore, there is now little or no difference in the price of a standard bottle of whiskey and a packet of 20 cigarettes between the two parts of the island compared with differences of about £1 for spirits and about 25 pence for cigarettes in favour of Northern Ireland in 1989. The tax based price difference for televisions and videos has been about halved over the past two years.
At the same time, having regard to the severe budgetary costs involved, we have sought, in EC discussions, to ensure that the eventual agreement, in relation to both rates and structures, minimises both the direct cost to the Exchequer and the risk of diversion of expenditures. For the reasons I gave above, an estimate of the cost of equalising vis-à-vis member states other than the UK would not be meaningful.
Although it is purely hypothetical, the estimated gross cost to the Exchequer of equalising in full our excise duty and VAT rates with those currently applying in the United Kingdom would be £560 million annually. I should say that this figure of £560 million should not be compared with the figure of £600 million in use some time ago for the cost of indirect tax harmonisation. The latter figure predated recent budgetary changes both in this country and in the UK, was net of related tax buoyancy and was based on the assumption that less than full equalisation would be necessary.
From a technical standpoint, the stimulus which a large scale reduction in taxation of £560 million would give to consumer spending, and indirectly to employment, could be considerable. Conventional economic analysis would suggest that the net cost to the Exchequer would only be reduced by about one-quarter, even allowing for favourable diversion of cross-Border trade. As I have consistently made clear, however, such a major loss of revenue would be unsustainable. The offsetting budgetary measures that it would necessitate would largely neutralise the economic benefits of the hypothetical reduction in taxes.
(Limerick East): I understand from the Minister's reply that the figures he has quoted of £560 million is for total harmonisation. Has the Minister got the figure for the approximation of coming within the acceptable range, which we need not go into in terms of figures?
I have not got the first figure yet, but the acceptable range will be in the region of 2 to 3 per cent. That is a differential that the economy could withstand when one takes exchange rates between sterling and the punt into consideration. There will not be any great risk of diversion of trade or revenue in that sort of band. I have not got the net cost of that with me.
(Limerick East): Could the Minister provide it at some stage?
I will send it on to the Deputy.
