Vol. 428 No. 2
11 Mr. Yates asked the Minister for Finance if his attention has been drawn to the likely job losses in the manufacturing and retail clothing sector arising out of the increase in VAT on clothing and footwear; and the proposals, if any, he has to make changes in this regard in view of the likely job losses.
53 Mr. Durkan asked the Minister for Finance if his attention has been drawn to the significance of the increased VAT rate in respect of the clothing industry as announced in the 1993 budget; if he intends to introduce any measures to alleviate the proposal; and if he will make a statement on the matter.
I propose to take Questions Nos. 11 and 53 together.
I am aware of the concerns of retail and manufacturing interests in the clothing and footwear industry about the increase in the VAT rate which I announced in the budget. I have had a number of meetings with representatives from the industry, as have officials of my Department.
As I explained in my Financial Statement, the budget proposals in relation to VAT reflected the prevailing budgetary circumstances, the requirements of the Single Market and a desire to keep the rate of VAT on areas of expenditure which are particularly employment-intensive at the lowest possible level. In regard to those items formerly on the 16 per cent VAT rate, because the EC Directive obliges member states to have only one rate over 15 per cent, it was no longer possible to retain both the 16 and 21 per cent rates. While I was able to avail of the flexibility allowed by the EC agreement to move certain labour intensive services temporarily to the reduced rate, budgetary circumstances ruled out a more widespread application of a low rate to other goods and services, including adult clothing and footwear, which were previously at the 16 per cent rate, or a reduction of the standard rate. Accordingly, I decided to move these items to the existing standard rate with effect from 1 March 1993. I should point out that there was no change in the VAT treatment of children's clothing and footwear, which remain at a zero rate.
I recognise that the increases in retail prices of the items concerned are unwelcome in current trading conditions. Naturally the sectors facing rate increases feel aggrieved. The Government, however, had to take a view, in formulating the budget, of what is best for the economy as a whole, in terms of promoting economic growth and the sustainable jobs which flow from it. A significant contribution towards budgetary correction from the indirect tax area was unavoidable on this occasion. I would point out that the financially responsible and balanced nature of the overall budget has already contibuted significantly to the downward move in interest rates which have now emerged. This will be a major benefit to all sectors in the economy, and to the clothing and footwear industries at both manufacturing and retailing levels.
Is the Minister aware that in the supply and retail of clothing there are 35,000 people employed? Surely that industry qualifies as being labour intensive. Is the Minister aware that yesterday more than 8,000 people protested at how out of touch the Minister was and about the real threat that 3,500 jobs may be lost because there is such a slump in the clothing sector? Is he aware that they consider it will not be a tax on consumption but on jobs because they cannot pass on this price increase to the public?
I have met sectors of the clothing industry and they inform me that the figure involved in the retail and manufacturing services is 25,000 jobs. The Government had to produce a responsible budget. Under the new EC directive we can only have one rate over 15 per cent for the standard rate. I made it clear last year that the 16 per cent rate was a holding rate which would change. For the clothing and footwear industries the rate moved from 10 per cent to 12½ per cent, from 12½ per cent to 16 per cent and from 16 per cent to 21 per cent. For budgetary reasons these rates have been changed this year to comply with the EC directive. Prior to the budget I met all of the concerns of industry. On budget day we had a number of questions from all parties on certain industries and I was asked to take into account the VAT levels for various sectors of industry. I examined the position in great detail and 80 per cent of clothing and footwear bought here is imported.
It will be 100 per cent from now on.
Fifty per cent comes from the UK, 25 per cent from other European countries and 25 per cent from the Far East. Sixty five per cent of what we manufacture in clothing and footwear is exported. VAT remains at the zero rate for exporters. In balancing the various demands I considered where employment lay, what was home sourced, what was indigenous and what was imported. It would have been nice to be able to bring everything down to 12½ per cent but that was not possible. About 50,000 jobs are in the areas in which VAT was reduced from either 21 per cent or 16 per cent to 12½ per cent. I know that most industries are under strain but not necessarily because of VAT rates or the currency crisis. I opted for protecting the areas with most indigenous jobs. There are far in excess of 50,000 jobs in the areas in which VAT is reduced as against 25,000 jobs in the clothing industry, half of which would have been in manufacturing, and two out of three of those jobs would relate to exports.
Is the Minister aware that VAT on clothing and footwear in the UK is 17½ per cent and that it will not pay retailers, from a cash flow point of view, to import more goods? Will the Minister also agree that this will have the effect at retail level of increasing the trade through black economy casual traders? In view of the fact that this is the most jobs negative issue in the budget, will the Minister reconsider this measure in the context of the Finance Bill?
Casual trading concerns me. In the Finance Bill last year I introduced a number of regulations and procedures to deal with casual trading in all industries, particularly in the clothing industry. The VAT rate in the UK for exporters of goods from this country is a zero rating. The people in the consumer business in the UK who pay 17½ per cent will continue to source more of their goods in Ireland. The VAT rate works both ways. What is bad for imports is good for exports. Some elements of the trade are finding things very tight, but in other areas there are huge profit margins. One way or the other the standard rate is effective over the next few years. I made my VAT decisions in the budget and I do not intend to change.
Question No. 12, please.
Has the Minister taken into account the effect of his proposal in the Border regions?
The Deputy may not intervene.
I am only drawing to the Minister's attention the very serious difficulty in the Border areas.
The Deputy may not intervene at all.
The Border region is seriously affected.
Do I have to repeat myself?
I accept your ruling, Sir, but I hope the Minister was listening to what I was saying.
Question No 12, please. There are the priority questions to dispose of and time is fast running out.
