Notwithstanding a month-on-month increase in both February and March of this year, it is clear that retail sales remain weak. As discussed in the 2012 Stability Programme Update, there are a number of factors holding back consumer spending, including declining real disposables incomes and an elevated savings rate (reflecting inter alia balance-sheet repair, uncertainty and high unemployment). Since coming into office, the Government has brought forward a number of measures to support the domestic economy and job creation, including the Jobs Initiative, lending targets for the pillar banks and the Action Plan for Jobs 2012. I am confident that these policy actions will help underpin a stabilisation in consumer spending in the near term, followed by a gradual pick-up in private consumption in the years to come.
On the VAT increase introduced as part of Budget 2012, I would remind the Deputy of the need to restore order to the public finances. The Government is committed to doing so, and in a way which is least damaging to economic activity. Evidence suggests that direct taxes, such as income tax, are more harmful to economic growth than indirect taxes, such as VAT. This rationale informed our decision at Budget time to keep income tax rates, bands and credits unchanged, but to increase the standard rate of VAT. In the first quarter of 2012, VAT was up by 5.8% year-on-year and 3.2% ahead of profile. Although it is still early in the year, VAT receipts in the first quarter suggest that the annual Budget target of €9,995 million, or a 2.6% increase on 2011 receipts, is achievable.
