The 9% VAT rate was introduced as a temporary measure in 2011, due to cease at the end of 2013. This period was subsequently extended, but in 2017 a commitment was given to undertake a review of the 9% VAT rate. This review was published in July 2018 and the Budget decision to increase the VAT rate was made following that analysis.
This review assessed the relevance, cost, value-for-money and impact to date of the 9% VAT rate and also undertook an analysis of the estimated impact on the various tourism sectors of removing the VAT rate. The review found there is a lack of competitiveness in the sector and that if the 9% rate were to be increased, this would likely not materially impact demand or employment in the sector.
The review found that tourism expenditure is more sensitive to income growth and the economic cycle than to price changes. The economy is currently performing well, with high levels of employment and strong demand in the tourism sector. Growth is also expected to continue in the medium term. This positive economic outlook means that the income channel of demand is likely to ensure that economic activity within the sectors to which the 9% VAT rate applies remains strong.
Furthermore, the Revenue Commissioners also published a report on the 9% VAT Rate in June 2018 which analyses the output and employment impact of the 9% VAT rate using Revenue data. The analysis found an estimated increase in employment of on average 1.8 employees for each firm benefitting from the reduced rate in the accommodation and food sector in the year following the introduction of the reduced rate. However, beyond the short term, they were unable to distinguish the impact of the rate on employment from the impact of other factors in the economy.
Given the impact of an increase in the VAT rate on the hospitality sector has only recently been reviewed by my Department and the Revenue Commissioners, there does not seem to currently be a case for reviewing the impact of the increase.
Finally, the Deputy will appreciate that any reduction in VAT rates incurs a cost to the exchequer, which would necessitate recovery elsewhere.