Belfast Telegraph

Friday 29 August 2014

The Republic needs its own VAT cut...and right this minute

I got a call from one of my good friends this week, asking me if I wanted to take a slot in a large van going up to Newry next Sunday to do the Christmas shopping.

He has three other people already who are chipping in and the van will no doubt be filled to the brim with toys for the kids, presents for loved ones, booze, food and God knows what else. I have scary visions of a Ford Transit shunting down the M1, wheels buckling under the weight.

Does my friend feel unpatriotic for giving the queen his money? Not in the slightest, he says.

"Being patriotic is all well and good," he says.

"But I'm tired of being ripped off, and with the VAT difference now, we'll save a fortune."

It's hard to argue against him and it seems thousands of other people from the south share his lack of patriotism.

Last week, Alastair Darling in a Keynesian attempt to stimulate the flagging British economy slashed the rate of VAT from 17.5 per cent to 15 per cent, with effect from December 1.

In stark contrast, our embattled Finance Minister Brian Lenihan announced in his Budget a 0.5 per cent increase in VAT, to 21.5 per cent.

The Lenihan levy on VAT is the worst thing he could have done to an already brittle economy. It was anti-business, it was anti-consumer, it was downright stupid.

While the cost of reducing VAT by 1 per cent is about €450m, Lenihan is going to have to bite the bullet and reduce it or consign |thousands of southern Irish workers to the dole queue

I was in the Dail the day he announced his Budget and I thought then as I do now that the VAT increase would do more damage than good.

The proof of that is in the increasing number of people flocking over the border to shop in the North. He has to act because if he doesn't, thousands of people working in the Irish retail sector will be out on the street without a job.

He has to make it attractive for people like me and my friend to do our shopping in Nutgrove not in Newry.

But Lenihan is in a tight bind. He is faced with an economy on its knees, tax revenues are falling through the floor, and he hasn't got much room to manoeuvre.

Above all else he's not an economist but a lawyer, as he said himself.

Lenihan also has to tackle consumer confidence which remains in a major slump.

The latest consumer index figures released last Friday show confidence down at 44 compared to the last peak of 106.2 in early 2006.

People are scared out of their wits to spend their money.

They don't believe things are going to improve any time soon and many fear that their job won't be there in six months time.

But the figures speak for themselves. The VAT take at the end of last month was just over €11bn, down over €1bn at the same stage the previous year.

While the cost of reducing VAT by 1 per cent is about €450m, Lenihan is going to have to bite the bullet and reduce it or consign thousands of Irish workers to the dole queue.

What he should do is scrap the pay deal and use the €650m he'd save on the public sector pay rise to cover the cost of reducing the VAT rate.

Jim Power of Friends First said this weekend that the minister must stop the madness and slash VAT by, at least, 2 per cent or 3 per cent.

He said: "Irrespective of the cost of reducing VAT, even for six months say, it would bring people back to the shops and they would spend.

"There is no point having a high VAT rate when nothing is moving."

The political opposition are also calling for the VAT hike to be reversed.

Labour's finance spokeswoman, Joan Burton, said: "He (Lenihan) should drop the half per cent and should go even further. It's sending out the wrong message to the public, and to the small businesses who are on their knees."

The VAT increase is another major headache for the small business sector in Ireland.

Already crippled by needless government bureaucracy, high energy costs and high labour costs, they were dealt with another whammy in the form of higher commercial rates announced last week.

Patricia Callan of the Small Firms Association has called for the Government to implement a small business strategy to ensure some protection for firms and said VAT is one of the issues that needs to be addressed.

Lenihan, sooner or later, will have to bite the bullet and look at the VAT issue again.

As long as our VAT remains as it is, he is handing millions worth of business into the hands of northern traders.

A VAT decrease will help restore some consumer confidence, as will the continuing drops in interest rates and oil prices, and it will get people back in the shops and get them spending.

As long as he refrains from acting, he will continue to kill Irish businesses, and the spectre of weekly trips to Newry will become the norm not the exception.

For me, if Lenihan acts sensibly by slashing VAT and giving consumers and businesses a helping hand, I'll happily do my shopping in Dublin.

If he doesn't, you know where I'm going next weekend.

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