Vat rise may give traders a taste of southern comfort
The Republic's 2% Vat hike spells good news for hard pressed Northern Ireland businesses, says analyst Donald McFetridge
Published 08/12/2011 | 08:00
During the past two years, there has been a perceptible drop in the number of southern consumers travelling north to shop. Prior to that - in 2009 - the numbers had been steadily rising to an extent which was causing the Irish government a considerable degree of concern.
The recent drop in the number of shoppers travelling over the border is due principally to exchange-rate fluctuations and the limited advantage in terms of price-savings to be gained.
The price differential across many product categories lessened to the extent that, with only a few exceptions, Northern Ireland became a less-attractive option for shoppers considering making the journey north.
In 2009, the Irish exchequer announced that (in that year alone) it had lost in excess of €810m (£700m) due to the leakage of retail business into Northern Ireland. In 2008, it had cost them €640m (£550m) and, in 2007, just under €400m (£343m).
No wonder, then, that Brian Lenihan, the Republic's late finance minister, stated publicly that southern shoppers who took their business outside the state deserved to be penalised.
However, that all looks set to change, with the announcement by the Republic's current finance minister, Michael Noonan, that he plans to raise Vat from its current 21% to 23% from January 1, 2012.
This is, of course, great news for Northern Ireland retailers, many of whom are struggling to keep the doors of their shops open.
The prospect of an increase in southern shoppers will be widely welcomed by an industry under constant threat - particularly when the dull, dark days of January set in and the sale signs still remain in many shop windows due to what is expected to be one of the most difficult Christmases, trading-wise, on record.
Southern retailers, also hit by a wide range of austerity measures and efficiency savings, will no doubt witness a considerable draught.
Shoppers who were reluctant to travel north will, once again, be jumping into their cars and making the journey to the border in order to avoid paying the extra 2% levied in the Irish winter budget 2011.
It is now a well-accepted fact of business life that, in the past, the Northern Ireland economy has been artificially buoyed up by the influx of southern shoppers and this looks set to become the pattern in the New Year.
The current Vat rate of 20% in Northern Ireland (up from 17.5%), compared with 23% in the Republic, will make it more worthwhile for southern consumers to travel north - particularly for so-called 'big ticket' items.
However, times have changed irrevocably since 2009 and many retailers (both in Northern Ireland and the Republic) are concerned that there will be fewer euros around to spend on those 'big ticket' purchases - particularly in the white-knuckle ride of January and February, when the credit card bills start to thud onto doormats across the country.
Towns and cities, such as Newry, Londonderry and Strabane, are likely to see a marked increase in footfall from the south, as well as places such as Enniskillen.
Many retailers here, who are extremely worried about how spending will pan out over the Christmas period, are anticipating increased shopper numbers from the south, which could help to compensate for the decreased footfall figures recently released in Northern Ireland.
Michael Noonan's advisers in the Central Statistics Office in Dublin have, no doubt, done their arithmetic. But they are also bound to be concerned about the effect of the 23% rate of Vat on the retail sector in the south - and the damage it could wreak on the Irish economy as a whole.
The Irish Business and Employers' Confederation (IBEC) in the Republic has, in the past, called on the Irish government to reduce excise on alcohol by as much as 20% in order to try to discourage southern consumers from shopping in Northern Ireland.
In 2009, for instance, shoppers purchasing alcohol north of the border were realising price-savings of up to 30%.
Therefore, an increased levy on alcohol, in addition to the hike in Vat, means that the journey north could be more worthwhile for shoppers wishing to make purchases in that product category. And, while in Northern Ireland, clever retailers will be trying to ensure that they sell in other product categories, as well.
For example, Ikea, which has reported decreasing profits at its Belfast outlet, could stand to benefit if southern shoppers visiting Belfast spend at their Holywood Exchange outlet. Similarly, other sectors of the retail industry stand to benefit - for example, fashion, footwear and electrical goods.
The cumulative attraction of cheaper alcohol and at least 3% difference on a wide range of other products will inevitably make shopping in Northern Ireland a much more attractive proposition than it has been in the past two years.
While some people will argue that travel costs could discourage shoppers from travelling north in the numbers they did in 2009, I predict that we will see southern shoppers making fewer car journeys, but when they are here they will stock up and spend larger amounts on each visit.
This can only be good news for troubled retailers here, keen to make up the deficit of a poor Christmas trading period in the New Year. On the other hand, a direct corollary of all this is that it does not augur well for either retailers in the south, or for the wider Irish economy.