9% VAT Food, Tourism & Jobs

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1 9% VAT - Food, Tourism & Jobs 9% VAT Food, Tourism & Jobs Economic Analysis on the key issues regarding the special VAT rate of 9% and Job Creation in the Accommodation & Food Services Sector at National Level July 2016 a

2 b JULY 2016

9% VAT - Food, Tourism & Jobs The reduction of VAT on food and tourism services from 13.5% to 9% has been a resounding success since its implementation by Government in July 2011.

3 9% VAT - Food, Tourism & Jobs The reduction of VAT on food and tourism services from 13.5% to 9% has been a resounding success since its implementation by Government in July On behalf of the Restaurants Association of Ireland, I wholeheartedly welcome the 31,000 new jobs created since the introduction of the reduced VAT rate of 9% in July 2011, as outlined in the following report. While the 9% VAT is significantly rebuilding our economy in the Food and Accommodation sectors county by county, our industry is still experiencing a 3-tier recovery where a divide remains evident between businesses in the capital, urban areas and rural Ireland. While the industry continues to support the jobs recovery and rebuilding Ireland s economy, the uncertainty surrounding Brexit means that the retention of this measure is crucial in maintaining stability in the food, tourism and hospitality sector. Adrian Cummins Chief Executive, Restaurants Association of Ireland. 1

4 JULY 2016 Foreword Employment in the Accommodation and Food Services sector stood at 145,900 in the first quarter of Since the reduction in the VAT rate for tourism related activities to 9% in July 2011, employment in the sector has increased by 31,000 or 27%. This compares to growth of 7.2% in overall employment over that period. The lower VAT rate was introduced as a special measure to promote employment in the tourism sector and it has been very effective. While it cannot be claimed that the reduction in the VAT rate has been the only factor driving employment in the sector, it has made a significant contribution and has had a very positive impact on the competitiveness of the tourism product in Ireland. The recent weakness of the euro against sterling and the dollar has also been very beneficial. However, the recent decision by the UK to leave the EU poses considerable challenges to Ireland and every sector of the economy. Visitors from the UK account for 41% of our tourists and thus poses a serious challenge to the Irish tourism and hospitality industry. This report outlines trends in employment in the Accommodation and Food Services sector since the lower VAT rate was introduced. It shows how the growth in employment in the sector has made a very significant contribution to indirect job creation; employer and employee related tax receipts; and lower social welfare expenditure as people have moved from the live register into employment. Given the increased attention now being paid to regional economic activity and concerns about the unbalanced nature of the recovery, the very important role played by the sector all around the country is very obvious. The Accommodation and Food Services sector makes a very important contribution to regional economic activity and employment. The lower VAT rate is a good example of how a targeted policy initiative can be effective in addressing difficulties in a particular sector. Given the continued requirement to boost employment all over the country and boost tax revenues and the uncertainty surrounding Brexit there is very compelling evidence to suggest that the lower VAT rate should be maintained in order to preserve and build upon the progress that is being achieved in the sector. Government intervention does work.. Jim Power Economist. 2

5 9% VAT - Food, Tourism & Jobs KEY ISSUES REGARDING THE SPECIAL VAT RATE OF 9% EMPLOYMENT PERFORMANCE IN The ACCOMMODATION & FOOD SERVICES SECTOR In July 2011, the VAT rate for Tourism related goods & services was temporarily reduced from 13.5% to 9% by Government as part of a measure to promote job creation. This incentive was due to expire at the end of 2013, but has been subsequently extended due to the fact that it continues to have a positive impact on the sector in terms of activity and employment. The aim of the lower rate of VAT was to encourage and support growth in small businesses in the tourism sector. In this context the measure has been very successful, hence the decision by the Minister for Finance to extend it. As well as the direct jobs created in the sector, the multiplier effect of employment in the Accommodation & Food Services sector is an important consideration. Between Q and Q1 2016, on a seasonally adjusted basis, the number of people working in the Accommodation & Food Services Sector nationally increased by 31,000, taking total employment from 114,900 to 145,900. This increase of 27% compares to an increase of 7.2% in overall employment over the same period. The increase in Indirect Employment as a result of this job creation is estimated at 14,490. The total increase in Direct and Indirect Employment is estimated at 45, (000s) Q2 11 Q3 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14 Q3 14 Q4 14 Q1 15 Q2 15 Q3 15 Q4 15 Q1 16 Figure 1: Number of people Employed in Accommodation & Food Services (S/A) Source: QNHS Q1 2016, May 24th 2016 While the national average unemployment rate stood at 8.4% of the labour force in the first quarter, and has subsequently fallen to 7.8%, the regional variation is stark. The unemployment rate stood at 6.9% in Dublin; 8.6% in the Border region; 11.6% in the Midland region; 10.2% in the West; 5.9% in the Mid-East and 7.7% in the Southwest region. The Southeast had the highest unemployment rate at 12.5%. These variations, along with lots of other real and anecdotal evidence illustrate just how significant a problem regional economic growth and development is. It has been given some priority in A Programme for Partnership Government. The accommodation and food services sector makes a very strong regional contribution, and is a key element of rural and regional economic activity and employment. 3

6 JULY 2016 COMPETITIVENESS It is widely recognized that generating sustainable broad based export-led growth is essential in rebuilding a sustainable Irish economic model. To achieve this objective, cost competitiveness is an essential ingredient. A high cost base undermines the attraction of FDI and business expansion; it makes firms selling into foreign markets less competitive; and it creates the potential for import substitution. For a service export like tourism, international competitiveness is absolutely crucial to success. If the tourism product is not competitive, foreign visitors will be diverted to other cheaper markets, and domestic tourists will have a stronger incentive to go overseas. Ireland s international competitiveness deteriorated significantly between 2000 and 2008 as all of the costs of doing business were allowed escalate in a very damaging way. From 2009 onwards, there was a significant improvement, helped by the weakness of the euro against sterling and the dollar, but also an improvement in the costs of doing business as the economy contracted. Over the past year there has been some deterioration again. The Real Harmonised Competitiveness Indicator (Real HCI) increased by 3.7% between April 2015 and April The Nominal Harmonised Competitiveness Indicator (Nominal HCI) increased by 4.9% over the same period. Exchange rate movements have made a significant contribution to this deterioration in competitiveness. For example, since March 2015 the euro has appreciated by 5.8% against the dollar and since July 2015 it has appreciated by 20% against sterling. However, there is also clear evidence that many of the costs of doing business are increasing in line with the economy Jan-95 Sep-95 May-96 Jan-97 Sep-97 May-98 Jan-99 Sep-99 May-00 Jan-01 Sep-01 May-02 Jan-03 Sep-03 May-04 Jan-05 Sep-05 May-06 Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11 Sep-11 May-12 Jan-13 Sep-13 May-14 Jan-15 Sep-15 Source: Central Bank of Ireland Nominal HCI Real HCI Real HCI Figure 2: Harmonised Index of Competitiveness The Costs of Doing Business in Ireland report does give some cause for concern in relation to the recent trends in business costs. Its key findings include: Ireland remains an expensive location in which to do business with a price profile, which can be described as high cost, rising slowly ; In the year to Q3 2015, Irish labour costs grew by 2.1%, compared with growth of 1.9% in the EU- 28 and 1.2% in the euro area; In 2016, Ireland had the 2nd highest monthly minimum wage and the 5th highest in PPP terms of 18 countries considered; Ireland is the 6th most expensive location in the euro area for prime retail rents. Rents increased by 22% in 2015; 1 Costs of Doing Business in Ireland 2016, National Competitiveness Council, April

7 9% VAT - Food, Tourism & Jobs Commercial rate increase as a proportion of total Local Authority revenue from 24% in 2002 to 38% in Over the same period, the proportion received from Central Government fell from 46% to 29%; Ireland was the 5th most expensive country in Europe for diesel in January 2016; Industrial electricity prices for SME energy users are 6% higher in Ireland than the euro area, making Ireland the 6th most expensive location. Between 2010 and 2015, Irish prices for SMEs increased by over 20%; Water and waste-water costs for industrial users compare favourably to those in competitor markets; and Irish interest rate on business loans have been consistently higher than equivalent euro area rate. In December 2015, the interest rate on loans of up to 0.25 million was 80% higher than the euro area average, and 60% higher for loans of up to 1 million. In the period from 2011 to 2015, average consumer prices for Cafes & Restaurants increased by 6% and average prices for Accommodation Services increased by 10.4%. The price rises for both of these items are being heavily driven by Dublin, where there is a shortage of hotel rooms and business costs are rising more strongly than in the rest of the country. When the 9% VAT rate was introduced it helped keep prices low for a protracted period, but some price pressures are now starting to build. (%) CPI Restaurants & Cafes Accommodation Services Source: CSO Statbank Figure 3: Price Trends RECENT TOURISM PERFORMANCE Since the bottom of the tourism market in 2010, the number of overseas visitors to Ireland has increased by 40.8%, from million in 2010 to million in s Source: CSO Statbank Figure 4: Overseas Visitors to Ireland 5

8 JULY 2016 ( ml) Source: CSO Statbank Figure 5: Expenditure by Overseas Visitors to Ireland (Ex Fares) The total expenditure by overseas visitors to Ireland has increased from a low of 2.9 billion in 2011 to 4.2 billion in Figure 6 shows the breakdown of the reasons why overseas visitors come to Ireland and how each category has evolved since the bottom of the market in In the period from 2010 to 2015: Business has increased by 38.8%; Visiting Friends has increased by 15.3%; Holiday and Leisure has increased by 58.8%; and Other has increased by 53.5%. In 2015, Business visitors accounted for 16.7% of the total; Visiting Friends accounted for 26.6% of the total; Holiday and Leisure visitors accounted for 46.3% of the total; and Other accounted for 10.4% of the total (000s) Source: CSO Statbank Business Holiday/leisure/recreation Visit to friends/relatives Other reason for journey Figure 6: Breakdown of Visitors to Ireland 6

9 9% VAT - Food, Tourism & Jobs 18% North America 6% Other 35% Other Europe 41% Great Britain Figure 7: Geographical Breakdown of Visitors to Ireland (2015) Source: CSO Statbank Table 1 shows the growth in origin of visitors between 2010 and % Change Great Britain 2,738,500 3,546, % Other Europe 2,045,200 3,043, % North America 935,600 1,514, % Other 317, , % Table 1: Change in Geographical Source of Overseas Visitors Source: CSO Statbank In the Tourism Action Plan the Department of Transport, Tourism & Sport set out a number of important targets for Irish tourism; Increase revenue from overseas tourism, excluding air fares and ferry charges, to 5 billion per annum by 2025; Increase employment in the tourism sector to 250,000 by 2025; and Grow overseas visitors to Ireland to 10 million by

10 JULY 2016 THE IMPORTANCE OF MAINTAINING 9% VAT RATE Cost competitiveness is a key ingredient for business success, particularly for export-oriented business. It is clear that over the past 18 months, as the economy has recovered, Irish competitiveness has deteriorated. Exchange rate movements are outside of our control, so there is a strong imperative to manage business costs carefully. For internationally traded services such as tourism, cost competitiveness is essential. It is clear that competitiveness is key to the ongoing recovery in tourism and the growth strategy that has been laid out by the tourism sector. The recent decision by the UK electorate to leave the EU poses considerable challenges to Ireland and every sector of the economy. From an Irish economic and political perspective, there is much to worry about in relation to Brexit. The impact on the UK economy; the impact on sterling and hence on the competitiveness of the Irish export relationship with the UK; the future trading relationship that would be negotiated between the UK and the EU; the border with Northern Ireland; the implications for the all-island energy market; and the future of UK corporation tax policy (already the Chancellor has spoken about a 15% Corporation Tax Rate). Sterling has lost 23% of its value against the euro since November 2015, and has shed 11% since the Brexit vote. This currency move will damage the competitiveness of Irish exports to the UK and will make Ireland a lot less attractive for UK tourists. It is estimated that for every 1% that UK activity declines, Irish economic growth would decline by about 0.3%. The number of UK tourists travelling abroad would also be damaged by a UK recession. The Accommodation & Food Services Sector would clearly be very vulnerable to a UK recession and ongoing sterling weakness and vulnerability. The reduction in the VAT rate to 9% has improved the competitiveness of the Accommodation and Food Services sector since it was introduced, and has also helped ensure the viability of many businesses that have been going through challenging times. While some parts of the sector are now experiencing improved trading conditions in line with the economic recovery, it is not universal and many businesses are still under significant pressure. A number of issues need to be taken into account in any consideration of the 9% VAT rate. The Accommodation and Food services sector has experienced strong growth in employment since the lower VAT rate was introduced and the performance of the Irish tourism sector has improved substantially. Other factors have obviously had an impact. These include the improvement in global growth, particularly in two important source markets, the UK and US; the weakness of the euro against the dollar and sterling; the removal of the air travel tax; and domestic initiatives such as the Gathering. However, the 9% VAT rate has made an important contribution. Tourism is a very competitive, labour intensive, and price sensitive sector. The move to 9% took the Irish rate down to European norms and also gave a stimulus to demand on the back of the price reduction that followed the lower VAT rate. Various studies show that tourism has a relatively high price elasticity of demand (PED). For example, Durbarry 2008) estimated a PED of -2.0 in the UK tourism sector. In the Irish context, Tol et al (2013) estimated PED of for holiday visitors, for business visitors, with a measure of -1.1 for short stay visits. It is clear that lower prices boost demand for tourism products. If the VAT rate was put back up to 13.5%, it is inevitable that this would result in an increase in prices and damage demand, tourism revenues and employment. Given the recent Brexit vote, there is a distinct risk that the UK economy will go into recession and sterling could weaken further. Given the uncertainty around Brexit there are no certainties, but the risks to Irish tourism from a sharp slowdown in the UK economy and weaker sterling are clear. Against this background of intense uncertainty for the Irish economy in general and the Accommodation & Food Services sector in particular, it would not make sense to increase the VAT rate applying to the sector, given the extra vulnerability that has arisen from the Brexit vote. 8

11 9% VAT - Food, Tourism & Jobs In-depth analysis: Job Creation in the Accommodation & Food Services Sector The following analysis identifies the direct and indirect employment associated with the introduction of the reduced VAT rate of 9% in the Accommodation & Food Services Sector in July Direct employment refers to the employment directly provided in the Accommodation & Food Services Sector. Indirect employment refers to the jobs supported elsewhere in the economy by the jobs in the Accommodation & Food Services Sector. This analysis examines the level of employment in the sector in Q and its contribution to the Exchequer. It also looks at the change in employment in the sector between Q and Q1 2016; the impact on Exchequer revenues of the change in employment; and the reduction in social welfare expenditure if all of the direct jobs created took people off the Live Register. IMPACT OF JOB CREATION IN THE ACCOMMODATION & FOOD SERVICES SECTOR Q Q Number of Direct Jobs Created Number of Indirect Jobs Created Total Increase Social Welfare Savings From Direct Employment Payroll Tax Receipts From Direct Employment National 31,000 14,260 45, m m DIRECT & INDIRECT EMPLOYMENT As well as the direct jobs created in the sector, the multiplier effect of employment in the Accommodation & Food Services sector is an important consideration. Anthony Foley of DCU Business School estimated in the Drinks-related employment in Dail constituencies 2013 report, which was commissioned by Drinks Industry Group of Ireland, that the total employment multiplier effect of a job in that sector is This means that for every direct job in the sector, 0.46 of a job is supported elsewhere in the economy. In this report, this multiplier is applied to direct employment in the Accommodation & Food Services sector. The Irish Congress of Trade Unions has estimated that for every 10,000 people off the live register and back in employment means a net gain to the Exchequer of some 200 million 4 in social welfare savings. 2 Tourism Taxes: Implications for Tourism Demand in the UK, Durbarry, Ramesh, Review of Development Economics, Volume 12, Issue 1, (2008).) 3 UK Tourists, the Great Recession and Irish Tourism Policy, Richard S.J. Tol & Niamh Callaghan, The Economic & social review, Vol. 44, No. 1, Spring Post-Budget Briefing 16th October 2013, by Congress Assistant General Secretary, Sally Anne Kinehan 9

12 JULY 2016 SUMMARY OF NATIONAL IMPACT Employment in the Accommodation & Food Services Sector Q In Q1 2016, 145,900 workers were employed directly in the Accommodation & Food Services Sector. The total Gross Annual Wage paid to those workers totaled 3.38 billion. The total Net Annual Wage paid to those workers totaled 3.05 billion. The payroll taxes accruing to the Exchequer from this employment totaled 695 million. Indirect employment as a result of direct employment in the sector is estimated at 67,114. Change in Employment in the Accommodation & Food Services Sector Q Q Total employment in the Accommodation & Food Services sector increased by 31,000 between Q and Q The total Gross Annual Wage paid to those extra workers is 718 million. The total Net Annual Wage paid to those extra workers is 648 million. The payroll taxes accruing to the Exchequer from this extra employment totaled million. The savings in social welfare payments, assuming the extra employment took people off the Live Register, is estimated at 620 million. Indirect employment as a result of the change in direct employment in the sector is estimated at 14,

13 9% VAT - Food, Tourism & Jobs IMPACT OF JOB CREATION IN THE ACCOMMODATION & FOOD SERVICES SECTOR Q Q (SEASONALLY ADJUSTED EMPLOYMENT) NUMBER OF DIRECT JOBS CREATED NUMBER OF INDIRECT JOBS CREATED TOTAL INCREASE SOCIAL WELFARE SAVINGS FROM DIRECT EMPLOYMENT PAYROLL TAX RECEIPTS FROM DIRECT EMPLOYMENT National 31,000 14,260 45, m 147.6m Carlow m 1.8m Cavan m 2.4m Clare , m 3.8m Cork 3,506 1,613 5, m 16.7m Donegal 1, , m 5.2m Dublin 8,643 3,976 12, m 41.2m Galway 1, , m 8.1m Kerry , m 4.7m Kildare 1, , m 6.8m Kilkenny m 3.1m Laois m 2.6m Leitrim m 1.0m Limerick 1, , m 6.2m Longford m 1.3m Louth , m 4.0m Mayo , m 4.2m Meath 1, , m 5.9m Monaghan m 1.9m Offaly m 2.5m Roscommon m 2.1m Sligo m 1.9m Tipperary 1, , m 5.1m Waterford , m 3.7m Westmeath m 2.8m Wexford , m 4.7m Wicklow , m 4.4m 11

JULY 2016 CONCLUSION Since the introduction of the 9% VAT rate for tourism related goods & services in July 2011, there has been a significant increase in the number of overseas visitors to Ireland

14 JULY 2016 CONCLUSION Since the introduction of the 9% VAT rate for tourism related goods & services in July 2011, there has been a significant increase in the number of overseas visitors to Ireland and in employment in the Accommodation & Food Services sector at a national and local level. This employment has generated considerable revenues for the Exchequer and has contributed to significant social welfare savings. One of the key attributes of the sector is that it has a broad regional spread and provides considerable employment all over the country. In the context of a country where there is a strong imperative to boost employment and economic activity in the regions, the ongoing health of the sector is of vital importance. While all of the improvement in employment in the sector and in overseas tourism cannot be attributed to the reduction in the VAT rate alone, it has certainly contributed to an improvement in the competitiveness of the sector. With a recovery in the sector under way, it would not be wise to threaten it by increasing the VAT rate to 13.5%. The lower rate is an important component of the efforts to build the tourism sector and improve the regional spread of growth and should not be risked. 12

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9% VAT - Food, Tourism & Jobs Rebuilding Ireland s Economy

9% VAT - Food, Tourism & Jobs Rebuilding Ireland s Economy Report from the Restaurants Association of Ireland on the impact of the introduction of the new rate of VAT of 9% in July 2011 August 2014 National