Debate over 9% VAT is Irish tourism’s Neverending Story and it isn’t finished yet

Tánaiste Leo Varadkar had a reputation for making loose comments in his earlier years in politics. These days, his words tend to be more calculated. He must have known exactly what he was doing when he waded into the debate over the tourism industry’s 9 per cent VAT rate on Tuesday afternoon.

Paschal Donohoe, the Minister for Finance, confirmed in his budget speech an earlier decision of Government that the industry’s special low rate would last only until the end of February. The Department of Finance hates the 9 per cent rate and has long wanted it banished.

Barely an hour after Donohoe finished, his Fine Gael party leader and the next taoiseach sat in the Government press centre and said the decision “would have to be reviewed before then”. It is not a done deal, he was saying.

It didn’t completely undermine Donohoe, who looks to be on his way out of the finance ministry anyway. But it did seem like a power play from Varadkar, who would have known that his comments would keep the 9 per cent rate on the agenda when Donohoe wants the matter closed.

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The debate over the VAT rate charged on a certain category of goods and services ought, by rights, to be an obscure one. It should be of interest only to industry leaders and the sort of fiscal nerds who get off on this kind of thing; proper inside-baseball stuff. Yet in this State, the public debate over the taxation of tourism has been interminable for more than a decade. It is the industry’s Neverending Story, with the minister for finance of the day as Falkor the luckdragon, carrying the entire Irish tourism industry through the sky. The debate’s longevity is due to a combination of intensive industry lobbying and the willingness of successive governments to let the issue fester.

There is much at stake for a nation with no shortage of problems requiring public cash to fix them. In a full, unrestricted year of Irish tourism, reducing the rate from its normal level of 13.5 per cent to 9 per cent costs the State €400 million in tax forgone. But then again, what do you consider normal when the rate has been 9 per cent for most of the last 11 years? It has been 9 per cent since 2011 apart from an 18-month interlude when it returned to 13.5 per cent from 2019 until the pandemic’s devastating effect on the industry became clear. If it is in place for a decade, it gets baked into the sector’s financial model.

Varadkar was the minister for transport and tourism in 2011 when the 9 per cent was first brought in to stimulate the industry, and he remains popular within the sector for championing the decision at the time. Perhaps he still feels a sense of ownership of the 9 per cent, and wants to be closely associated with any move to reverse to rise back up to 13.5 per cent in February.

The cut to 9 per cent turned out to be an inspired policy decision from the 2011 government and its minister for finance, Michael Noonan. Many people mistakenly assume that the lower rate was brought in to allow tourism businesses drop their prices to stimulate growth. In fact, it was always intended that businesses would pocket the cut, using it to repair their margins and stave off insolvency. It was a discreet State bailout of a jobs-rich industry whose businesses were also servicing heavy property debts.

Tourism was among the first indigenous sectors to recover after the financial crash that started in 2008. By 2013 or 2014, the sector was booming so much that now-familiar complaints stated to emerge that prices in the sector were rising too quickly, so why is the State wasting cash to stimulate it with a special low VAT rate? Industry lobbyists, wisely from their perspective, attributed all of the growth in the sector at the time to the pricing flexibility afforded by the 9 per cent rate.

The full truth was that Ireland’s tourism success in that period had more to do with huge growth in aviation capacity and a strong dollar, which supercharged the US market for Irish tourism. From a European perspective, decisions taken by Ryanair in that period did as much to stimulate Irish tourism as anything in the Department of Finance’s VAT department.

In successive budgets, the Government threatened to hike the VAT rate back up to 13.5 per cent if the industry didn’t behave itself on pricing. Donohoe finally took the plunge in October 2018 and increased it to raise cash to spend on health and housing. Trade unions and his department officials strongly backed him. Then the pandemic upended everything and he was forced to restore it to 9 per cent.

And now here we are, with the Government once again seemingly set upon raising it back to 13.5 per cent on March 1st, using the controversy over Dublin hotel room rates as cover. Yet look closely and it is clear that there is far from unanimity at Cabinet about the decision. Donohoe didn’t actually say the rate would go back up to 13.5 per cent in March. He said only that the 9 per cent would last until then, which is a subtle difference that doesn’t rule out the possibility that it could be raised.

By then, Varadkar will once again be taoiseach and, it seems, Fianna Fáil’s Michael McGrath will be the new minister for finance. It will be they who hold the whip hand in any review of the decision to halt the return to 13.5 per cent, and not Donohoe.

There are many arguments for why the rate should have been returned to 13.5 per cent before the energy crisis and the war in Ukraine, and the European recessions that such calamities are sure to precipitate. But those arguments are weaker now. Regardless of the frothiness this summer of Dublin hotel rates, there is a real danger that restaurants and tourism attractions everywhere, as well as regional hotels, might start dropping like flies over the winter under the strain of quadrupled electricity bills.

Tourism is heading into yet another challenging period. It is on a downswing. The State docking an extra 4.5 per cent of the revenues of the tourism industry seems like a pro-cyclical move in a time when you would expect countercyclical interventions.

Regardless of what Donohoe said in his budget speech, the Government looks certain to reassess the situation around tourism’s 9 per cent rate in the depths of winter. Varadkar’s intervention this week made sure of that. The realisation of this is also why the industry’s lobbyists were so careful this week not to wail too much about it. Everybody knows that, as far as tourism’s VAT rate goes, it’s still game on.