This is not the time to impose greater tax burdens on the hospitality industry

We have been doing some things right. In Greece last week a businessman said to me: "Ireland is solving its problems. I wish we could say the same here."

Sometimes it takes an outside perspective to appreciate that progress has been made. Challenges of Himalayan proportions remain. But there is some growth. Employment is increasing, however slowly. We are, at least technically, out of recession.

It is possible to have a degree of sympathy for Ministers who are in the third year of struggle. Even after the summer recess the strain is there on their faces as the serious budget haggling gets under way. Some are visibly ageing – and not all of them were in the first flush of youth when this administration was formed. These are challenging times to be in government.

There are periods, I suspect, when Ministers are so beleaguered that they cannot think straight. They are on informational overload, reliant on summaries and abstracts prepared by civil servants and likely at any time to fall victim to the laws of unintended consequences. Sometimes, perhaps, they even lose sight of some of the things that they have achieved.

One would like to think that something of this miasmic condition lies behind Minister for Finance Michael Noonan’s announcement that he is considering the reintroduction of the 13.5 per cent VAT rate for the hospitality industry which he reduced to 9 per cent in 2011. He needs €316 million, he told a Limerick conference. If he cannot get it from the hospitality sector, he said, he will have to get it from somewhere else.

When he reduced VAT for hotels and restaurants Noonan was following the lead of his French counterpart. As the French economy contracted in 2008-2009 the restaurant and cafe sectors came under pressure. Contrary to national habit, the French decided to eat and drink at home, eschewing the cafes and bars. Tens of thousands of waiters, barmen, chefs and kitchen workers were let go as business dwindled.

Tourism figures rise
But when the Sarkozy government cut the tax rates for the sector from 19.6 per cent to 5.5 per cent, they started going out again. Not only that, but tourism figures also started to rise as word got about that France was not as expensive as it used to be.

Noonan makes the point that when he announced the drop in VAT in 2011 it was, in effect, a unilateral decision. There had been no recent lobbying on the issue. He is entitled to credit for that. He saw a good idea working elsewhere and applied it here.

The restaurant owners’ association says that it enabled its members to create 9,000 jobs. Hoteliers all over the State will acknowledge that it allowed them to reduce prices, offering better value to the domestic market and to foreign tourists. The result is that tourism figures are up. Hotels, especially at the upper end of the market, are doing more business. Foreign capital is now actively seeking investment opportunities in Irish hotels.

Getting money out of the savings accounts and into general circulation has not been one of the Government’s successes. Domestic demand has remained stubbornly flat while savings have grown. But a vibrant hospitality sector is one of the most efficient ways of getting money to move around in an economy. Purchasing of big-cost items like cars is deferred in a climate of uncertainty. But affordable luxuries – coffee with friends, a couple of pints in the evening or Sunday lunch at the local hotel, especially where there is a perception of good value – will draw some euro out of cautious wallets and create local jobs.

The effects are palpable. I know a village in the midlands where a thriving hotel was established in the boom years. It built up a residential clientele, offering country weekend packages. Then it developed a fine business in weddings and conferences.

But its impact on the local economy went far beyond the 30 or so jobs that were created directly on the premises. Local pubs increased their trade. A new restaurant opened up. Families developed B&B businesses, catering for the overflow from the hotel when there were big weddings or business conferences. Tradesmen got work building the additional bedrooms. Young people got part-time jobs, enabling them to put aside money for college.

The hotel hit hard times when the recession struck and the banks moved in. The main creditor bank put in a management team to restructure the business. Costs were slashed. The product was redefined.

Many staff were let go. But it was known that it was continuing to lose money. It seemed only a matter of time before it would shut its doors.

It was Noonan’s VAT reduction of 2011 that helped close the gap and keep that business afloat. It isn’t like it was in the glory days and there aren’t as many jobs. But there are some. Margins are tight but business is still trickling down to the local pubs and the B&Bs. And the calendar of bookings for weddings and conferences is healthy.

Policy puzzle
It's difficult to think why a Minister would consider undoing something so successful, which he himself set up in the first place. He acknowledges its success and that it has created jobs. But the reduction in 2011 was intended as a temporary measure, he says, and "the people in Finance and Revenue" are counting on the money.

In fairness, Noonan has not said definitively that VAT is going back up to 13.5 per cent. But it would be astonishing if a politician of his skill and experience could not see beyond the rigidities of a Civil Service formula put in place two years ago. It cannot be impossible to find €316 million somewhere that is less directly connected to the creation of jobs.

The hospitality sector is in steady recovery. It is offering talented young people an alternative to emigration. This is not the time to kick the legs out from under it.