VAT rate cuts for building houses should cut both ways

Cantillon: Arguing that developers should profit from VAT reductions will not play well

Charles Gallagher, executive chairman of Abbey, speaking at the company’s agm in Malahide. Photograph: Alan Betson/The Irish Times

The suggestion by housebuilder Abbey's executive chairman, Charles Gallagher, that cutting the 13.5 per cent VAT rate on houses would boost both the supply of new homes and builders' profits is bound to annoy a few people.

Even before the crash a decade ago, developers were near the top of many people’s list of bogeymen. Afterwards they were seen as one of the groups responsible for leaving the Republic languishing in recession and its citizens with a €64 billion bill for bailing out the banks.

Arguing now that they should profit even while the exchequer takes a hit on VAT is not going to play well in many quarters.

Gallagher was making the point that Ireland will have to be prepared to accept trade-offs of all kinds if it is going to solve the housing crisis. VAT is really just one of them, but it is clearly an important one to the Abbey boss, whose business makes money from building and selling houses.


Building more houses means, one way or another, that builders are going to make more money

Others issues such as planning and environmental controls also slow down building and drive up costs. Gallagher, who was speaking after Abbey’s annual general meeting, argued that the Government itself appears to feel hemmed in by a lot of these barriers, which has made it slow or unable to act.

Gallagher is right. Trade-offs are inevitable. Building more houses means, one way or another, that builders are going to make more money. They are, after all, supplying something for which there is pent-up demand.

However, trade-offs don’t just work one way. If the State is to forgo some of the tax it takes from the sale of houses, it should get some benefit in return. In this case, it is pretty clear what that benefit should be: cheaper and more affordable homes for its citizens.