Donohoe signals no extension of temporary VAT reduction

Minister for Finance Paschal Donohoe has signalled that the Government does not intend to extend the current VAT reduction – from 23 per cent to 21 per cent – when it expires at the end of this month.

The lower rate, announced last year as part of the Government’s July stimulus package, was designed to boost the fortunes of hard-hit retailers.

"It is our attention that the VAT rate will go back up to its original rate at the end of the planned period," Mr Donohoe told the Oireachtas Committee on Budgetary Oversight.

He said the separate reduced rate of 9 per cent for the hospitality sector would, however, continue until the end of 2021.

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“When we made the original decision in relation to the standard rate of VAT, there was a particular need to support retailers at a time of great difficulty,” Mr Donohoe said. He noted retail businesses were receiving additional support via other programmes.

According to the Department of Finance, the temporary reduction in the standard VAT rate applies to about 50 per cent of economic transactions, including item such as clothes, electrical equipment, fuel, alcohol and tobacco.

EU rules

Separately Mr Donohoe told the committee that the EU's controversial fiscal rules had proved "their worth" in the current crisis, helping Ireland and other member states cushion their economies from the incoming shock.

Even though the rules around spending and deficits imposed on euro zone states by Brussels – and often criticised here as too limiting – were jettisoned at the outset of the crisis, he said they had kept national finances in check in the lead up to crisis, which has facilitated big increases in spending now.

"When the pandemic hit, national finances for the vast majority of countries within Europe were in a position of small deficit or balance or surplus and that, combined with the work of the European Central Bank (ECB), has been vital in allowing us do what we are doing at the moment," he said.

Debate is rumbling in Europe about what sort of fiscal rules should apply in the post-pandemic era and when they should come back. Mr Donohoe, who is also head of the Eurogroup of finance ministers, is likely to play a leading role in this debate.

Mr Donohoe said there would be no rapid withdrawal of the various supports put in place to cushion workers and businesses impacted by the restrictions.

He said it was not the Government’s intention to move from running a deficit to being in balance in a short period of time, “it’s going to take time for our economy and our society to recover”.

Process

The Department of Finance is forecasting a budget deficit of about €20.5 billion for 2021, rising to €25 billion if subsequent waves of the virus trigger more stringent-than-assumed containment measures.

Mr Donohoe and the Minister for Public Expenditure and Reform, Michael McGrath, were appearing before the committee to discuss parliamentary engagement in the budgetary process.

A recent report by the committee criticised the lack of parliamentary scrutiny and oversight that surrounds the budget and the Government’s decision to cancel last year’s mid-year expenditure report, which forecasts the likely spending increase earmarked for the budget.

“The exceptional circumstances last year, with a requirement to respond to the evolving situation with the virus, meant that the focus was on implementing measures to support our people and businesses experiencing extreme difficulties arising from the pandemic and to ensure that our health service had the resources to respond to the crisis,” Mr McGrath said.

The scale of support provided resulted in overall gross voted expenditure for 2020 coming in at €85.3 billion, an increase of almost €15 billion on the amount set out in the pre-Covid estimate, he said.

Sinn Féin finance spokesman Pearse Doherty criticised Mr McGrath for not revealing the scale of the hike being anticipated at an appearance before the committee just five days before the budget. "It's not the way to do budgets," he said.

Mr McGrath responded by saying it was not his intention to mislead the committee. “In preparing Budget 2021 we were dealing with an extraordinary amount of volatility”, he said, with final decisions being made at a late stage.