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State appears to be getting seven-year itch over tourism VAT rate

Caveat: The industry is currently booming but we all know that booms never last

When it comes to seeking State support, the problem for the Irish tourism industry is that it is a victim of its own success.

Visitor numbers are at record levels and hotels are full, yet the industry is trying to convince sceptical Government politicians, and even more sceptical department officials, that its special 9 per cent VAT rate absolutely must be retained in Budget 2019, or else the sector faces disaster.

It’s like pleading hunger while you wipe the chocolate sauce from your cheek: sceptics will just think you’re being greedy.

Yet, despite the record 10 million visitor numbers and the packed hotels, the industry does indeed face challenges. Nobody, and no industry, can live healthily on chocolate sauce – which in the industry’s case, is represented by a boom in US visitor numbers that remains uniquely vulnerable to external economic shocks.

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The €9 billion Irish tourism industry needs major investment to give it a healthier, more sustainable and varied diet. The temporary US boom is but a Trump trigger finger, or some other dollar-weakening implosion, away from a reversal.

And that's before we even consider what might happen to tourism from the UK if there is a hard Brexit.

More attractions and tourism infrastructure need to be built, especially in areas that are currently not seen as tourism hotspots. New attractions can be tailored to different markets, and there needs to be cash to market them through State agencies.

Policymakers also need to drain the congestion-promoting tourism excess from Ireland’s edges to better spread the benefits to underdeveloped parts of the land.

This will inevitably require the State to loosen its purse strings, either directly to build attractions, or through incentives to encourage development.

But when the industry’s special VAT rate – dismissed as an economic “deadweight” during the week by Government officials who are champing at the bit to raise it – already deprives the exchequer of €490 million annually in tax foregone, the need for more capital investment is a hard sell to those who control the State’s coffers.

Seven-year itch

Minister for Finance Paschal Donohoe may well retain the special VAT rate for another year with an election possibly on the horizon. But the "temporary" measure has been in place since 2011. It is clear that the State is getting the seven-year itch.

A reckoning will come eventually. Your tax rate, or your capital investment? Tourism may have to choose between its past and its future.

The industry argues that the VAT rate has singularly helped to boost overseas tourist numbers from the 6.3 million recorded the year the measure was introduced. It also credits the measure with creating 80,000 new jobs, to bring today’s total of almost 240,000 directly employed.

But this is an overly simplistic analysis. The practical impact of reducing tourism prices by 4.5 per cent (the 9 per cent rate used to be 13.5 per cent) has long since been outpaced by price rises.

Initially in 2011, the VAT move kept some struggling tourism enterprises in business and helped others cut prices or at least boost their margins. But most of the heavy lifting since then, in terms of boosting visitor numbers, has been done by a strengthening dollar against the euro, making Ireland cheaper to US visitors.

The general global economic recovery has also boosted tourism everywhere. Together with investment in new routes by airlines, these macroeconomic factors, more so than the VAT rate, have colluded to send the Irish tourism industry to new heights.

The VAT rate, the bulk of the benefit of which flows principally to burgeoning Dublin hotels and corporate canteens in the likes of Google (and, also, newspapers), is far too blunt of a tool to give tourism the sort of targeted support it now requires.

Industry growth

In its budget submission, the Irish Tourist Industry Confederation (Itic) has called for a range of supports to help the industry grow earnings from foreign visitor numbers by more 65 per cent in the next seven years.

It wants €50 million added to the annual budget for the sector, principally on restoring the flimsy budgets of the State marketing and development agencies, Fáilte Ireland and Tourism Ireland, which saw their allocations decimated over the past decade.

It also wants the State to more than double the capital expenditure envelope for tourism over the next 10 years, under the National Development Plan, to €600 million.

These are perfectly reasonable requests, given tourism's unparalleled ability to deliver jobs to parts of the State that the likes of Google and Facebook will never reach.

Yet, it is a delicate balancing act for the lobbying group to seek this assistance, while also raging against the dying of the light on the VAT rate.

Here is a concerning post-script, which illustrates that the future growth of Irish tourism is vulnerable to externalities, and hence requires attention and investment.

Policymakers want the industry to attract more premium visitors from markets such as China, whose tourists can spend on average 10 times as much as short haul visitors.

A few months ago, the industry rejoiced at the news that Chinese airline Hainan was opening a direct link between Dublin and Beijing.

Yet this week, as first revealed by business website Fora.ie, Hainan is already scaling back capacity on the route, presumably due to a lack of demand.

If only Tourism Ireland, which markets the country abroad, had a bigger budget, it could ramp up advertising further in China to boost Ireland’s image, and nurture this nascent air link.

Tourism to Ireland is booming. But we all know that booms never last. What happens next will be decided in the corridors of power.

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FOOTNOTES

– People who live in rural communities deserve fast internet access: it represents basic social and economic infrastructure in this day and age. But does this mean that it should be provided via a heavily State-subsidised fixed-line scheme that is hopelessly in disarray?

The National Broadband Plan (NBP), which is down to just one tendering consortium, the make-up of which appears uncertain at the moment, is swaying at the bar like it has just done the 12 pubs of Christmas.

Yet the Minister for Communications Denis Naughten, doing his best impression of Comical Ali, is telling all and sundry that the process is absolutely fine and, sure, it'll all be over soon anyway.

I know everybody just wants to get this long-running issue to closing time. But wouldn’t it make more sense to take a breath, while there is so much uncertainty?

Mobile operators, including Three Ireland, are gearing up for investment in 5G, which could also potentially be incorporated into the technical mix.

With so much taxpayer cash at stake, would it be so terrible to press the pause button on the NBP tendering process, just for a short while, to figure out what on earth is going on, and what the hell to do next?

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The reports emerging that Google may be considering re-entering the Chinese market with a State censor-friendly version of its search engine should make the scales fall from the eyes of any of the last remaining cohort who ever bought into its self-serving, and utterly ridiculous, “philosophy”: Don’t be evil.

Facilitating State repression of information should be anathema to the supposedly libertarian idealists who founded Google.

Then again, in the world of Big Tech, money talks. And it appears that everything else, including morals and values, can just take a walk.