In March of this year, Brian Lenihan said "If I have one act of contrition, I should not have interfered with the VAT rates. It was a mistake and the wrong thing to do. We have lost €700 million in revenue going to the North."
Addressing his comments to the annual lunch of the Sutton-Howth Chamber of Commerce in Dublin, the Minister conceded that the increase in the VAT rate in the October 2008 budget had “sent out the wrong signals”. His unexpected concession came just weeks after Tanaiste Mary Coughlan admitted that the VAT increase had been a "total disaster".
However, despite these acknowledgements, and the implorations of many public figures, Minister Lenihan failed to reverse the decision until today.
At the time, Labour Senator Alan Kelly said that the Minister’s VAT decision must be reversed in April’s supplementary budget. Deputy Kelly said that Mr Lenihan's admission was a case of "stating the obvious" and that "It should have been plain to anyone with a titter of wit that increasing VAT, particularly at a time when the euro was strengthening significantly against sterling, would provide a further incentive for shoppers to take their business across the border.”
A couple of weeks after Lenihan made his initial admission, there were again calls for a reversal of the Vat increase. Sinn Féin’s finance spokesman, Arthur Morgan, called on the Government to reverse the tax rise and “ultimately look towards establishing a harmonised all-Ireland VAT rate in conjunction with his counterpart in the Northern Assembly.”
These calls were prompted by figures released by the CSO at the end of March which revealed that GDP had fallen by a massive 7.5 per cent in the final three months of 2008.
In his budget delivered in October 2008, Lenihan had increased the Republic’s VAT rate from 21 per cent to 21.5 per cent, while his British counterpart, Alastair Darling, cut the British rate from 17.5 per cent to 15 per cent.
Yet, April 2009’s emergency budget came and went with no reversal of the Ministers “mistake”. A mistake which, by the minsters own admission, has largely contributed to the loss of €700 million and, by retailers estimates, 11,000 jobs so far.
In the wake of April’s supplementary budget, Lenihan faced a barrage of angry callers to the 'Pat Kenny Show'. He admitted that the increase in VAT was "a psychological mistake", but defended his decision not to reverse it because it would have cost a "substantial amount" of money and the government "cannot afford to give away money at this stage”.
In the first six months of 2009 the government collected €5.3 billion in VAT receipts, this is down 21 per cent on 2008 figures for the same period.
Not only did the Ministers mistake have woeful consequences for the country as a whole, it hit the impoverished and vulnerable the hardest. Indirect Taxes, such as VAT, are indiscriminate, levied across all of society regardless of ability to pay and therefore have a disproportionately greater impact on low income and social welfare dependent individuals.
Because VAT is unrelated to the wealth of the payer, those in the bottom tenth of income earners pay more than 20 per cent of their gross income in indirect taxes such as VAT, while those in the top 10 per cent pay less than half that amount.
In an attempt to stem the haemorrhaging of Irish money through the border, largely precipitated by the ministers “mistake”, government today announced a cut in excise duties on alcohol. However, the idea that shoppers from the republic are heading over the border primarily to buy cheap alcohol is a fallacy. A favourable exchange rate and reduced VAT mean that virtually everything is cheaper, including groceries, clothes, electronic goods and cars.
Although British Chancellor Alistair Darling has announced that the UK’s VAT rate will return to 17.5 per cent on January 1, this still leaves Ireland’s rate 3.5 per cent higher. Coupled with favourable exchange rates, this means that cross border shopping is unlikely to decrease, despite the cut in excise duty on alcohol.
The Chairman of the Small Firms Association, Dr Aidan O'Boyle, has branded the VAT reduction as merely symbolic.
Sonya Manzor, a partner in William Fry Tax Advisors, said: “If the minister is looking to stem cross-border shopping he should have gone further and matched the 17.5 per cent rate in the UK.”