VAT Cut Won’t Halt Cross-Border Shopping
This post was written by Alan Ahearne
This website got a plug today in Alan Ahearne’s “Short View” column in the Sunday Independent. The article asked whether the Government should heed calls for a fiscal stimulus plan for this country. Ahearne concludes that the answer is an unambiguous no.
Cuts in VAT rates, along the lines introduced in the UK, would do little to bolster economic activity in this country. Part of the tax cut may not be passed on to consumers. Moreover, a substantial chunk of Irish households’ spending is on imported goods. Increased spending on imports provides only limited support to our economy. The bang for the buck from a VAT cut is small in an open economy like ours because much of the impulse leaks out through higher imports.
A stimulus proposal might be effective at boosting transactions if it were huge. But the country can’t afford such a plan. Claims that a VAT cut could be self-financing are baseless. The Dept. of Finance estimate that the 0.5 percentage point hike in the standard VAT rate in Budget 2009 will raise €220 million. A crude extrapolation would suggest that slashing VAT to the UK rate of 15 per cent would add another €3 billion to the State’s already enormous borrowing requirement. As argued previously on this website under the post “On Deficits and Debts” (3 December), there’s a limit as to how much the Government can comfortably borrow on international markets.
A cut in VAT would also likely do little to stem the flow of shoppers across the border with Northern Ireland. Price differentials between the Republic and the North largely reflect the weakness of sterling and differences in business costs. A fiscal stimulus won’t solve these problems. A focus on improved competitiveness and realistic wage-setting would be much more valuable. Meanwhile, budgetary policy should aim at avoiding national bankruptcy.
December 7th, 2008 at 2:27 pm
The National Retail Strategy’s cap on floor areas must be reviewed and lifted to allow UK stores like ASDA and Sainsburys to set up in the Irish State.
Stores like those above operate on 60000 sq ft where as the cap is about 20000 in non gateway towns.
Counties like Meath could absorb some of these stores on edge of town sites.
In difficult times people will put their families and their budget ahead of the national interest.
December 7th, 2008 at 2:50 pm
Although weakness of Sterling and the VAT reduction have exacerbated the situation, I think it can be argued that much of the long-standing price differentials between North and South reflect pricing to market. Until recently Irish consumers were relatively cash rich and time poor. It seems reasonable to anticipate an increase in non-market search activities by the now more price sensitive consumers in the South and adjustment may come from a reduction in retailer and producer profit margins.
December 9th, 2009 at 9:19 pm
[...] the early days of this blog by current adviser to the Minister for Finance and former blog alum Alan Ahearne (back then blog posts were written in the third person apparently!) and a later crankier post by [...]