There is no Laffer curve in tourism

The Sunday Times reported on a recent paper by Niamh Callaghan and me.

The paper is on the demand for tourism in Ireland by UK visitors. This is relevant because UK tourists make up about 45% of all visitors to Ireland (and because UK tourists are not that different from other tourists).

The paper starts with descriptive statistics. Irish tourism prices have developed roughly in line with prices elsewhere, except in 2008, when Irish prices rose very sharply, and in 2009, when Irish prices fell as the rest of the world raised their prices.

Ireland roughly maintained its market share in UK tourism. The drop in visitor numbers in Ireland seems to be because people take fewer holidays during a recession, rather than because there is something wrong with Ireland as a tourist destination. Ireland does well in the market for secondary holidays (city visits, fishing trips etc) and people economize on that rather than on the main family holiday.

We then estimate the price elasticity of UK tourism demand — that is, the price elasticity across destinations — using twelve years of micro-data from the International Passengers Survey. We use that to run two simulations, abolishing the travel tax and reverting the VAT cut. The results are qualitatively the same for both scenarios. The tax changes have a small impact on the total cost of the trip. With a price elasticity smaller than one, the impact on visitor numbers is small too. Tax cuts bring additional visitors and additional revenue, but all tourists (including those that would have come anyway) pay less tax. The latter effect is larger, so that there is a net loss to the Irish economy.

Tourism tax breaks are like export subsidies. Foreigners benefit. The tourism sector benefits. The overall economy loses out.

19 thoughts on “There is no Laffer curve in tourism”

  1. Judging by the search terms on NAMA wine lake, it seems clear that there is a lot of foreign interest in Ireland as a tourist destination, in no small part driven by the perception of the country being mired in economic chaos, and consequently the assumption that prices will have collapsed. And it is true that prices for hotel accommodation have dropped significantly. But beyond the package deals (flight, transfers, accommodation) the anecdote I constantly hear is that the country is still a massive rip-off (maybe worse than that there are some incredible bargains like green fees at some golf course, but then there are eye-watering prices like €4 for a coffee in a basic cafe so you are anxious as a tourist about the pricing that awaits you).

    Why is this country not getting to grips with prices which are still 18% above the European average despite the fact that per capita GNP is now only 3% higher. God knows we have enough agencies and quangoes that are supposed to monitor prices and engender competition.

    And this is not just a gripe focussed on tourism. With forthcoming austerity, the permanent residents would welcome prices which take account of the new economic realities. Richard Bruton, would you ever wake up and deploy at least part of your immense abilities at re-adjusting prices.

  2. Couple of questions, if someone would be so good:

    Does this imply that the 10 euro flight tax that so exercised Michael O’Leary did not affect potential tourist decision making? Or at least no more than his own 10 euro credit card charges.

    And, as a general point, then, is it fair to say that tax breaks designed to encourage spending in specific sectors (like the car scrappage scheme) simply transfers spending from one sector to another with no net benefit to the exchequer or overall employment numbers

  3. @Dealga
    1. RyanAir is hit disproportionally by flight taxes because the relative difference between the ticket price before and after tax is larger for discount airlines. So they lost out relative to other airlines. But the overall impact is probably smaller than O’Leary’s rhetoric suggests.

    2. This is true in general. Sector-specific tax breaks increase the overall distortionarity of the fiscal system.

  4. @Jagdip,

    Welcome to our little band of malcontents. It is getting close to 3 years since I started shouting the odds here (with some limited subsequent support) about the simple structural reforms that could be implemented and which would massively reduce the excessive and unnecessary cost burden on consumers and the domestic economy.

  5. Personal experience of recent weekend trip to Ireland:

    Aer Lingus flight: Very reasonable price, quality of service okay

    Hotel in Westmeath: excellent value, friendly staff, good food

    Horseriding in Westmeath: wonderful scenery, very good price, very nice people

    Theatre in Dublin: First class theatre, excellent seats, a little bit pricey, but worth it

    Car hire: extremely reasonable price, car a little old and kaputt, but reliable.

    All-in-all a first class trip to a beautiful country I love with all my heart, for a budget most middle-class European tourists could easily afford.

  6. @ Ludwig

    Careful, now! Your positivity will not be tolerated! Joking aside, pleased you had a great trip!

    @ Richard

    Good stuff – what one might have expected!

    Did you adjust for the reduced dole expenditure by making UK emigration more attractive to the visiting friends and relatives (VFR) segment, which has the highest elasticity? What is the optimum flight/holiday subsidy?

  7. Jagdip

    You are getting ripped off if you pay 4 euros for a coffee. Shop downstairs will throw in a bun with a latte for 3 euros and in a real cup as well.

  8. It might help the Irish tourist sector if someone could figure out how to get a direct flight from Canada (one of the few G8/G20 countries not currently up excrement creek without a rowing implement) to Ireland more than about 7 months a year. The Canadian carriers turn much of their capacity towards the Caribbean once the leaves turn.

    At the very least the rapidly increasing numbers of Irish emigrants in Canada might appreciate not having to transit Thiefrow or US Homeland Security on their way back for Christmas to spend their foreign-earned cash.

  9. The magic died here back in the late 80s / early 90s or there abouts – the countryside is now a giant subrural mess , unless you know the little pockets of hillside that have not been scoured by the various orcs that have roamed this land there is little point coming to this bog unless you are a mindless golfer or some such.
    Perversely the oringinal land of Golfers has kept its magic.

    When they privatised the Old Head & denied normal well adjusted people a Sunday walk the writing was on the wall.
    The teenage backpackers that once came here in large numbers will not now come back when in their high spending forties.
    The place is lost.

  10. The teenage backpackers that once came here in large numbers will not now come back when in their high spending forties.
    The place is lost.

    To you maybe.

    But there are more than twice as many tourists coming here each year compared to the late 80s/early 90s.

    So, no everyone shares your view on how crap the country is as a tourist destination.

  11. @Mark Dowling
    I agree with you there should be a Dublin – Calgary flight once per week to provide access to all those high paying jobs in Fort McMurray. Another one from Dublin to Toronto or Montreal as an aid to Irish tourism.

    My wife who takes European vacations talks to a lot of Canadian women who take European vacations. The consensus in the matriarchy is that Spain is good and cheap, Ireland is too expensive, too wet and too cold, Greece is dangerous but if you go direct to the islands without transiting through Athens (from Budapest, Frankfurt or Vienna) then Greece is good and cheap. The Irish diaspora, who tend to overlook the climate and the cost generate a lot of Ireland’s tourism business.

  12. @ Richard Tol
    Richard, Just a query:
    I understood that the problem with the travel tax was that it reduced airline profitability and thereby caused them to reduce services to Ireland, rather than any direct effect on the tourists themselves? The argument being that if there were 10 euro extra to be squeezed out of Michael o’Leary’s passengers, he’d have got his hands on it long ago.
    As I understand airline services to Ireland have been severely curtailed. The airlines argue that this is a result of the travel tax and increased airport charges to pay for T2, Aer Rianta says its due to the recession.
    That argument reminds me of the one over salmon drift-netting. Salmon numbers were collapsing, but the drift-netters said that this was as a result of environment or disease, not their fishing, so they should be allowed to continue to fish. Of course if something else was decimating the salmon, that was all the more reason to stop fishing for them.
    If recession is causing airlines to cut back services anyway, is it not a bit perverse to push them further down that road with increased taxes and charges?

  13. @Donogh
    Good point. We assume that the tax (break) would be passed on to the travellers. We’ll address that in the next version of the paper.

    The data that we looked at suggest that the dominant factor is that there are fewer tourists everywhere. Ireland was not hit harder than other markets.

  14. I don’t know if anyone has seen the youtube clip on worldirish’s Facebook page, its called Irish fans celebrate in Tallinn, this clip should be used to attract tourists from eastern europe and Russia and maybe even beyond.Check it out, it is funny.

    We need to entice the maybe 800 million or so (open to correction or verification) middle class people from the BRIC nations.

    We need to employ some Chinese and Indian and Brasil
    ian people who love Ireland and who came here for an education to encourage their fellow country folk to holiday/study/ceol agus craic/ or whatever.

    We need to tap into the religious conscience of the billion or so Catholics around the world and get them to make a pilgrimage to the emerald isle, close to nature, close to God or something like this.

    Monks from the far west islands of Ireland saved the Catholic faith once upon a time a doctor from Canada told me once at a beer festival in Erlangan, southern Germany, they brought with them the concept of eating together outside which has led us to “Cafe Culture” and “people watching” and the whole social aspect of well, being social which is now a “continental” way of life outside of winter, maybe we can use this someway to attract our Catholic neighbours of France, Italy, Spain etc.

    We need to offer free public travel to over 55’s regardless of where they come from, get the silver money in, I believe Spain does something like this.

    We need to big up our New Years celebrations all over the island to 1. Make us a new years destination for everyone not from Ireland and to 2.Make us a new years destination for everyone from Ireland. Look at how much Syndey in Oz makes from Irish and non Irish, get them in for a party and home for a party.
    How about a full moon party like in Koh Phangan in Thailand, not necessarily at new years, why not have both, why not have one every full moon?.

    We need to tell everyone how our own St Brendan went to America when it was probably called something else, build a tourist industry around him, how much does C Colombus bring to Spain? How do they milk that?
    We need to look at our place in the trail that took the Vikings to North America, maybe recreate a sailing route, with us as a stop/stops, we should link our coasts with all in that trail, I believe we have support for this in our relations with our relations in Eastern Canada.
    We need direct flights from, Silicon Valley to the European Tech Hub that is Ireland, from more than one city in EACH of the Bric nations.
    We got out from under Britannia, we just got out from under the Vatican, we will get out from under the Troika, we just need to be Irish and proud again, we have the technology people and we can work, we need to work together, we need to be decisive, assertive and communicative, we need to think outside the circle.
    How do we pay for all this, easy we put an Irish Sovereign Levy on all our gas which other people are selling for themselves and the oil they will sell.
    “I could never figure out, how yer man stood up on the surfboard after 14 pints of stout”, music, surf, culture, history, scenery, salmon, active sports, gaelic games, bare knuckle fighting, boxing, katie taylor, luke kelly, people immigration, bird migration, political falsification, tae, go on, go on, go on,and on and on, we love a challenge and are very competitive so lets do it folks

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