THIS ARTICLE APPEARED IN IRISH EXAMINER 10th AUGUST 2018
While the Irish economy is performing very strongly on the surface, it is clear on closer examination that the country does have a significant concentration risk. Last week the National Competitiveness Council (NCC) highlighted this fact in a very vivid manner. The NCC expressed concerns that the sustainability of growth could be threatened by the heavy dependence on the performance of a narrow base of firms and economic sectors. It pointed out amongst many other statistics that the top 10 per cent of firms account for 87 per cent of value-added in manufacturing and 94 per cent in services; a third of total exports are accounted for by just 5 firms; and 39 per cent of corporation tax is paid by the top 10 companies.
The obvious risk is that if any of those companies or their sectors experienced a shock, then the Irish economic model could be quickly and cruelly exposed. Just as in the world of investment, having a diversified portfolio is crucial, in an economic context, having a broad-based and diversified economic model is very important.
While there is an inevitability in a small open economy that has based its economic development strategy on attracting foreign direct investment since the 1960s, that a small number of large companies would become very dominant and have a disproportionate impact on the economic and financial metrics of the country, it does create a vulnerability. The main problem and vulnerability for Ireland is the fact that those companies on which we are so dependent are foreign-owned multi-nationals and hence are very much outside of the control or influence of domestic policy makers. In other words, boardroom decisions in Palo Alto or Seattle can have a massive influence on areas such as Cork or Leixlip. We need to strive to ensure that our economic model is as broad and diversified as possible and that indigenous companies and sectors are given as much recognition and support as their foreign-owned counterparts.
There has been considerable speculation and comment recently about the appropriateness of the special 9 per cent VAT rate that applies to the hospitality sector. The Department of Finance research paper written about in this column last week clearly does not think it is a good idea; the trade unions for their own unique reasons do not like it; and Social Justice Ireland does not see much in the way of social justice in the tax mechanism. That body has an ambition to increase the tax take and reduce social injustice. How the abolition of the 9 per cent VAT rate could possibly achieve that ambition I have no idea.
The hospitality sector is the consummate indigenous sector that makes a very significant economic contribution to the whole economy, but particularly to rural areas where there might not be a lot else going on. It is also the most crucial element of the tourism sector. It is all well and good having heavy investment in tourism attractions and lots of beautiful scenery, but if this is not backed up with a high-quality hospitality sector, then tourism will fail. Hotels and restaurants are vital to tourism and should be operating in as supportive an environment as possible.
In 2017, expenditure by tourists visiting Ireland is estimated to be worth €5.3 billion and when spending by domestic tourists is factored in, this jumps to €8.8 billion. Fáilte Ireland estimates that 240,000 workers are employed in the tourism and hospitality industry. This is an incredibly strong economic contribution and acts as a serious counter balance to the small number of dominant firms in the economy.
Many of those businesses, particularly outside of Dublin, do very well during peak holiday season in July and August, but for much of the rest of the year, the environment is much more difficult.
If you tax something more, there will be less of it, and if you tax something less there will tend to be more of it. This fact should be remembered by those caught up in an often-ideological debate about scrapping the very important, supportive and sensible lower VAT rate of 9 per cent.
This Article appeared in the Irish Examiner, 3rd August 2018
If the success of a government is to be gauged by what is happening on the labour market, then the current government and its immediate predecessor should be judged as successful. The economy is now on the verge of the highest level of employment ever achieved and the unemployment level continues to decline. Data released this week showed that the level of unemployment declined by 38,200 in the 12-month period to July and the unemployment rate remained unchanged at just 5.1 per cent of the labour force. Since the lowest point of the labour market in January 2012, the number of people unemployed has declined by 235,300 from 355,800 to 120,500 and the unemployment rate has come down from 16 per cent of the labour force. These figures demonstrate clearly just how flexible the Irish labour market is and just how willing and able businesses are to create employment once the environment is favourable. The 9 per cent VAT rate is a good example.
This week the Department of Finance published its assessment of the 9 per cent special rate of VAT in the hospitality sector. Its main conclusions are that the policy has achieved its objectives and that it is no longer relevant in the current and forecasted economic environment. Furthermore, it argues for an ending to the favourable rate on the basis that hotels and restaurants in particular have experienced a loss of competitiveness and rising prices relative to comparable sectors and that the majority of sectors impacted are now enjoying healthy profit margins. It also estimates that the reduced rate has cost approximately €2.6 billion since its introduction.
The lower rate was introduced in July 2011 at a time of crisis in the economy, and its main objective was to help the competitiveness of Ireland’s tourism sector in particular, to ensure that firstly, as many ailing businesses as possible survived and secondly to boost employment. Between the second quarter of 2011 and the first quarter of 2018, the number of people working in the Accommodation & Food Services Sector increased by 54,400, taking total employment from 117,300 to 171,700 on a seasonally adjusted basis. The sector accounted for 7.7 per cent of total employment in the economy. On the back of this direct employment growth, I estimate that another 25,000 indirect jobs were supported.
The direct jobs created would have resulted in payroll taxes of an estimated €280 million accruing to the Exchequer and possible savings of over €1 billion in social welfare expenditure if it is assumed that the bulk of the jobs created took people off the live register. In estimating the total cost of the 9 per cent VAT rate it would be appropriate to include payroll tax revenues collected and social welfare expenditure saved. In addition, those extra workers employed would have spent their earnings in the economy and made a further contribution to the Exchequer.
Personally, I think it would be mad to increase the VAT rate at a time of such uncertainty for the tourism sector in particular. In the first six months of the year, 4.87 million overseas visitors came into the country, which is 6.7 per cent ahead of the same period in 2017. Visitor numbers from Great Britain increased by 2.2 per cent and accounted for 36.7 per cent of total overseas visitor numbers. However, this is down from 40.9 per cent in 2016. The crucial UK market is under pressure from sterling weakness, but luckily the overall tourism performance is being held up by very strong growth in visitor numbers from elsewhere.
It is worth remembering that the sterling/euro exchange rate averaged 72.63 pence in 2015; 81.92 pence in 2016; 87.64 pence in 2017; and 88.1 pence so far in 2018. This represents a significant deterioration in the terms of trade over the past four years.
It is also worth bearing in mind that the health of the hotel and restaurant sector in Dublin does not reflect business conditions in many rural areas. It is also worth remembering that the costs of doing business are rising and labour costs in particular look set to become a massive issue for the hospitality sector. As an aside, the reaction of the trade union movement to the Department of Finance report puzzles me. I would have thought that trade unions would support employment creation measures but then again, I never professed to understand trade unions.