From top: rush hour traffic on the M50 around Dublin this morning; Michael Taft
The Business Post (paywall) reports that Fianna Fáil and Fine Gael are discussing various fiscal responses to reboot the economy when the emergency is over.
‘Initiatives such as temporary VAT cuts across a number of the worst affected sectors, rather than just the tourism and hospitality industry, are expected to be in the mix.
The plan will also seek to answer calls from business groups for the write-off of rates bills and access to working capital for business.’
There is nothing wrong with this approach in principle. We need to get our enterprise base back up on its feet.
The question is: how can we optimise any incentives, subsidies and supports? In this respect, we can learn lessons from the last time the Government intervened to boost a sector with the VAT cuts – in the hospitality sector back in 2011.
One of the first things the Fine Gael / Labour government did on entering office was to launch a Jobs Initiative which included a temporary cut in the VAT rate from 13.5 percent to 9 percent.
This was intended to do two things: reduce prices to incentivise demand, and help repair balance sheets. These, in turn, were intended to drive hospitality employment and, so, help overcome the jobs crisis at the time.
Temporarily reducing VAT to boost economic activity is a classic Keynesian, social democratic or counter-cyclical tool.
During the crisis one commentator taunted the trade union movement with the success of the VAT rate cut, not realising that it was the trade union movement who had first come up with the idea.
Focusing on the hospitality sector, the headline results were impressive. Numbers employed in the sector topped out at 147,000 in 2007. This bottomed out at 113,000 in 2011.
However, from that point, at approximately the same time as the VAT cut, employment rose so that by 2015 it surpassed pre-crash highs and by 2018 – the year the VAT cut was reversed – there were over 180,000 employed.
How much of this was due to the VAT rate cut is open to debate. For instance, the number of visits to Ireland from abroad fell to 6.1 million in 2010. This started rising in 2011 and by 2015, the numbers increased to 8.6 million. By 2018 this rose again to 10.6 million.
The hospitality sector benefited from foreign demand (that is, it was reliant upon the spending capacity of people from outside the country). Most of this increased foreign demand would have been down to rising incomes and consumer confidence in other countries.
Nonetheless, we can be reasonably satisfied that the VAT rate cut was helpful, even if we can’t quite identify its precise contribution to employment growth.
However, within the sector, there are some issues to consider.
According to the CSO, value-added in the hospitality sector rose significantly after the VAT cuts.
Value-added rose by 28 percent in the period between 2009 and 2018 while wages stagnated, rising by less than 4 percent.
Eurostat reports that, in 2008, profits made up 7 percent of value-added. After going into negative territory during the height of the recession, profits started rising in 2012, going from four percent to 24.6 percent in 2017. Meanwhile wages stagnated, rising only 3.7 percent during this same period.
We can see a similar pattern of profit growth in industry surveys.
Crowe Howarth charts the rising level of profits per hotel room. Profits more than doubled between 2012 and 2018.
The failure to match wage growth with profit growth – so that the benefits from a cut in VAT (which is subsidised by everyone) are spread out evenly – not only constitutes a social inequity and industrial injustice. It imposes costs on the public and other businesses as well.
Suppressing wages means less tax revenue (income tax, PRSI, consumption taxes) and higher social protection costs (Working Family Payment, Part-Time Unemployment Benefit).
Consumer spending is hit – not only by low wages but by precarious work contracts where income is uncertain from one week to the next. This has a negative impact on other businesses that rely on workers’ purchasing power.
In short, by suppressing wage growth companies in the hospitality sector externalised, or imposed, costs on to other sectors of the economy, so that they could grab ever-higher profits.
Cutting VAT rates remains a potentially beneficial strategy in reviving economic activity. However, the strategy will be costly and inefficient if it follows the pattern of the last VAT cuts.
How can we make it better?
We can make it better by ensuring that workers in these sectors have a voice at the table, by creating sectoral collective bargaining bodies in those sectors directly benefitting from any proposed VAT cuts such as hospitality, retail, business services, etc.
Representatives of employees would negotiate an agreement with employer representatives covering issues such as wage increases, overtime, pay scales, working conditions (e.g. health & safety) and contractual certainty (e.g. secure hours, minimum hours, secure income).
Such sectoral collective bargaining should be accompanied by the right of employees to bargain collectively at firm level.
And neither employees nor employers would have the right to undermine these bodies by boycotting them (as is being done currently by employers with the Joint Labour Committees).
This could be done by implementing the principles in the private members bill introduced by Senator Ged Nash last year (now a TD).
VAT cuts must be accompanied by stakeholder justice – the right of employees to participate in the benefit that a public subsidy provides. This would ensure such state interventions are socially equitable, fiscally beneficial and economically optimal.
In other words, common sense.
Michael Taft is a researcher for SIPTU and author of the political economy blog, Notes on the Front. .
Its very hard to separate out the beneficial effects of the VAT cut from that of the overall economic recovery and the big increase in incoming tourists. Is there any research that attempts to do this?
Secondly, as you know every government measure that tinkers with the economy has unintended consequence. As this is an unparalleled crisis, it is likely that any response is likely to have largely unforeseen consequences ( though someone somewhere will swear blind later that they knew about them all along).
I’ve no problem with collective bargaining at the firm level but bear in mind that the Irish hospitality sector is already seen as expensive even though wages are quite low. How do we increase pay without making ourselves even less competitive as a tourism market?
Joe Small – the Department of Finance undertook a review which can be read here: https://igees.gov.ie/wp-content/uploads/2019/03/Review-of-the-9-VAT-Rate.pdf . Revenue Commissioners found it difficult to isolate the impact of the VAT cut but suggested there was a short-term gain, but over the medium-term the benefit flattened out – which is what happens with short, sharp stimulus shocks.
Thanks Michael.
I tend to agree with this. In fact, I already talked to friends (online, not in person) that I’d like to see a VAT reduction. However, as the article states, the recovery in the hospitality industry was partially driven by foreign demand. As a result, I would like to see any VAT reduction expanded to all businesses that cater to local demand, ranging from the corner laundry to the landscaper, individual contractors found on tradesmen.ie and others. These all suffered, and to kickstart the local economy, these people need to attract demand by passing the VAT savings onto their customers.
Bruncvik – yes, a VAT cut across these sectors would be helpful. I focused on the hospitality sector because that’s what the 2011 VAT cut focused on.
This is what we need to be considering! Thanks Broadsheet and Michael!
So, what you’re saying is we should ignore this opportunity to create a fairer, less stressed, environmentally friendlier society and just return to the unfettered globalised capitalism and environmentally destructive behaviour that put us in hospital in the first place … I’m no expert, but that just seems a bit stupid to me.
I know you should never waste a crisis, in terms of policy-making, but looking at this as an opportunity to create a utopian society through radical transformation isn’t very realistic.
Reducing your cigarette intake after a bout of cancer would hardly be radically transformative. But again, I’m no expert, I’m sure it has all been fully thought through.