Sunday Business Post - 27 June - Irish retailers welcome British VAT hike
Britain’s harshest budget in decades was revealed last week and Irish exporters have major concerns about the impact it will have on business here. Exporters fear that the Vat increase, from 17.5 per cent to 20 per cent from January next, will result in €13 billion being taken out of spending circulation and going into British government coffers. This, they believe, will lead to a drop in sales of their products.
Irish Exporters Association (IEA) chief executive John Whelan said the effects of the last increase in Vat, from 15 to 17.5 per cent, six months ago, was already being felt, and the new increases would affect consumption further. ‘‘The main indigenous market here exports mainly to the UK – and a large proportion of these products are food and drink," said Whelan. ‘‘The Vat hike could depress demand for these – but we are hoping international markets will perceive it as a measure that’s good in the medium-to-long term for the economy, and this will cause sterling to strengthen." He added that he hoped the exchange rate would stabilise at 80 cent to the pound, as most exporters worked out their margins at this rate. ‘‘For the five years prior to 2008, it stayed around this rate. If you take the situation at the back end of last year, when there was a rate of around 0.83 cent, it adds €1.5 billion in costs for Irish exporters. This cannot be recouped by price increases in a recession," he said.
However, the Vat increase could also work in the economy’s favour – by continuing to dampen enthusiasm for cross-border shopping, and reducing the price margins between Irish and British products. Whelan believes the new 20 per cent rate may also help in the creation of a more level playing field for Irish and British products on sale side by side in supermarkets, or other outlets.
Retail Ireland, the representative body for the retail sector in Ireland, described the Vat increase as a further ‘‘nail in the coffin’’ of cross-border shopping. According to director Turlough Denihan, the phenomenon has slowed significantly in the last six months, compared to a high at the end of last year, when 250,000 households were travelling North to buy cheaper goods. ‘‘The 20 per cent reduction in alcohol excise here, that [Minister for Finance] Brian Lenihan introduced last December, has also helped that. In 2008, 10 million litres of beer and 800,000 litres of spirits were purchased in the North by residents of the Republic." He said that this had been ‘‘a huge issue’’ for the retail sector.
‘‘However, sterling has strengthened by six per cent against the euro since the beginning of this year and, by next January, the British Vat rate will have jumped by one third in 12 months," he said. Denihan also highlighted the fact that sales volumes are on the increase in Ireland. They were up almost 4 per cent since last April although the value of these is not yet on the rise. He believes the growth in sales is partially attributable to less people travelling North for goods. ‘‘Our members have also cut their prices, with clothing and food down 12.5 per cent for example. A recent survey we did showed businesses have become significantly more positive in their outlook. The increase of Vat in the British budget is just another factor that will boost the recovery further," he said.
However, the Alcohol Beverage Federation of Ireland (ABFI) was more cautious in its outlook about the implications of Britain’s emergency budget. One of the only taxes not adjusted by the new coalition government was excise duties. ABFI director Rosemary Gareth said the British Vat increase would make ‘‘little difference’’ to the rate of cross-border purchasing of alcohol in the short term. ‘‘While the extremely welcome decision by the Irish government to reduce excise by 20 per cent in last December’s budget has undoubtedly reduced prices and encouraged southern consumers to buy their alcohol locally – thus providing a wider stimulus to the economy – our high levels of alcohol taxation remain a major competitive threat for the Irish drinks industry and the wider economy," she said.
Drogheda Chamber of Commerce director Patrica Rooney said she was delighted to see ‘‘that if our rate couldn’t go down, at least theirs went up’’. Rooney believes there is a real perception among consumers about the disparity in Vat rates, which is currently 3.5 per cent, and will be just 1per cent by January 4 next year. ‘‘Businesses are still struggling, but they seem to have reached a plateau, and at least things are not getting worse. Traders have adapted to the new reality. Typically, about one in four of those who live in the border counties travel to the North to shop at least once a year," she said. ‘‘There are still many vacant retail units in Drogheda and the live register has increased 20 per cent over the last 12 months. It’s time now to market what we have here – the price-drops and value to be had. I do feel the fact that the new British Vat rate comes into force in January could be a trigger for a bumper Christmas cross-border shopping spree.
Our retailers have fought hard and a level playing field will help them further now," she said.
