THE GOVERNMENT has ruled out a call for a 1 per cent cut in the lower VAT rate, which Fine Gael claims could be funded by a windfall levy on carbon charges paid to electricity companies.
Taoiseach Brian Cowen told Fine Gael leader Enda Kenny that lowering the VAT rate from 13.5 per cent to 12.5 per cent would cost about €400 million a year and “the likelihood is that any reduction in the VAT rate would be absorbed by retailers and wholesalers and not passed on to consumers”, he said.
“That was the experience of one of my predecessors, when he reduced the 21 per cent VAT rate to 20 per cent in budget 2001. He subsequently had to reverse that decision.”
Mr Cowen also ruled out imposing a windfall levy on electricity companies, who receive a carbon charge payment from consumers. He said “it is important to point out that the revenues available to the ESB and others are factored into their capital programmes for providing alternative energy sources”.
His views were later echoed by Minister for Finance Brian Lenihan during a Fine Gael Private Members’ debate in the Dáil, introduced by Simon Coveney, the party’s Energy and Natural Resources spokesman.
Mr Coveney had said there was a need for “new thinking” on the energy sector and the economy as a whole. He pointed out that consumers were paying carbon charges on their electricity bills, but until 2013 power companies “have been allocated the vast majority of carbon allowances for free by the Government”.
The Cork South-Central TD said that “assuming the price of carbon allowances will average €25 per tonne in 2008-2012 without Government action to recoup the windfall, generators could make unearned gains of almost €1.6 billion over this period, €315 million a year.”
He said Fine Gael believed it was wrong that power generators, whether public or private, “make unearned windfall gains as a result of this system at the expense of consumers”. Mr Coveney added that the electricity regulator had estimated that electricity in the Republic was 10 per cent higher than if the carbon cost was not factored into the price.
He believed that a 1 per cent cut in the VAT rate would have a “positive impact on the economy and hard-pressed homeowners who are struggling to meet their bills”. It would support overall competitiveness by reducing inflation and would give a direct stimulus to the domestic economy.
Mr Lenihan said, however, that “even if the reduction was passed on in full to consumers, the impact on the consumer price index would only be 0.18 per cent”.
He believed, however, the suggestion that the 1 per cent would be passed on to the consumer was “highly optimistic, not to say unfounded”.
Mr Lenihan also highlighted that there might be “little or no net gain to the Exchequer” from VAT on fuels, as “spending in the economy is reallocated to petrol and other oil products and away from other VAT-liable spending”.
The debate continues today.
