The special 9 per cent VAT rate for the hospitality sector is likely to be slightly increased in the October budget, Taoiseach Leo Varadkar has indicated.
Mr Varadkar outlined a number of budgetary priorities in the Dáil on Wednesday, and strongly indicated the 9 per cent rate will be changed, but a return to the usual 13.5 per cent rate was not being contemplated this year.
The lower rate was introduced during the economic crisis to encourage tourism and to boost the hospitality sector. It also applies to newspapers.
There have been calls in recent years to restore it to its original level, particularly against a backdrop of a strong tourism sector and rising prices in the hospitality industry, such as hotels.
It has been estimated that fully restoring the rate would bring in an additional €500 million in extra tax for the State, but Mr Varadkar was cool on the idea.
He was responding to Donegal TD Thomas Pringle, who raised difficulties being encountered by "local coffee shops, hairdressers, butchers, furniture shops and newsagents, businesses that will never be primed for export".
“These are the businesses that are largely left outside Government supports, yet are the drivers of local economic growth, creating sustainable local employment across rural communities and helping to maintain rural populations as a result,” he said.
Mr Varadkar gave some examples of Government policies, including the special VAT rate.
“There are many people in this House, particularly among the parties of the left, who want to reverse it and increase the rate by 4.5 per cent.
“It would be a mistake and doing it in one fell swoop would do real harm to small business and to employment, particularly in rural areas.”
Tax cuts
Minister for Finance Paschal Donohoe has said he has only €800 million to spend on new tax cuts and spending increases in the budget. He is likely to agree some revenue raising measures with Fianna Fáil, whose support is needed to pass the budget, to help bring the money available to him to more than €1 billion on budget day. The package has to be split on a 2:1 basis between spending increases and tax cuts.
Government sources have said that increasing the special VAT rate or raising carbon taxes were being considered to achieve this aim.
Galway West Independent TD Noel Grealish also asked what measures Mr Varadkar will consider for inclusion in the budget for the "squeezed middle".
The Taoiseach said he wanted, among other things, to again increase the threshold at which people pay the higher rate of income tax and help with childcare costs.
"The average person working full-time in Ireland earns about €44,000 a year yet on €36,000 they hit that higher rate of income tax. It is far too soon," he said. "I would like to see fewer people paying that highest rate of income tax and I want to see people paying less of their income at that higher rate."