TAOISEACH BRIAN Cowen ruled out a reduction in VAT rates. He said that as part of a fiscal stimulus package, the UK government had decided to reduce its standard VAT rate from 17.5 per cent to 15 per cent on a temporary basis.

"The exchange rate is the determining factor rather than the VAT rate," he added.

Labour leader Eamon Gilmore asked if he would change the Republic's VAT rate. "No," replied Mr Cowen. "The Opposition opposed various taxation and expenditure measures that we introduced to address the budget deficit on the current side."

Earlier, Fine Gael leader Enda Kenny asked Mr Cowen if he was prepared to look at the question of a reversal of the 0.5 per cent increase in the VAT rate, which was "crucifying" the retail sector.

Mr Cowen, who was replying to Opposition leaders' questions in advance of the publication of the exchequer figures, said that while the UK's standard VAT rate would have an impact on the price differentials between North and South in respect of some goods, it should be pointed out that the UK had increased excise duties on alcohol, cigarettes, petrol and diesel to offset the 2.5 per cent reduction in VAT on those items.

Approximately half of the value of goods and services purchased in the State were not subject to the standard rate of VAT and, therefore, unaffected by the change, said Mr Cowen.

"For example, all Government services, local authorities, hospitals, schools, the majority of foodstuffs, oral medicines, books, children's clothes and so on are subject to a zero VAT rate," he added.

"Housing, electricity, gas, domestic fuels, restaurant services and labour-intensive services, such as hairdressing and shoe repair, have the reduced VAT rate of 13.5 per cent applied to them."

Mr Cowen said there would be a deterioration on the projected 5.5 per cent deficit because of the slowdown and the fact that the reduction in taxation concerned property-related taxes and other taxes that performed disappointingly.