This article was first published in the online LinkedIn newsletter The Illustrated Brief . The accompanying illustration is by the author Ashleigh Neill.
Ireland reduces its value-added tax (VAT) rate from 13.5% to 9% across cafes, restaurants, catering services, and hairdressers. Despite warnings from the IMF, which has urged the Irish government to raise revenue from income tax, VAT and property tax to reduce Ireland’s reliance on multinational corporation tax windfalls.
It is one of those rare days in Ireland where you can enjoy your cappuccino al fresco. Sitting outside a family-run coffee shop in the small square of my hometown in Listowel, County Kerry, I found myself musing, as one does, about what else but fiscal policy.
Specifically, the spectacular lobbying efforts of the Restaurants Association of Ireland and the Irish Hairdressers Association regarding VAT exemptions.
A Shifting Rural Landscape
Some thirty years ago, the small town of Listowel boasted around fifty pubs. Having spent many an evening working as a student bartender through college, I used to listen to local characters regale me with tales of days gone by and long-remembered shenanigans. Lending a pen, locals would see if they could recall all the names of the pubs that had once flourished in the town. Today, only twelve of those pubs remain.
Instead, the landscape has made way for cafés, with two new cafés already opening this year. The town has also seen an increase in recent years in hairdressers, barbers, and beauty salons. A trend that is mirrored right across the state.
Budgeting in a cost-of-living crisis is a tricky blend to get right, and the latest policy directions regarding VAT reductions are certainly not to everyone’s taste.
The Pass-Through Illusion
The hospitality sector has long benefited from a reduced VAT rate of 13.5% compared to the standard 23% rate for services. The VAT exemptions have been introduced to encourage employment and alleviate cost pressures on small businesses.
It is highly unlikely that these tax reductions will be passed on to consumers in the form of lower prices.
- The Margin Squeeze: The exemption is unlikely to prove a massive structural benefit, as small businesses grapple with minimum wage increases, mandatory pension contributions, rising commercial rates, and rent.
- The Sectoral Divide: Traditional pubs that do not serve food, which make up the vast majority of drinking establishments, are entirely excluded from this specific food-based VAT break. Yet they face the same cost overheads and are also vital sources of employment and social outlets, especially in rural communities.
Implication for Financial Stability
While the economic rationale for introducing VAT exemptions is heavily debated, the fiscal cost is clear: the move is set to cost the State an estimated €681 million in foregone tax revenue per year.
This brings us to the deeper, systemic issue facing the Irish economy: concentration risk.
As my illustration depicts, Ireland’s fiscal standing rests heavily on three multinational companies (widely understood to be Apple, Microsoft, and Eli Lilly), which make up 50% of all corporation tax in Ireland.
The Irish Fiscal Advisory Council (IFAC), the state’s independent fiscal watchdog, has repeatedly raised concerns over the rate at which this tax windfall is being spent. Ireland’s current revised medium-term fiscal plan shows the fastest net spending growth in the EU. Most corporation tax receipts are spent rather than saved. Only €1 in every €6 collected will be set aside, with the remaining €5 allocated to ongoing spending commitments.
The Central Bank of Ireland’s latest final stability report highlights that budget surpluses depend on corporation tax revenues. Without these receipts, the budget balance is projected to remain in deficit, leaving the State exposed if the global economy weakens or multinational activity is affected.
My illustration tries to capture this precise tension: the political desire to support local businesses (albeit a specific subsection of them) with permanent tax relief, while completely ignoring long-term structural fiscal warnings.