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SO, THE BUDGET for 2012 has been announced. Very little was a surprise, given that various Ministers have been leaking the long-list of proposed cuts over the past two months or so. It’s just a question of what made the short-list this year, and what will be postponed for future years.
On the taxation side, there will be no change to the income taxation system but instead, VAT will increase. In fact, we knew this already as Ireland’s budgetary plans were, per the terms of the EU-IMF loan, sent to those lending to us so they could be kept abreast of their borrower. Unfortunately, Ireland operates under a bizarre system of national budgeting, where the Minister of Finance is supposed to pull rabbits out of hats on Budget Day to the oohs and aahs of the media (and perhaps the public). So the Irish public was none too impressed to learn many of the details of the Budget via the German parliament.
The reported increase in VAT rates, two percentage points, led to a rush of people decrying that this would be like 2009 all over again, with traffic jams on the way to Newry, as Irish consumers exploit arbitrage opportunities between Northern Ireland and the Republic. Clearly, if such a stampede were to happen again, more retail jobs would be at risk.
However, what impact will the VAT rate actually have on cross-border differentials? It turns out that this sort of thinking flatters the government, in terms of the power if has over these things. The graph below takes a hypothetical basket of goods that cost €100 in late 2007 and the same, i.e. £70, in the North. By late 2008, the value of sterling had collapsed, with the euro now worth 97p, rather than the 70p it was a year earlier. That – and the VAT cut from 17.5% to 15% – meant that the Northern Ireland basket now cost just €72, whereas the Irish basket – thanks to inflation – cost €104.
Price of a basket of goods, North and South, from 2007 to 2012
With about €20 in fuel and tolls for a return trip to Newry from Dublin, you could make your money back on a weekly shop. Since then, though, sterling has strengthened somewhat, with the euro now worth about 85p. Meanwhile, VAT in the UK has risen from 15% to 20%. And whereas prices in Ireland are now only about 1% higher than four years ago, prices in the UK are over 15% higher.
The basket of goods that cost €100 both North and South in 2007 would now, after VAT increases to 23%, cost about €104 in the Republic – and about €98 in the North. Whereas you could make your fuel and tolls back with the weekly shop up North in early 2009, now you’d need to spend €400 just to break even. If inflation continues at 5% in the UK and 3% in Ireland, the gap on this basket will narrow by the next of next year from €6 to €4. To put it another way, to make a saving of €100 from a cross-border shop, you’ll need to spend €2,600, rather than just the €300 needed in 2008.
The risk to the economy from the VAT increase is not about people scooting up North and making a saving. It’s about destroying consumption, not diverting it, in two ways: firstly, it pushes up the cost of living, already a concern in relation to attracting investment into Ireland. More pressingly, it is effectively a tax that falls most heavily on poorer households.
This paper by Eimear Leahy, Sean Lyons and Richard Tol, of the ESRI, outlines the percentage of disposable income paid in VAT by different income groups. Whereas VAT is like a tax of six per cent on the disposable income of the richest households (who will be doing tax efficient things like saving in their pension and owning their own home), the poorest households feel VAT as a 16 per cent tax on their disposable income. But with Ireland’s marginal rates of income tax already so high in an international comparison, something has to be done, right?
The government thinks it’s in a bit of a bind. How do you increase taxation revenues, as it must, without affecting either Ireland’s cost of living or its competitiveness, as VAT and income tax inevitably do? Thus it has chosen what it regards as the lesser of two evils: raise VAT, not income tax.
The obvious 'third way' in all this is to tax land. It’s immobile, so it’s not going to go anywhere in response to a tax increase, nor will people’s decisions be distorted as a result. I’m hoping the €100 household charge, which is of course incredibly regressive, is only a measure to take the sting out of moving from a country with no property tax to one, like every other developed country, that does have one.
The more land – residential, commercial or agricultural – is taxed, the less income and consumption have to be taxed. Given that Ireland needs more tax revenues, it’s obvious which choice is best.
Ronan Lyons is an Irish economist based at Oxford University, and runs the Economic Research unit at Daft.ie. You can read more articles on his blog, where this originally appeared.
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here not every one in the country lives in dublin there are more roads to the border than the dub belfast road.
there are more towns to shop in ie derry,strabane,enniskillen to name a few,so give over with this dublin outlook
Who is Ronan lyons?
Sorry Ronan but you’re a stranger to me speaking from a Dublin perspective, many many people in the border counties have been shopping in the north for years, RIP OFF IRELAND hasn’t gone away you know.
To be fair there was a price comparison on TV the other day and the guy was claiming the cheapest bottle of Baileys in Dublin was E24, and in the North E22.50. My ar*e, sure its in Lidl all over the country for E16
Baileys is €15 in centra for the last three weeks shop local also trays of bud €24
Did people really spend a day travelling up to Newry to save just a few quid a week, or did they mostly buy products that were considerably cheaper up north?
E.g. if you forget about products like bread & milk where you’re probably not going to save that much, and think about booze, clothes, baby stuff etc and I bet that the average savings were much higher – and might well be now.
Look at any shop with products that have both a euro and sterling price, and I bet that you could still save a good bit of cash if you’re clever about buying the products are worth making the trip for.
that’s a good point!
I remember my aunt going on that things like booze (Christmas???), toilet roll, washing detergent, and a few othe bulky items were well worth the journey.
In Iceland and asda they have loads of great cheap christmas food. Well worth the trip.
Just order loads online from UK. Minimal delivery charges to your door and sometimes its free. No fuel wasted, no trafic jams and less VAT, whether it be from Amazon, Electricals, Clothes whatever. This Irish govenment haven’t a clue about whats happening in the real world. I reckon Noonan thinks the World Wide Web is the home of a giant spider. The idiots should be lowering VAT in an attempt to encourage spending in an already baron retail marketplace..As for buying Irish, what planet are those people on.Perhaps if you halved the greed of the price involved you might be somewhere resembling competitive sanity. Now where’s that mouse?
Amazon charge the Irish VAT rate.
It’s a pity that the headline suggests that the worries about the VAT increase are ill founded.
Is there any research out there that would show what the 2% increase will do to overall consumption?
I know the Revenue Commisioners say the govt will get an extra €670m assuming “no change in the behaviour of consumers”… but that’s just obviously ridiculous.
I’m sure Tesco know how much demand would fall if they raised prices by 2% (and because we’re in a recession, no sensible retailer would consider such a move)… does anybody know the equivalent elasticity for a VAT increase?
Noonan has admitted he doesn’t have a clue. Worst case scenario this could end up collapsing demand and losing money for the exchequer. Never mind the devastation to businesses and jobs that would cause.
Imagine the headline : “Tesco to increase prices by 2% during a recession, expect to earn 670m more in profit”.
An increase in VAT will be the staw that broke the camels back for some small retailers. Although I think this is the governments plan allowing the likes of Walmart into this country and giving them the commercial property incentive as well. I mean it’s just what Ireland needs. Although costco/tesco seem to have that market sown up. One thing Ireland doesn’t need is fresh taxes property, water, carbon, vat, income, pension levy and motor tax too name but a few. The government is intent on being the poster boy for paying off debts yet we have got nothing for doing this. Only because Greece stood up and got a 50% write down off its debt did the eu/IMF give us a bone. This latest round of austerity is just sickening the government should have set the budget when this current crisis is over, instead it when ahead like a good lapdog and will be the one pushing through the new treaty if merkozy wants it.
I couldn’t agree more, all these figures, like the property tax, assume everyone will pay it when its clear the majority can’t or won’t as they feel its a punitive tax, they are either in debt up to their ears on their property and this tax is the last thing they need or they have managed to keep their heads above water and pay their mortgage in very difficult times and feel they own their own property, why should they pay for the privilage of doing that?
As for the VAT rise, do they seriously believe people won’t still go North? Ok the figures may look like that on paper but if you go to some of the shops across the border you’ll still get bargains you simply won’t get here, my mother is 75 and a friend of hers gets her medication over the border every 3 months and saves a fortune, so do many people. Is this saving just down to the difference between the currencies and VAT? Traders in the North seem to be able to produce offers, at prices just unavailable down South. For these things alone people will still travel across the border.
It costs a lot less to fill a freezer in Enniskillen than it does in Longford and we have no tolls on the way up,any body with sense would go up there,support your local some laugh…..
Dead right Brendan. RTE did a trolley comparison and demonstrated no difference but it was staged by picking things in the south that are cheaper. People don’t by things in the north that are cheaper in the south.
Young people travel from North Longford, Leitrim, North Roscommon, Sligo, Cavan, Monaghan, Meath, Louth, Donegal, to buy cheaper beer and nothing else. Noonan just increased the duty on supermarket beer here because his constituent publicans are complaining. Beer duty and VAT will of course send more people North on booze trips. (Note: I know wine is cheaper in the south still)……
Why do the irish always elect people who lie just to get in will we ever learn…..
Because there is no other option… They are all liars.. Some enter politics with decent morals and beliefs but it seems to me this soon goes out the window when their own greed and self interest’s take over
also note to who ever wrote this there are alot of roads into the north apart from dub belfast road
I think you will find that you will find the authors name of the price is at the foot of the article. Also, he is using dub newry as and example, I. am sure that he knows that there is more than one road to the north!
They didn’t bring in the sugar tax(yet), but reading some of the posts they should bring in a freezer tax. Whoever feeds kids the muck they sell in Iceland needs their heads tested.
Iceland are opening stores all over the republic. Their stores are Mobbed with people buying their muck because they can’t afford real food. I spoke to a student last week in Clonmel (where Iceland opened recently) he said he can get two pizzas for ?1.50…he was a happy camper.
Do you know the percentage of landowners in the country? After the housing boom surely that rate is quite high, and possibly higher than every other country that does have this tax. Many struggling with mortgages would see this as further punishment for owning a house that is in negative equity.
Such a load of whinging over 2%. Two bleedin percent!! My mortgage just dropped. Im a happy camper :))))
its not just about 2% increase in VAT , its the accumalative burden of the fuel increase, possible health insurance increase of 50%,as VHI have indicated, the across the board 100E for every property.This charge itself opens the door to annual increases in line with inflation, up but rarely down.On the ‘green’ issues we have car taxation increasing yet alcohol stays the same.So lets continue to drown ourselves with ‘rye’ smiles and celebrate! Cigs are up as it allows ministers to say they know they are aware of the health implications and are doing their bit! Oh , taxing the booze would have been just a step to far. In reality just rubber stamping the rumour that this great isle does have a drink problem!
well 2% of my turnover in an additional tax means I will have to let staff go. I won’t be passing on the increase to customers.
Seems the drinkers are somewhat offended by my drinking comment, seems the truth hurts and just clicking the thumbs down without any real reply or comment shows the possible effects of drinking. At least have the b***s to speak up. If the government had the peoples health in mind they have balked at the better option to put up the alcohol price, rather than trying to take money away from the disabled, funny enough they have backed off from that now, rightly so. But where do they make up that deficit? Wake up ` thumbs down` , are you really sure its ok to up car tax, cigs, social charge,VAT etc, but leave the booze alone?
Really don’t understand heading north to shop save very little done it a couple times as i was asked to bring couple up petrol and price diff dosen’t make it worth while if u lived in dundalk maybe be so but if it saves me a fiver rather leave it here then send it to the UK! And if you shop around ie bottle Baileys u can get it for 15 down here!
Baileys was £7 in Asda. You buy a big shop there and you’ll save a couple of hundred and the fuel. No Brainer if you have a tight budget. And if not , keep paying the big wedge
Believe me if you have a big family that like frozen food it pays..
as I live in the southwest the whole shopping in the north debate is largely irrelevant to me. however having said that, it often occurs to me that unless you are within a few miles of the border a trip up north would take most of a day. now some people might have a day or half day to spare every week but in my case I have better things to be doing with my kid than spending half the day or more with him strapped into the back of the car every week.
Might be thinking of moving up there as there might be jobs instead of this banana republic …. No vrt tax ,fuel cheaper .speak English ,i would only be 35 mins away from mates .worth thinking about .
Well in the article on fuel and road tax increase it states that fuel in the north will now be cheaper than in the south. So that is another incentive for people to spend cross border, ” I’ll go up for the shopping and may as well fill the car while I’m at it…” Even the illusion of saving is a very powerful draw.
Dont fill up In newry, most of the pumps have laundered diesel!
Ask anyone who drives up there, they won’t fill up in newry.
Fuel is still cheaper in the south anyway
Cavan, Monaghan, Louth, Sligo, Leitrim. The majority people in these counties can be across the border in less than a hour. Its businesses in these counties that will be hit by this.
Amazon.co.uk. Straight to your door. Will ye ever cop on some of ye.
As amazon does a lot of business with Irish customers they are VAT registered and charge Irish VAT rates to Irish customers.
The issue is not just whether the VAT rise will drive people north, but how much of their regular Christmas shop people who are planning to go north will do across the border.
At its worst, people were nipping across the border to stock up on booze for a house party. Now, to justify the expense, people will have to “spend more to save more” in effect.
Shopping in the north is cheaper for a lot of items clothes, toiletries, meat and toys for example. Consider these alone and it is worth the trip. However my fear is the return of the petrol shopping as of this morning petrol is cheaper in Asda Enniskillen than Cavan or surrounds. Only by about 0.5c but the giant that is Wallmart/Asda will dive on this soon and drop by 2p a litre or offering 5p a litre off with £100 shopping receipt making it worth your while to come for petrol too. Diesel is still more expensive but the gap is getting smaller.
As an Enniskillen man I welcome the southerners coming up to shop. but I wish that a lot more of them would explore Enniskillen and Fermanagh beyond the carparks of Asda and Tesco. Please go into the town and spend your money there. I remember 2 years ago I managed to spot car reg from all 26 southern counties on a single saturday afternoon in the run to christmas in Asda car park. I would be great if they explored Fermanagh and told people how great our county is.
I shop up north once a month or every month.I live in Roscommon 1hour 15 from Enniskillen.I don’t take a day off work why would anyone take a day off work to go shopping.Prices are still cheaper on a host of goods and still enough to justify the 25 euro fuel cost.White goods are far cheaper.Eg 32 inch LCD TV 236 euro in Enniskillen same spec in the Republic cheapest i could scource 299 euro this will only widen after Jan 1.Also preception is a problem people will percieve the government is bleeding them dry and will feel denying the exchequer as a way of giving the two fingers.There is still no shortage of southern reg cars in the various car parks in Enniskillen and this was before the 2% vat announcement.The government would do well to rember people are patriotic,but their first loyality is to the family.
Just beware folks that LCD TV from the North is no good for digital SAORVIEW so unless your using it with sky or upc its no good here after analogue sitches off in 1012
*switches off in 2012 – damn I’m gettin old n blind
Another bit of toothless drivel from our Ronan the ”Scholar”
I am British and I say ‘lol’ to how the Irish economy is messed up. Then again ours isnt really that brilliant either. Basically if it wasnt for London, we’d be poor as a rats ass.
Meh, it’s still a regressive and will drive up costs for businesses and people.
have your say