Swings and roundabouts: hospitality VAT reduction means little or no income tax cuts in budget

Budget
season kicks off earlier these days and the holding of
the National Economic Dialogue (NED)
this week – where interest groups put their case - has sounded the starting gun ahead of October's package.
Over recent years governments have favoured using scarce resources for extra spending over lower taxes. And this is set to continue.
This means less wherewithal for tax cuts – and here the promised return of the VAT rate for the hospitality sector to 9 per cent looms large.
Costing over €750 million a year, it would eat up most of the spare cash for tax reductions. And this will be a big political issue. Because the trade off for this is likely to be much less by way of an income tax package for households.
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The VAT move would leave less cash for what are referred to as income tax 'cuts' – but are really adjustments to the income tax system to take account of inflation.
If income tax bands and credits are not adjusted for inflation each year, then taxpayers end up seeing a bit more of their income taken in tax – for example with due to a higher proportion of their income being payable at the higher 40 per cent rate.
It is what is called 'fiscal drag' in the jargon and is one of the most powerful hidden tax increases available to any government. Just by doing nothing, the tax burden creeps higher.
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Central Bank researchers found
that the average income tax rate on all incomes increased from 24 per cent in 2021 to 24.9 per cent last year in 2023.
Much of this is due to more people having higher paid jobs but, according to the bank, fiscal drag – the lack of full indexation of the income tax system for inflation is also factor. Some tax relief has been given in recent budgets, but not always enough to take account of wage inflation.
And, as things stand, this may continue into 2026. The mood music is interesting. At the NED,
Tánaiste Simon Harris spoke of the " solemn commitment' the coalition has given
to reduce the hospitality rate back to 9 per cent. The lower rate had applied from 2011 to 2019, when it was increased back to 13.5 per cent.
The rate was then cut for all hospitality business on November 1st, 2020 in response to the challenges faced by these sectors during the
Covid-19
pandemic.
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The expiry date was extended a few times, but the rate finally returned to 13.5 per cent on September 1st, 2023. Department of Finance officials finally thought they had won the battle – but then the general election came along and a big lobbying campaign from the sector.
The subsequent Programme for Government
said: 'The Government will bring forward measures to support SMEs (small and medium enterprises), in particular the retail and hospitality sectors, acknowledging the increased cost pressures on these sectors and this will entail changes to VAT, PRSI and other measures.'
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While the return to 9 per cent was not mentioned specifically, we were told that the two big parties had agreed that the rate would be returned to this level for 'food-based hospitality'.
This means that cafes and restaurants would get the lower rate, but hotels would not – at least in relation to their accommodation services.
Splitting in this way may not be easy – the Revenue Commissioners, according to previous Dáil debates, cautioned about 'administrative and operational difficulties'. What happens, for example, to a small Bed & Breakfast which charges one amount for an overnight stay and 'the full Irish?' How is the VAT rate apportioned?
Nonetheless, according to Harris, the die is cast. The problem is that even restricting the cut to food-based hospitality will be costly and take up the vast bulk of any likely tax package.
Food-based hospitality may be main VAT beneficiary.
Department of Finance officials estimated last year that the annual cost of cutting the 13.5 per cent rate to 9 per cent was €764 million, while restricting the cost to food-based items would cost €545 million.
The Department, wanting to stop the return, warned against it
in last year's pre-budget advisory papers
, saying it would represent an " enormous fiscal transfer of taxpayer's money to the sector which the evidence available at present does not support.'
Apart from the cost, the Department said that recovery in consumer spending should benefit the sector, where employment had already returned to above pre-pandemic levels. Ireland's VAT rate was not out of line, they argued, as '14 EU countries have a VAT rate of 12 per cent or higher on food services'.
The sector's case is also well known – its representatives point to a large number of closures and the financial pressure on SMEs from official measures including a rising minimum wage, and – from next year – pensions auto enrolment, though some extra impositions have been delayed.
But the political choices for the Government are stark enough. The total package for reducing tax in the budget may not exceed €1 billion by much, if at all. The VAT package would thus consume a significant amount of this.
Other SMEs may wonder why they are being left out. And households may see a very restrained income tax package, which is unlikely to keep pace with wage inflation.
As Minister for Finance
Pachal Donohoe
said somewhat delphically at the NED: 'If we decide that we are going to make a particular set of decisions and investments, that means there are other things that we will not do.'
With uncertainties rising, Donohoe and Minister for Public Expenditure
Jack Chambers
have both underlined the need for caution.
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Some 1.1 million earners in Ireland do not pay income tax or USC, tax institute claims
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They are likely to spell out to colleagues the trade-offs from the VAT cut, particularly in terms of scope for income tax measures. Trade-offs do not imply that a particular policy is " right or wrong' but focus on what is called the opportunity cost – the price of not being able to use the money elsewhere.
The VAT cut is unlikely to provide much to consumers, bar perhaps holding down the rate of inflation they face while eating and drinking out.
On the flip side, it will limit the cash for adjustments in income tax bands and credits at a time when many budgets of lower and middle income households are tight.
Fiscal drag will take its toll. And households will also feel the pinch from the ending of the once-off universal supports in energy credits and double child benefit - assuming that the Government holds to its indications that these will not be repeated.
It is impossible to know how the world will look when the budget is presented in October. But whatever happens the first budget of the new administration, coming after last year's pre-budget giveaway, is going to be far from easy to agree on. Prepare for summer sparks in the Cabinet.

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Irish Times

2 hours ago

• Irish Times

Letters to the Editor, June 21st: On public service, the cost of living and sunscreen

Sir, – A stream of commentary in the columns of The Irish Times has crystalised a sobering truth, that ' Our administrative and legal procedures simply cannot unblock the logjam in time to prevent serious damage ', as Michael McDowell put it. ('There is a way to break the logjam in infrastructure', June 18th). Before last Christmas, Patrick Honohan, former governor of the Central Bank, wrote in an Irish Times article: 'The issue is not so much what the aims of public policy should be... the problem has been in delivery'; and recently an Irish Times editorial spoke of our 'sluggish' administrative processes. A simple example illustrates the depth of this dysfunction: a friend of mine, an experienced property expert who spent much of his career in the public sector, repeatedly attempted to draw attention to suboptimal performance in a prominent State body (mirroring wider poor performance manifest in the ballooning housing crisis) and to offer solutions. As a last resort, he wrote to Taoiseach Micheál Martin in January and, after several reminders in the meantime, he finally received a reply this week, six months on, saying that his letter had been forwarded to Jack Chambers, Minister for Public Expenditure, Infrastructure, Public Service Reform and Digitisation. The Office of the Taoiseach publishes a national risk assessment annually which sets out the '24 strategic risks facing the country in the short, medium and long term'. READ MORE Pandemics, war, housing and social cohesion are mentioned, for example, but never mentioned in this annual assessment is the overarching risk, which if not addressed, compounds all other risks, namely, administrative incompetence and inertia. The Civil Service is not up to the job. Just for example, with 15 grades and associated sign-off authorities above the level of Executive Officer, and several more below EO, Civil Service structures are not fit for purpose in this day of digitisation and AI; reasonable public expectations of personal accountability, with consequences, are thwarted when things go wrong, be it in the national children's hospital, nursing homes, the Office of Public Works, policing or the degradation by nitrates of Our Lady's Island lagoon. To achieve progress on his extensive portfolio of responsibilities, radical public service reform has to be front and centre for Mr Chambers. – Yours, etc, EDDIE MOLLOY, Rathgar, Dublin 6. Rent pressure zones Sir, – While most attention has focused on the likely impact of changes to rent pressure zones (RPZs) on future rents, little consideration seems to have been given to their consequences for house prices. Firstly, housing and apartment development land prices will rise on the basis that building rental homes will be perceived as having become more profitable and this will lead to increased house prices, even if other building costs don't also increase. Secondly, as long-term rental yield expectations will have been increased, they will lift the capital value of underlying assets and progressively influence the market for not-for-rent new and second-hand homes. As always, it is not just rental income that's important in property investment but the 'total return' which includes capital appreciation determined by purchase-sale market conditions and timing. Thanks to the RPZ changes, these have suddenly become more favourable for landlords and builders and less so for buyers and renters. – Yours, etc, BRIAN FLANAGAN, Blackrock, Co Dublin. The high cost of living in Ireland Sir, – Your front page article ( 'Ireland second most expensive country in Europe ' June 20th), will come as no surprise to anyone holidaying or on business in mainland Europe this year. We have just returned from Cyprus where a bottle of decent supermarket wine was €5.50 (€10 here), 20 cigarettes were €4.30 (€14.50 here) and a litre of unleaded diesel was €1.32 (€1.74 here in rural Donegal). Against an average monthly rent of ¤2,000 in Ireland, €850 a month could get you a furnished two-bed apartment in Paphos with access to a pool and a five-minute drive from the beach and all shopping amenities. Of course, wages are lower (minimum wage of €6.60 an hour there, €13.50 here) but that's irrelevant if you are working from home for a multinational – your salary is the same wherever you are, or like us, you are on a fixed pension income. Around 76 per cent of Greek Cypriots speak English, all government documents are in both languages, they drive on the left and you can keep in touch with news in English from British Forces radio or the English edition of the Cyprus Mail. Annual sunshine hours are 3,000 against 1,500 in Dublin. After 11 years in Ireland we've had enough and are planning a move. If it wasn't for the cat, we'd be there now. – Yours, etc, KENNETH HARPER, Burtonport, Co Donegal. Sir, – Eurostat's finding that Ireland is the second most expensive country in Europe came as no surprise. Donegal friends of ours recently returned from Venice, and when I asked if it had been expensive, they replied: 'Not really – after living in Ireland, Venice seemed quite reasonable.' When Venice starts to feel like a bargain, something has gone badly wrong. – Yours, etc, ENDA CULLEN, Armagh. Sir, – Your recent reporting on Ireland being the second most expensive country in the EU is a timely reminder of the factors driving up costs for households and businesses. Among these, fuel stands out: not because of global market volatility, but because of Irish taxes. We believe Minister for Finance Paschal Donohoe should establish an expert group to review how fuel for transport and home heating is taxed. Its remit should be clear: It should secure fair revenue for the State, support the shift to renewable energy and protect vulnerable consumers from punishing costs. Current policy hits hardest those with no alternative. That's not sustainable – environmentally, economically, or politically. – Yours, etc, KEVIN McPARTLAN, Chief executive, Fuels for Ireland, Dublin 1. Sir, – Your article (' Ireland's grocery prices are still soaring. How can that be? 'June 16th) cites many reasons for the huge grocery price hikes which we've all seen in the past year or so. Aside from geopolitical events, there is one development that I have noticed in all our local supermarkets over the past year: there has been a huge change in the way supermarket food in particular has been displayed. Now acres of plastic doors have been installed for refrigerated and frozen goods. Inside these cabinets every item of food is presented in plastic or aluminium containers and the food is then covered in literally kilometres of plastic wrap. Potatoes, carrots and even onions are in plastic bags, mushrooms, tomatoes and fruit are in plastic trays shrouded in film. Are we all paying for these plastic doors, the food containers, the cling film? I would like to know how much the packaging contributes to the increased costs. We are offered no choice on whether to accept it or not. I would also like to know whether there are any health risks to us from all the plastic. Are we going to be able to recycle all this packaging? I weighed two washed and emptied trays: one plastic (27 grammes), the other aluminium (23 grammes). Our waste company accepts no aluminium trays for recycling, which presents an additional problem, as one aluminium school lunch tray arrives into our house every weekday. I share the outrage of Pricewatch's readers, but it's not just each individual family budget that's being affected. The cost to our climate is going to be heavy: the CO2 generated by manufacture of aluminium and plastic is only one part of it. Washing the items to make them fit for recycling takes energy (which we pay for). More CO2 is then needed to cart the stuff to a central recycling facility, where even more fossil fuel is needed to recycle it. As for the plastic doors, I reckon their lifespan would be 25 years at most, which gets us to 2050. I wonder whether there is any plan to dispose of or repurpose them. It doesn't appear that the supermarkets are taking climate change seriously. – Yours, etc, MARY SIKORA, Rosscarbery, Co Cork. Child poverty is not inevitable Sir, – The latest child poverty monitor from the Children's Rights Alliance is not just a wake-up call, it's a national shame. In one year, more than 45,000 more children in Ireland have been pushed into consistent poverty, bringing the total to nearly 103,000. This is not a statistic. It is a searing indictment of political choices, public apathy, and a system that continues to fail our most vulnerable: our children. Poverty is not inevitable. It's the result of policy decisions that too often favour economic metrics over human dignity. Today, children account for nearly 40 per cent of those in consistent poverty. Thousands go to bed hungry, live in insecure housing, and miss out on the most basic joys of childhood. This, in one of the wealthiest countries in the world. 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There are things to envy about the Australian way of life, skin cancer is not one of them. – Yours, etc, BEN AVELING, Ranelagh, Dublin. Nuclear weapons and disarmament Sir, – How can a country with nuclear weapons insist that another country should not have them? The Nuclear Non-Proliferation Treaty (NPT) is signed up to by 191 countries, including five states that have nuclear arms. This treaty, as well as aiming to prevent the proliferation of nuclear arms, looks to the disarmament of those weapons already in existence. As far as I am aware no such disarmament has taken place since the putting in place of the treaty in the 1970s. Don't those with the power to disarm nuclear weapons not know of the utter devastation caused by the atomic bombs in Hiroshima and Nagasaki, or of the still evident effects of Chernobyl? No country should have nuclear weapons. The fact that some countries do have them causes others to develop these weapons. Can the double standard be stopped and a serious effort made to comply with the aims of the NPT to stop both proliferation and disarm already existing weapons? The consequences of not doing so are unthinkable. – Yours, etc, MARY FITZGERALD, Terenure, Dublin. EuroMillions dejection Sir, – Unlike Brian Cullen (Letters, June 20th) I had a longer period of excitement as I didn't check my tickets until I heard where the winning ticket was sold. My wish always, if it's not me (we have to live in hope!), is the winner is someone who needs it, remains in good health, takes the best of advice and puts their winnings to good use and gives to worthy causes. Again, unlike Brian, 'who just has to go and buy another ticket', I wonder is it some sort of post big jackpot Lotto dejection/ depression that I did not purchase a EuroMillions ticket in my local Centra this morning as the EuroMillions jackpot is ONLY ¤17 million tonight! – Yours, etc, JOE WALSH, Dublin.

Irish Examiner

2 hours ago

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Housing commencements fall to 10-year low for the month of May

Home building has hit another dismal low-point, with new data confirming that last month's housing commencement figures were worst seen in May for 10 years. Last month, housing commencements - the number of new residential projects that have officially begun construction - were less than half the number of May last year. With the exception of May 2020, when covid-19 shut the construction sector, the May 2025 figure is the worst since 2015, with just 1,024 homes getting underway. Department of Housing statistics show that, in the first five months of the year, just under 5,000 homes have been officially commenced in Ireland, set against an initial government target to deliver 41,000 homes. Minister for housing James Browne has said this target is now 'not realistic' and that 'we're coming off a much lower base from last year than was expected'. The latest figures come as thousands of people are set to participate in a Raise the Roof protest at the National Monument in Cork City on Saturday, with trade unions and opposition parties urging the public to turn out to highlight the impact of the housing crisis on society. A commencement is a formal notice a developer must lodge to notify that that construction or a significant alteration to a building is beginning. There is no penalty if the work is never undertaken. Although it had been seen as an indication of how many homes would be built in the short-to-medium term, doubts have been cast on the reliability of these statistics, given a flood of notices were lodged at times last year prior to the expiry of Government incentives. Nevertheless, the fall in commencements to levels not seen since before the pandemic is viewed as a negative indicator of housing supply. The Central Bank has forecast that just 32,500 new homes will be built this year. Separately, the Central Statistics Office (CSO) said on Friday that the volume of building in the residential sector fell 10.6% in the first quarter of 2025 compared to the same time last year. Sinn Féin's housing spokesperson Eoin Ó Broin said the drop in housing commencements 'isn't surprising news'. Minister for housing James Browne has said he is committed to enacting a 'step change' in the housing department and will clear 'the dead wood out of the way so that homes can get delivered'. Photo: Leah Farrell/© 'It's why the Central Bank have revised their estimates and appears the Government will miss their targets not just this year but in 2026 and 2027 as well," he said. 'There's still an ongoing delay in the approval of vital social and affordable housing projects, and I suspect this accounts for a significant proportion of the shortfall in commencements. There is far too much bureaucracy and red tape.' Minister Browne has said he is committed to enacting a 'step change' in the housing department and will clear 'the dead wood out of the way so that homes can get delivered'. A spokesperson for the Department of Housing said the dip in commencement notices in the early months of 2025 "is not unexpected given the extraordinary number lodged in the last two years in response to Government measures to accelerate supply, principally through the Development Levy Waiver and Water Connection Rebate – notices were lodged for almost 102,000 new homes in 2023 and 2024 combined". The lower number of notices lodged over the first five months of 2025 likely reflects a shift in focus in the construction sector to progressing the homes already in the pipeline, they added. "Feedback from the sector suggests significantly increased activity on sites around the country – the Department of Housing is working with local authorities to gauge the level of activity currently underway in respect of the notices received in 2023 and 2024. Our initial analysis suggests almost 90% of the associated sites have been activated so far, auguring well for the completion of many of these units in 2025 and 2026."

Irish Times

6 hours ago

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AG says he cannot help on legal query over Shannon flights that may aid Israel's Gaza war

Attorney General Rossa Fanning has told the Social Democrats that he is not in a position to assist after the party appealed to him to check whether Irish policy on flight inspection at Shannon Airport is consistent with EU customs law. The party's foreign affairs spokeswoman Patricia Stephenson had previously called on the EU anti-fraud watchdog, OLAF, to launch an investigation into the inspection of flights into Shannon which she said may be facilitating Israel's bombardment of Gaza . She also wrote to the Attorney General, along with her party colleague Gary Gannon, asking whether Irish policy is consistent with the State's legal duties under both EU law and the Genocide Convention. In a response, Mr Fanning wrote that while he appreciated the party had written to him 'with the public-spirited concern of conscientious members of the Oireachtas', he was unable to assist as his constitutional role 'does not extend to providing analysis of legal matters to individual members of the Oireachtas'. READ MORE He said that furthermore, 'it would be neither appropriate, nor in accordance with my legal position, for me to act as a conduit in bringing such concerns to the attention of the Government'. [ Ireland seeks 'legal clarity' over Shannon stopover for US deportation flights Opens in new window ] 'As members of the Oireachtas, I trust you will have the opportunity to express to Government directly the concerns you raise in the correspondence to DG TAXUD [Directorate-General for Taxation and Customs Union] and OLAF.' The Social Democrats have said there is credible evidence that military contractors and private aircraft carrying dual-use goods are moving through Irish airspace and Irish territory en route to Israel. Ms Stephenson has previously said that under EU customs law, Ireland is required to carry out risk-based inspections. 'That means prioritising flights operated by arms brokers or those on known weapons trade routes. That's what the law says - and right now, Ireland isn't following it,' she said. [ New aircraft inspection system planned to prevent illegal transport of weapons through Ireland Opens in new window ] Speaking on Friday after receiving the AG's letter, Ms Stephenson said: 'Given the response of the Attorney-General, it's now important that the Taoiseach clarifies if the Irish State is indeed in breach of EU law in choosing not to inspect planes that are arriving in Shannon and then travelling out of the European Union directly from Ireland. 'Obviously our concern is one of moral failure, regarding Gaza and the weapons travelling through Ireland, but the State can't continue to operate outside of EU Customs and VAT requirements while maintaining this appalling indifference to what is happening in Shannon Airport.'