With 150,000 people now employed in Ireland's hotel and tourism industry, the Irish Hotels Federation (IHF) says Ireland "will be left behind" over the coming years unless urgent action is taken to improve competitiveness in global tourism. In its pre-budget submission presented to Minister for Finance, Charlie McCreevy, T.D. today, the IHF is requesting that immediate strategic measures be undertaken to assist the tourism sector return to a path of growth. The submission outlines a five-pronged approach, which the IHF is urging the Government to undertake in order to address the serious competitiveness issues facing the sector.

The five budget proposals are as follows:

• Reduction of the hotel VAT rate from 13.5% to 10%
• Availability of hotel and restaurant VAT as a business input
• Restoration of Pre-Budget 2003 excise rate on spirits
• A cap on local authority commercial rates and charge increases, to 50% of the previous year's average inflation rate
• Allocation of an additional €40 million to domestic and international marketing

Jim Murphy, President of the IHF, stated today that these measures should be the first step in an integrated development plan to enhance business confidence and to improve the fundamentals of the tourism industry.

"The position of the hotel and tourism industry remains difficult, with substantial uncertainty over projected growth in 2004. Within a stagnant international economic environment, a number of fundamental budgetary measures are urgently required to stimulate growth and safeguard the industry's 150,000 jobs," states Mr Murphy. "World tourism is expected to double in the next 20 years, however unless Ireland's competitiveness is bolstered it will be left behind as other countries reap the rewards of a tourism upsurge."

In its submission the IHF stresses that Ireland has become a high cost economy where high inflation rates, increases in PRSI contributions, local authority charges and rates increases, insurance cost increases, and a VAT increase in the last budget are collectively threatening the competitiveness and long-term gains of the industry. Measured in a common currency the Irish compensation per employee rose by 16.8% between 2000 and 2002 compared with 6% in the UK and France and less than 4% in Germany and the US. The submission also highlights that the tourism industry makes significant contributions to the economy of €4 billion in foreign exchange earnings, €2.3 billion in exchequer contributions and 4.5% of GDP.

However, the Federation warns that it will not be able to sustain this momentum unless certain key issues are addressed quickly. According to Fáilte Ireland's June 2003 Tourism Barometer, 55% of hotels and 69% of guesthouses suffered a decline in customer volumes in January to May this year.

In the first of its proposed budgetary measures, the IHF is calling on the Government to reduce the hotel VAT rate to 10%, which would restore a degree of comparability with other EU countries. Ireland currently has the fourth highest accommodation VAT rate (13.5%) in the EU, double that of France (5.5%), Spain (7%) and Portugal (5%) and exceeded only by the UK, Denmark and Germany. Within the Euro-zone Ireland's rate of VAT is the second highest, exceeded only by Germany whose dependence on tourism is much less than Ireland's.

Additionally, the Federation is asking the Government to allow VAT as a business input. Hotel and restaurant costs are recognised as legitimate business expenses in most EU economies, but not in Ireland. An Irish VAT registered company can reclaim the VAT on accommodation and restaurant charges, incurred for business reasons, in most European countries, but does not benefit from the same treatment at home in Ireland. Likewise Irish hotels and restaurants are at a competitive disadvantage in dealing with EU business customers, who are registered for VAT, and can claim credit for it for similar expenses in other EU countries but not for business expenses incurred in the Republic of Ireland.

The IHF is also seeking a cap, on Local Authority rates and charges, to 50% of the previous year's inflation rate. This, it believes, could alleviate some of the cost pressures being experienced by its member hotels and guesthouses. The Federation is seriously concerned that there is no accountability constraint with respect to rates and charges increases and fears possible future increases would further erode the industry's competitiveness.

According to the submission, one of the main causes of Ireland's competitiveness being eroded in recent times is exchange rate movement, which the IHF acknowledges is outside the control of both tourism entrepreneurs and Government. However, it believes that measures to compensate for the exchange rate are within the competence of the Government.

"An Irish holiday package which required €2,000 expenditure in April to June 2002 cost a US tourist $1,838. Without any Irish domestic inflation the April to June 2003 cost was $2,274, an increase of almost 24%. Similarly for British tourists in the same period, and without any allowance for domestic inflation over the year, costs in Ireland rose by 11.6%. Neither of these cost increases can be attributed to Irish hotel operators. The IHF fully acknowledges that the industry must deal with cost increases through efficiency and quality measures but strong government support is also crucial. Instead, recent Government policy, in areas such as VAT, excise, energy and postage cost increases, has only served to further fuel the negative impact," argues Jim Murphy.

In its submission, the IHF stresses the absolute need for Government to continue to support marketing efforts, and proposes a €40 million increase, over the next three years, which would fund specifically targeted programmes with performance criteria aimed, in particular, at the domestic, US and European markets.

"It makes sense for Government economic policy to be counter-cyclical, providing additional support to sectors experiencing a difficult climate, as the tourism industry currently is. The IHF believes that €40 million is a small contribution relative to the industrial development budget, the benefits to debt servicing from the Euro appreciation and the potential economic returns that the tourism industry can and does provide," says Mr Murphy.

The IHF also proposes a restoration of the pre Budget 2003 excise rate on spirits as the first step in an ongoing process to move towards average European alcohol pricing levels, which are a major part of the tourism competitiveness package. The Forfás reports on consumer prices show Ireland to be a relatively highly taxed economy as regards alcohol, particularly in comparison to major holiday destinations such as Spain and Portugal.

"Our industry is urging the Government to take serious consideration of the measures it proposes, in order to assist in a much needed recovery for Irish tourism. Almost all of the high price increases in recent times have been public sector generated, such as local authority services, electricity, gas, hospital services, motor tax, transport and education, which raises serious questions about the Governments anti-inflation strategy. Overall, Ireland is becoming an increasingly unattractive and uncompetitive location for business and this trend must be reversed with determination, vigour and urgency, beginning with the 2004 Budget," concludes Mr. Murphy.

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