SUBMISSION

to the MINISTER For FINANCE on

BUDGET 2004

Irish Hotels Federation

Pre-Budget Submission

Contents                                                                                                           

Executive Summary                                                                                       

1.   The 2004 Budget Should Promote Tourism                                                       

2.   Economic and Business Environment for Tourism                                           

2.1              Growth
2.2              Exchange Rates and Tourism Competitiveness
2.3              Inflation and Tourism Competitiveness
2.4              Labour Costs
2.5              Other Economic Environment Factors

3.   Difficult Current Position of the Hotel Sector  

3.1       Tourism Barometer – Decline in Business in 2003
3.2       Tourism Barometer – Costs the Big Issue
3.3       Tourism Barometer – Low Expectations
3.4       CSO – Visitor Numbers Down in Q1 2003 and up in Q2 2003            
3.5       CSO – Bednights– Decline in Hotels, Guesthouses/B&B’s in first half of 2003
3.6       Profitability
3.7       Conclusion on Current Position

4.   Excellent Tourism Performance Over Long Term                                   

5.   Tourism in the Balance Of Payments: A deficit since Q3 2002                  

6.   The Economic and Exchequer Contribution of Tourism                              

7.   Tourism in a Period of Major Uncertainty                                                       

8.   Budget Policy as a First Step in a Tourism Development Strategy                

9.   Priority Budget Proposals                                                                                

9.1              Five Budget Proposals
9.2              Existing hotel VAT is Uncompetitive in Europe
9.3              Allowing hotel and restaurant expenses as a VAT input
9.4              Restoration of Pre Budget 2003 excise rate on spirits
9.5              Cap on Local Authority Charges and Rates
9.6              Increased Funding for Marketing 2004 - 2006

10. Conclusions                                                                        

Executive Summary

The Irish tourism industry has performed excellently over the past decade. Between 1990 and 2000 visitors from overseas doubled. The difficulties of 2001 stopped that growth and the 2000 level of activity has not yet been regained.

The tourism industry makes a substantial economic, regional and exchequer contribution, €4B in foreign exchange earnings; €2.3B in exchequer contributions; 4.5% of GDP and 150K jobs. It is arguably the most important indigenous enterprise sector. World tourism is expected to double over the next 20 years, so substantial potential exists.

The current position of the hotel and tourism industry is difficult. International economic recovery is uncertain. The large appreciation of the Euro has dramatically reduced competitiveness. Ireland has become a high cost economy in terms of labour, products and services. Profitability has been squeezed and performance in the first half of 2003 has been poor in several respects. The industry has been damaged by very large local authority charges and rates increases. It was further hit by a VAT increase in the last budget.

The industry is fearful of ongoing taxation charges and price increases in the absence of specific measures to the contrary. It must be strongly recognized that the excellent long-term performance masks a very difficult current and future situation.

As the first step towards recovering lost ground and helping the industry to consolidate in the new difficult high cost, high exchange rate environment the IHF proposes that Budget 2004 should include:

• Reduction in 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 charges increases to 50% of the previous year’s average inflation rate.
• Allocation of an additional €40M to domestic and international marketing over three years.

The Irish hotel and tourism industry has contributed greatly to the transformation of the Irish economy. Between 1990 and 2001 overseas visitors to Ireland rose from 3.1M to 5.9M. The hotel sector has invested to greatly increase capacity. Since 2001 the economic and business environment for Irish tourism has been very difficult. Despite tentative indications of a small international economic recovery in 2004 the environment remains difficult. In particular the exchange rate is a problem in the UK and US markets. Compounding the international economic environment is a staggering deterioration in domestic economic and business circumstances, much of it a direct result of government and government bodies actions. These unfortunate changes threaten the competitiveness and long-term gains of the industry. These include

• VAT increase in 2003
• PRSI contributions increase
• Increases in local authority rates
• Increases in local authority charges
• High overall inflation rates
• Large insurance cost increases
• Labour cost increases
• Uncertainty and cost generating regulation
• Deterioration in the public finances
• Negative effects of benchmarking

These negatives are outweighing the positive impact of the reduction in corporate tax and arise from a base of an already uncompetitive level of VAT and excise taxes on alcohol by international standards.

The 2004 budget must begin the process of providing a firm foundation for the consolidation and development of the tourism industry through

This should be the first step in an integrated development plan and supports the Interim Report of the Tourism Policy Review Group. It is urgent that these measures be implemented to enhance business confidence and to improve the fundamentals of the industry.

2.   Economic and Business Environment for Tourism

2.1  Growth

The economic and business environment for Irish tourism was difficult in 2003 and this continued on from the difficult situation in 2001 and 2002. While overall economic growth will improve in 2004 other significant underlying difficulties such as the exchange rate will continue. It must also be recognized that there are substantial uncertainties about projected growth in 2004. At the time of the 2003 Budget Irish growth was projected at 3.5% (GDP) in 2003. By publication of the Economic Review and Outlook in August 2003, this had been revised down to 1.5%. Between June and July of 2003 the OECD revised downwards its 2004 Euro area growth forecast from 2.4% to 2.0%. As noted in the Economic Review and Outlook 2003 “The international economy remains weak, with unsteady recovery in the US and stagnation in the Euro area in the first half of 2003.” The EU Commission has also revised downwards its expectations for 2003. Apart from economic factors, geopolitical concerns (Iraq, Middle East) could reduce expectations for 2004. This means that the proposed budgetary measures are all the more necessary and urgent.

Real GDP Growth (%) Selected Areas and Countries 2002-2004

	2002	2003	2004
Germany	0.2	0.3	1.7
France	1.2	1.2	2.6
Euro Area	0.9	1.0	2.0
UK	1.8	2.1	2.6
EU	1.0	1.2	2.0
USA	2.4	2.5	4.0
OECD	1.8	1.9	2.8
Ireland	6.9	1.5	3.8

Source:OECD Economic Outlook June 2003, 
OECD Economic Survey of the Euro Area July 2003;
Economic Review and Outlook 2003; IHF Forecast

2.2  Exchange Rates and Tourism Competitiveness

Recent exchange rate movements have dramatically altered the competitiveness of the Irish hotel and tourism sector. This is completely outside the control of both tourism entrepreneurs and the government but measures to compensate for the exchange rate are within the competence of the government. It surprises the hotel industry that this issue has not received more attention.

In the first quarter of 2002 the Euro was worth 0.876 US dollars. In the second quarter of 2003 the Euro was worth 1.137 US dollars. This is an appreciation of the Euro of 29.8%. Between quarter 2 2003 and 2002 the appreciation was 23.7%. The business implications of this are enormous.

An Irish holiday package which required 2000 Euro expenditure in Q2 2002 cost a US tourist 1838 dollars. Without any Irish domestic inflation the Q2 2003 cost was 2274 dollars, an increase of almost 24%. The industry must deal with this through efficiency and quality measures but a rapid change of this magnitude must have the active and strong support of government. Instead, recent government policy has added to the negative impact.

The British market is the largest market for Irish international tourism. The story with sterling is the same as the dollar but not to the same extent. In the year between Q2 2002 and Q2 2003 the Euro appreciated by 11.6%. Without any allowance for domestic inflation over the year costs to British tourists in Ireland rose by 11.6%, and none of this is due to price increases by Irish hotel operators.

While there will be exchange rate movements in both directions over the coming year it is not expected that there will be significant depreciation of the Euro. The hotel and tourism sector will have to operate on this new competitiveness reducing level of exchange rates. To do so, at a high volume of activity, it needs the support of government in the forthcoming budget.

Exchange Rates

The industry does not benefit from the reduced import prices arising from currency appreciation, as would the manufacturing sector which imports substantial quantities of raw materials. The hotel industry is a labour intensive service sector with a very high level of domestic content. The exchange rate changes are particularly damaging because the UK and the US are, by far, the two largest national markets for the Irish tourism product.

The exchange rate appreciation against the dollar and sterling also increases the competitiveness of British and American holidays for Irish residents relative to domestic holidays and breaks.

2.3  Inflation and Tourism Competitiveness

Over the past several years Ireland’s inflation rate has been above those of other European countries. This has eroded competitiveness. Above average increases in restaurants and hotels have contributed to this performance. Prices can be increased to reflect input cost increases and in this case are necessary for economic viability. Prices can also be increased, facilitated by lack of competition, to generate higher profit margins. In the hotels case, we strongly argue that the recorded price rises reflect the need to cover increased costs of production in labour, private services, public services, insurance and regulation.

The high rate of inflation, in addition to the exchange rate appreciation has greatly eroded Irish competitiveness. The Government and its associated bodies have contributed to the high rate of price increases. Due to the exchange rate, price of oil, slowdown in economic activity and interest rates the inflation rate is expected to moderate to about 3.6% for 2003 as a whole but this will still be high by European standards and must be reduced to the long term euro area rate of inflation.

The recent (to June) Irish HICP price change was 3.8% compared to 2.0% for the Euro area. The UK, which is our largest tourism market, had an inflation rate of only 1.1%. The restaurants/hotels price increase was above average (6.4%) in Ireland. The accommodation price increase was 5.5%. This price increase is based on the current CSO methodology which, following discussions with the IHF, is being revised to take into account price discounts. The current approach overstates price increases by measuring changes in the full room rate without taking discounts into account. Because of its service nature, and limits to productivity growth one would expect the restaurants/hotels prices to rise faster than average. This is reflected in the above data. For the EU as a whole, the hotels price increase was 72% higher than the average inflation; the Irish figure was 68%. In the UK hotel prices rose by three times the average inflation. The only exception in the table above is Germany.

Of the 15 EU economies 13 experienced higher hotel price increases than average inflation in the year to June 2003. The exceptions were Germany and the Netherlands.

It is informative to examine the sources of price increases in Ireland. The following data uses the CPI instead of the HICP.

Year to July 2003  CPI

Almost all the very high price increases have been public sector generated, local authority services, electricity, gas, hospital services, motor tax, road and rail transport and education. The index does not include commercial/public liability insurance, the cost of which has grown enormously over recent years as documented in the IHF submission to the Joint Oireachtas Committee on Enterprise and Small Business. That submission reported a mean increase in hotel and guesthouse insurance premiums of 351% between 2000 and 2003. More recently annual increases have been in the range of 30% to 60%.

Substantial parts of the inflation have come from direct public sector activities, which raises serious questions about the government’s anti-inflation strategy. A policy and regulatory failure on insurance and financial services has also contributed to cost increases. In addition Budget 2003 increased the VAT rate and excise tax which pushed up prices.

In the context of expectations of service price increases, the burden of public sector price increases, limited competition in insurance and financial services, the exchange rate changes and the growth in labour costs the hotel sector has done well to hold prices to the price rise experienced.

The Forfás reports on consumer prices have confirmed that Ireland has became a high price location for most products and activities. Regardless of the historical reasons, it is necessary to combat the continued erosion of competitiveness through a more active inflationary programme than is intended in Sustaining Progress.

2.4  Labour Costs

Over the period of the economic boom between 1994 and 2001 labour costs rose greatly turning Ireland from a low wage economy into a high wage economy. Wage inflation declined in 2002 compared with 2001. However the 2002 increase of 5% exceeded the EU average increase of 3%. Overall, wage inflation is expected to be about 5% in 2003 which will again exceed EU levels.

An indicator of the difficulty facing the tourism sector is the high rate of wage increase compared to other competitor countries.

Compensation per Employee (Common Currency)
% increase 2000/2002

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 under 4% in Germany and the USA. This data refers to the overall economy and the hotel industry will have its own specific trends and changes. Nonetheless, the data is a clear illustration of the way the business climate has deteriorated in the past two years relative to competitor countries. Heavy burdens are placed on an internationally competing labour intensive services sector by cost increases such as these

Labour costs have grown greatly over the past two years imposing a severe strain on the hotel sector which is an internationally competing labour intensive services sector.

2.5 Other Economic Environment Factors

The Irish Hotels Federation recognizes and welcomes the lower interest rates which have accompanied the Euro and the reduction in the corporate tax rate. These are welcome positives in the business environment but it is our strongly held view that these positives are more than offset by

• the weak and uncertain international economic environment
• the large appreciation of the Euro against the dollar and sterling
• the competitiveness eroding high rate of inflation
• the impact of enormous increases in public sector prices and in insurance costs
• the very high rates of labour cost increase compared to other countries

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.

3.   Difficult Current Position of the Hotel Sector

3.1 Tourism Barometer – Decline in Business in 2003

The hotel and general tourism sector has performed very well over the long term and was resilient in the face of the difficulties of 2001 and since. However, the IHF is not scare mongering when it strongly argues that the changed cost situation will have serious implications in the years to come and is already having a substantial negative impact.

The most up to date objective data on tourism performance are the Fáilte Ireland Tourism Barometer and the CSO’s second quarter 2003 Tourism and Travel data.

At the start of the year it was expected that 2003 would be difficult due to geopolitical tensions, the world economic slowdown and the strength of the Euro.

The Tourism Barometer is a survey of 767 tourism establishments in the Republic of Ireland. It is based on the opinions of operators. Overall the results present a relatively negative picture for the first five months of 2003. This is borne out by the bednight data from the CSO in section 3.5.

Year to date performance (Jan-May 03)
compared with previous year (Jan-May 02)
% of respondents

There is a downturn in business performance in all categories in the first half of 2003. It is greatest in guesthouses and B&B’s but is also high in hotels at 55% experiencing a decline. Only 10% of guesthouses and 26% of hotels reported an increase in business volume. The market segment performance for hotels is shown below.

Market Segment Performance

The volume decline for hotels is greatest in the overseas market segment but declines outweigh increases in all of the segments. This performance is reflected in a softening of demand for associated activities.

73% of  car hire operators, 40% of coach operators and 39% of attraction operators report a decline in volume. In angling, equestrian and cruising those reporting declines greatly exceed those reporting a volume increase.

3.2  Tourism Barometer: Costs the Big Issue

Based on the Barometer, the main operational difficulties were as shown below
% of respondents stating (multiple answers)

The high ranking for the three cost issues confirms the general economic analysis and the inflation analysis in section 2.

3.3  Tourism Barometer: Low Expectations

Expectations for the June to August period were negative in the Barometer as shown below.

% of respondents forecasting volume levels

June/August 2003 compared with 2002

44% of hotel respondents, 51% of guesthouses and 61% of B&B’s expect business to be lower in Q3 of 2003 than in Q3 of 2002. The corresponding volume increase shares are 27%, 5% and 10%.

3.4  CSO – Visitor numbers down in Q1 2003 and up in Q2 2003

Data from the CSO’s Tourism and Travel survey show that overseas visitors declined slightly in the first quarter of 2003 compared with 2002; 1,118,000 visitors compared to 1,121,000; a decline of 0.3%.

Overseas Visitors Q1 and Q2 2002 and 2003

The second quarter of 2003 showed a welcome increase of 5.6% compared with 2002, from 1,613,000 to 1,704,000. There were increases from Great Britain, Other Europe and USA + Canada. For the overall first half of 2003, the increase was 3.2% from 2,734,000 to 2,822,000.

3.5  CSO – Bednights: Decline in Hotels, Guesthouses & B&B’S in first half of 2003

The CSO data show that the numbers of bednights in hotels and guest houses/B&B’s declined in the first half of 2003, despite the visitors increase.

Bed nights in hotels and guesthouses/B&B’s Q1 02 and Q1 03 (K)

The combined bednights in hotels/guesthouses/B&B’s declined by 2.3%; including a 3.1% decline in guesthouses/B&B’s. The total number of bednights increased slightly in the period but this is due to growth in friends/family, hostel and rented houses/apartments accommodation. The decline in bednights associated with more visitors indicates visits of shorter duration.

3.6  Profitability

Registered hotel capacity has increased and with the decline in number of bednights hotel capacity utilization according to Fáilte Ireland has dropped by about 4% in 2003. Combined with dramatically rising costs and a CPI 6% price increase profitability will have significantly weakened in 2003. This will have continued a weakening shown in the 2003 Hotel Industry Survey.

Recent Performance Indicators (Hotels) 2000 to 2002

Source: Horwath Bastow Charleton: Hotel Industry Survey 2003

As shown above occupancy rates have been declining since 2000. The average room rate has risen between 2000 and 2001 but declined in 2002 contrary to the price data in the CPI. Profit (gross) before tax, finance costs and depreciation per available room has declined from €10.1K to €8.6K over the period. This will have continued into 2003. The profit decline (per available room) was 15% between 2000 and 2002. The level of €8.6K before tax, finance costs and depreciation is a small return relative to the likely investment cost of at least €150K per room.

3.7  Conclusion on Current Position

The independent data from Fáilte Ireland, Tourism Ireland and CSO show

• Volume declines in Jan-May 03
• Volume decline in all hotel market segments but greatest in overseas segment
• Insurance, overhead (rates etc) and labour costs major problems
• Weak expectations for the June-Aug period
• CSO visitor numbers increase in first half of 2003
• Decline in hotel guesthouse and B&B’s bednights
• A move towards shorter stays
• Profitability squeezed in 2000 to 2002 and this continuing in 2003

4.   Excellent Tourism Performance Over Long Term

The tourism industry has grown substantially over the past decade due to an effective partnership between the industry and government. The industry benefited from the supportive macroeconomic environment generated by Government policy which was complemented by active entrepreneurial and investment activity by the industry to double the numbers of overseas visitors to Ireland. The industry has not been found wanting in providing investment, facilities, capacity and innovation.

Overseas Visitors (K)

Between 1990 and 2000 visitor numbers more than doubled (+ 103.8%). Due to the many negative features of 2001 (9/11, foot and mouth and growing domestic cost situation) numbers declined to 5,990,000, a drop of 5.1%. There was a slight recovery to 6,065,000, an increase of 1.3%, in 2002. Current figures indicate a decline for 2003 as discussed in section 2.

The IHF is concerned that government does not recognize that the 2002, and likely 2003, volumes of activity are still 4% below the 2000 level which, allied with increased capacity, puts pressure on operating margins. It is on this situation that VAT increases, local authority charges, huge insurance costs and increasing labour costs, are being imposed. The industry as a whole has not yet regained the 2000 level of activity.

Associated with the doubling of visitors there has been impressive growth in employment and foreign exchange receipts. Overall, the tourism industry has performed well over the past decade.

Growth in Tourism Foreign Exchange Earnings

1990/2001

Based on Cert employment surveys tourism related employment grew by 45.2% between 1992 and 2001.

5.   Tourism in the Balance of Payments: A deficit since Q3 2002

Notwithstanding the excellent long term growth there is a strong national economic imperative to get even better performance from Irish tourism to counter the rapid growth in the numbers of overseas visits by Irish residents. This can be done by persuading more residents to holiday in Ireland and by attracting more overseas visitors. The greatest potential lies in the latter. The gap between earnings from inward tourism and outward tourism declined to a very small surplus in 2002 and became negative in each of the quarters from Q3 2002 to Q1 2003. This can be reversed only by improving the competitiveness of the Irish tourism product in both quality and value for money and effective marketing.

 (¹ Q3 and Q4 in 2002 were negative also)

6.   The Economic and Exchequer Contribution of Tourism

The tourism industry deserves strong backing from the government because of its contribution to economic activity, the nature of that contribution and its substantial potential.

Recent reports such as the Irish Tourist Industry Confederation’s The Impact of Tourism on the Economy; the Interim Report of the Tourism Policy Review Group and the Fáilte Ireland analysis support this view.

• The Interim Report notes that in 2002 Irish tourism
• Attracted 6M visitors from abroad
• Generated €4B in foreign revenue
• Accounted for around 150K jobs
• Generated exchequer revenue of €2.3B in VAT, excise duties and income tax from domestic and overseas tourists
• Fáilte Ireland estimates a tourism contribution of almost 4.5% of GNP in 2002.

The industry has a very low import content in contrast to electronics and pharmaceutical exports which have an import content of over 70%. Bearing in mind the economy’s dependence on foreign direct investment, especially for overseas sales the IHF strongly endorses the Interim Reports opinion that

“The Irish tourism industry is, arguably, the most important Irish-owned sector of enterprise, national and regional wealth-creation and employment generation” (page 4).

In addition to its scale, contribution to GNP and exchequer, role in export revenues and high domestic content the tourism industry has a strong (and potentially much stronger) regional dimension. The regional distribution of tourism revenue (including domestic and Northern Ireland) is shown below

 Regional Spread of Tourism Revenue % 2002

This is a more even spread of economic activity than achieved in overall gross value added.

7.   Tourism in a Period of Major Uncertainty

The IHF agrees with the Tourism Policy Review Group that the industry is in a period of uncertainty. Indeed this uncertainty is increased by particular public policy measures.

• An unexpected increase in VAT to 13.5%
• The uncertain economic effect of the smoking ban
• Fears of additional taxation in the forthcoming budget
• Fears of continuing large cost increases in local authority charges

The above is added to the externally determined uncertainty through, uncertain economic recovery, geopolitical uncertainty, events such as SARS and in particular the worrying impact of the Euro appreciation. The industry now operates in an economy with a high cost base.

In addition to the above the industry and the tourism market is undergoing change. It is the responsibility of the industry to cope with international product and destination competition, the impact of information technology, consumer demands and changing tastes.

We must deal with the market, the customer and the competitors. We recognise that the government is unable to deal with external factors such as exchange rates and international economic recovery. We do urge, however, that the government’s policies which it can control should not worsen the position of the hotel and tourism sector. Budget 2004, and overall policy, must support an industry which has delivered and which now faces a fundamentally different environment than three years ago. The tourism industry needs the government to move in partnership with it to deal with the changes and difficulties. In this way we can expect to benefit from the expected long term growth in world tourism.

8.   Budget Policy as a First Step in a Tourism Development Strategy

The Tourism Policy Review Group is currently preparing a strategy for the future sustainable development of tourism in Ireland within which the industry and government can work together in a fruitful partnership. The IHF strongly supports this work. Budgetary policy should immediately begin to support the development of tourism to create the foundation for future development.

As business people seeking to make ends meet the IHF has full sympathy for the Minister as he seeks to balance conflicting demands in the public finances. The low rate of corporate tax is an essential element of sustainable development. However, this incentive only works on the bottom line of profits and can be offset by cost increases above the line.

The IHF urges the Minister not to depart from the hitherto successful formula of low tax/low expenditure to GDP ratios. The priority must be to maintain control of the public finances without tax increases. Tax increases may solve short-term financial issues but will not sustain revenue growth and economic development in the future. Public expenditure must be allocated on a selective basis to maintaining the position of the less well off and to areas with the greatest economic return. Objective analysis will show that Government investment in and support of tourism generate excellent economic and social returns.

The IHF does not expect miracles in Budget 2004, but, given the evidence presented in this submission, and especially in light of the exchange rate changes, the Budget must contain the first steps in an ongoing programme of support for tourism.

9.   Priority Budget Proposals

9.1  Five Budget Proposals

The IHF, taking account of the public finances situation, and the very difficult operating environment for Irish tourism makes the following priority recommendations for Budget 2004.

1. Competitiveness Enhancement
2. The hotel VAT rate of 13.5% should be reduced to 10% (currently the hotel VAT rate is high by European standards).
3. VAT on hotel and restaurant costs should be allowable as a business input (this is already the position in many European countries).
4. Excise tax on alcohol should be reduced over the medium term to average European levels. Budget 2004 should begin this by removing the additional spirits excise imposed in Budget 2003.
5. Increases in Local Authority Charges and Rates should be capped at 50% of the 2003 rate of inflation for 2004.
6. Growth and Development
7. Increased funding for domestic and international marketing of €40M over a three year period 2004 – 2006.

The competitiveness enhancing measures should not be regarded as concessions. The proposals are necessary to reduce significant competitive disadvantages which already exist relative to other European countries in VAT, excise duties and price rises.

The investment of €40M over three years for increased domestic and international marketing is a relatively small amount, given the difficult operating environment for the industry. The same Euro appreciation which reduces competitiveness in tourism generates savings for the Government in servicing the national debt. The potential economic gains from an increase of €40M in marketing compares very favourably with the spend, and economic return, of the industrial development agencies. Based on passed experience a €1 million additional marketing expenditure could result in a tourism revenue increase of about €15 million and also produce a substantial return to the exchequer.

The reduction in tax allied to an increased marketing performance will present a strong and positive position on world tourism markets. The proposals continue the strategy presented in previous submissions but the situation is now very urgent and action must not be delayed.

9.2  Existing Hotel VAT is Uncompetitive in Europe

The Irish standard rate of VAT is 21%. The reduced hotel (and other) rate of 13.5% is apparently seen as a concession. Consequently the increase from 12.5% to 13.5% in Budget 2003 was still presumed to leave Irish hotels with a very favourable rate. This is not the case. The 12.5% and the 13.5% rates are high by European standards.

VAT Rates for Accommodation and Restaurants (Jan 03)

Ireland has the fourth highest accommodation VAT rate (13.5%) in the EU. It is exceeded by only the UK, Denmark and Germany. Even at 10% there would be eight countries with lower rates and two others have 10% rates. Within the Euro zone, where price transparency is now strong, Ireland’s hotel VAT rate is exceeded by only Germany. Germany is not as dependent on tourism as is Ireland or countries such as France, Netherlands, Greece, Spain and Portugal all of which very low hotel VAT rates.

9.3  Allowing hotel and restaurant expenses as a VAT input

Hotel and restaurant costs are legitimate business expenses and are recognized as such in many EU economies but not in Ireland. This effectively increases the cost of corporate use of the hotel sector for Irish companies. Countries which allow full or partial input treatment are Austria, Denmark, Germany, Finland, the Netherlands, Spain, Sweden and UK. Therefore the proposal is not a concession. It is the removal of an internally generated competitive disadvantage. Business tourism includes conferences and incentive tourism. These have been identified as poorly performing sectors in the Irish tourism industry. They are also sectors with good growth potential, but to achieve this potential requires Ireland to be competitive. The VAT regulations impose a competitive disadvantage of 13.5% relative to Northern Ireland and Great Britain. An Irish VAT registered company can reclaim the VAT on accommodation and restaurant charges, incurred for business reasons, in most European countries but cannot benefit from the same treatment at home in Ireland.

9.4  Restoration of Pre Budget 2003 Excise Rate on Spirits

Alcohol prices 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. This is particularly true relative to major holiday destinations such as Spain and Portugal. Generally, only the Nordic countries have higher alcohol excise taxes. The proposed restoration of the pre Budget 2003 excise rate on spirits must be seen as only the first step in an ongoing process to move towards average European levels. Once again this should not be seen as a concession. It is the partial removal of a self-imposed competitive disadvantage.

Ireland is a very high alcohol tax economy. The Irish wine tax is the highest in the EU. Seven EU countries have no tax on wine. The Irish beer tax is exceeded by only one country, Finland. The Irish spirits tax is the third highest in the EU.

EU Alcohol Tax Rates (Excise) (Euro PER HLPA), 2003 Feb

Source:  CEPS

                                               

Early 2003 excise returns, bonded movements and retail sales in bars suggest that the 2003 spirits excise increase may have been self defeating as regards revenue.

9.5  Cap on Local Authority Charges and Rates

As shown in the submission local authority rates and charges have increased well in excess of inflation and now constitute a serious burden on the industry. It is particularly undesirable in that local authorities are effectively monopoly providers of many services. There is also no accountability constraint with respect to rates increases as the abolition of domestic rates has removed any effective electoral sanction on striking a rate. The past and likely future increases, in the absence of controls, are a substantial threat to the industry and its competitiveness. The IHF recognizes the legislative basis on which charges are levied but it argues that government can and has persuaded local authorities to follow particular courses of action in the past.

As part of a more active anti-inflation programme the government through the means at its disposal should cap all local authority rates and charges increases at 50% of the 2003 inflation rate. This can be financed by increased central government subvention, or controls on local spending or a universally levied local tax.

9.6  Increased Funding for Marketing 2004 - 2006

Government already supports the marketing efforts of Tourism Ireland and Fáilte Ireland. It is sensible for government economic policy to be counter-cyclical. When the economy, or specific sectors, are in difficulty it should increase its support. Equally it should reduce its support when the economy is doing well. The tourism industry is currently in a difficult situation and presents a high rate of return on public sector investment.

The proposed additional €40M over three years would fund specific targeted programmes with performance criteria and subject to rigorous appraisal aimed, in particular, at the domestic, US and European markets. This is a relatively small contribution relative to the industrial development budget, the benefits to debt servicing from the Euro appreciation and the potential economic returns. The expenditure would be conditional on appropriate effective programmes being approved by an assessment process and within the context of the new tourism strategy. It should be noted that overseas visitors are still below the pre 2001 level.

The proposed expenditure is partly defensive as other competitor countries have increased their expenditure and partly offensive to realize the large potential which still exists.

10. Conclusions

In this submission the IHF has made a strong and reasoned case for active support by government in the 2004 budget. We have confined our proposals to budget related matters of taxation and expenditure. There are many other measures which matter to tourism such as insurance and energy costs, and infrastructural projects but some of these are (fully or partly) outside the scope of the budget. The proposed measures may seem large in the context of incremental expenditure and revenue but they are minimum requirements in the context of the difficult domestic and international environment. They are a first step in dealing with a radically altered and worsened business and economic environment for tourism, particularly because of the new cost and exchange rate position. The IHF looks forward to discussing these proposals with you.

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