As we’ve now had time to digest the extraordinary amount of coverage of Budget 2013, it’s time to consider its real effect on the drinks industry in Ireland.
Shortly after both Ministers’ speeches in the Dail, I began sifting through the Department of Finance website for the economic and budgetary documentation – again a plethora of facts and figures for us to review – however substance was in short supply. What was most noticeable was what was not done, which came as a relief in many quarters.
The Budget attempted a fairly significant broadening of the tax base with many seemingly small measures applied to a variety of sectors and individuals. Tax revenues in 2013 are expected to reach €37.95 billion, an increase of €1.785 billion on the expected out-turn for 2012 including over €200 million on excise duties, notably on alcohol and tobacco.
In the context of an uncertain Eurozone and global economy, the Budget measures still constrain the pace of Irish economic recovery. The government expects GDP of 1.5 per cent in 2013, followed by 2.5 per cent in 2014 and 2.9 per cent in 2015 with only a small reduction in unemployment in each of those years.
A business-positive Budget?
Let’s start with the good news; the Budget had an air of focus towards job creation although the worry is that this will be very much limited to the export area despite the Minister’s constant reference to the domestic economy. Indeed, it is fact that Ireland has the most progressive tax system in the EU and as a very open economy we should attract more jobs.
Income Tax remaining unchanged is a good thing. This at least means people’s pay packets will largely remain stable – other than the PRSI change which will take approximately €5 per week from net pay – so the perception of disposable income being the same may be there despite the range of stealth measures elsewhere.
The fact remains however that people’s net wage reduction from tax changes alone has averaged at around 10 per cent since austerity commenced in 2008. This reduction in disposable income will obviously have been felt hard in industries where spending is very much discretionary-based, including the Irish drinks industry.
The drinks and hospitality industry should be conscious that differing wage rate bands have a significant impact on their cost of employing someone and savings in employers’ PRSI can be made at lower wage levels with appropriate planning.
Corporation Tax remains at 12.5 per cent and this is probably the single most important issue for business. Where the drinks and hospitality industry is profitable at least, a high percentage of retained profits can be reinvested in the business.
The Minister announced a 10-point plan for SMEs to enhance cashflow, reduce administration and aid finding new markets and products. I can see nothing of note in here for us to get too excited about.
Notably, as part of this plan, the Minister confirmed that the reduced nine per cent VAT rate for the tourism industry will be retained to coincide with The Gathering project in 2013. This should allow the momentum gained in 2012 to continue for the hospitality industry.
The plan also had some vague detail about additional incentives for employment and job placement schemes with specific measures to be put in place in 2013.
What the plan does not address is the ‘elephant in the room’, the huge debt burden still affecting many profitable or cashflow-positive businesses. I see in practice every day good businesses, including those in the drinks and hospitality industry, weighed down by unsustainable property debts.
I’d challenge that certain banks are directly contributing to the closure of perfectly good businesses as a result of this, constituting a direct threat to employment in these industries as it weakens the ability of the underlying business to expand or indeed maintain employment. The knock-on effect is that these businesses have little opportunity to obtain working capital to keep going. Those who shout loudest and most professionally are most likely to get heard by the banks.
Despite intensive lobbying the Minister chose to significantly increase excise duties – a shocking €1 on a bottle of wine, 10 cent on a pint of beer and cider and excise duty on spirits up by 10c per single measure.
The €1 duty increase on a bottle of wine seems to be in direct contradiction to the initiative to retain the nine per cent VAT rate for the tourism industry. This increase will probably have greatest impact on hotel and restaurant businesses and of course off-licences. Michael Noonan, when asked what he had against wine, said that the objective was to stop (mainly) young people accessing low-cost drink in off-licences. Is this what ‘young people’ are consuming these days?
There was no measure to address below-cost selling of alcohol – an issue that the drinks industry has been greatly concerned about. It’s likely that the above changes will impact more significantly on independent drink sales outlets.
The PRSI changes will have their greatest impact on low earners and this may have significant impact in the pub sector where often a fixed net wage is paid to an employee, not to mention the negative effect on demand in working class areas particularly. The employer will therefore probably have to absorb the additional cost of €5 per week.
Surprisingly, the 15 per cent rebate on redundancy payments has been scrapped, effective January 2013, having being reduced to this level from 60 per cent in 2011. Will this give any incentive for a struggling business to hold on?
In summary, as a result of the Budget measures announced by the Government, the drinks and hospitality industry will have to fight hard to attract the dwindling amount of discretionary spending in the domestic economy. They will also have to deal with the pricing challenges from increases in excise duties imposed on wholesalers.
The drinks industry also needs to engage directly and strongly with its lenders to disassociate property debts from the core business. On an individual basis businesses in the sector should get appropriate professional advice in their engagement with lenders.