The Government should be scratching its collective head wondering how a string of high-profile restaurant closures three years ago led to a VAT cut the public doesn’t support and a perceived windfall for fast food chains.
If they aren’t they soon will be. The ESRI predicts that the Budget passed last week will leave households 2 per cent worse off this year assuming wage growth is as predicted. The €681 million full-year costs committed to cutting VAT on hospitality would have gone a long way to diluting the political impact of that bad news. A once-off energy credit of €250 – costing roughly €400 million – would not have gone amiss in January,
The Coalition cannot claim the high ground by arguing that such one-off payments are fiscally imprudent when they have been bounced into giving special treatment for a sector that includes the likes of McDonald’s and Supermacs.
[ Fast food giants set to cash in on hospitality VAT cutOpens in new window ]
The VAT cut on hospitality is an example of bad policymaking and good lobbying.
What started as a successful campaign by the Restaurants Association of Ireland to highlight the large number of restaurants that closed in the aftermath of Covid somehow ended up being part of Fine Gael’s election manifesto.
The post-pandemic shake-out in the sector was brutal but entirely in keeping with the Darwinian nature of the hospitality business. Only the fittest survive.
A definitive US study, which looked at 81,000 “full services” restaurants over a 20-year period found that 17 per cent fail in the first year and the median lifespan of a restaurant was 4.5 years. Interestingly, the restaurant failure rate in the first year was lower than the average for other service sector start-ups.
Budget 2026: What it means for Irish households and businesses
Ciarán Hancock is joined by guests to pore over the main elements of Budget 2026. The €9.4 billion package includes a minimum wage increase of 65c to €14.15c per hour, a €10 across-the-board increase to core weekly welfare payments, but no once-offs like double child benefit payments and electricity credits. On the panel:Cliff Taylor, Managing Editor, The Irish TimesFrank O’Neill, Tax Partner, EY IrelandSean Collender, President of the Restaurants Association of IrelandEllen Coyne, Political Correspondent, The Irish Times Produced by John Casey.
The US figures were backed up by a similar Irish study in 2018 that found that failure rates were 15 per cent after one year, 37.6 per cent after three years and 53 per cent after five years. If anything, Irish restaurants seem to have a better survival rate than US ones.
No one has looked (and that is part of the problem) but it would be interesting to establish if the wave of restaurant closures as various post-Covid chickens came home to roost was out of line with the long-run average.
The VAT cut also ran contrary to all the advice of the Department of Finance who successfully opposed it in last year’s budget. They pointed out that all the real economic data contradicted the picture being painted by industry lobbyists. The number of people working in the sector was growing and the prices were increasing. Both signs of a healthy economic sector, said the department.
All of this was swept aside by a wave of high-profile restaurant closures in Dublin. Dylan McGrath closed Brasserie Sixty6 and Rustic stone, Shanahan’s on the Green Closed. P Macs on Stephen Street and numerous others. Every one of them a blow for the people who put their money and effort behind them, but at same time pretty normal for the industry.
[ Hospitality VAT cut delayed to July due to ‘significant cost’ of policy measureOpens in new window ]
Many of the premises that closed have been taken over by others who feel they have the winning formula, reflecting ever-changing public taste and the wider economic backdrop. Different menus, different pricing. Maybe they have cracked, maybe they haven’t. Customers will decide and the fittest will survive. The law of the jungle.
The irony of it all is that Government has just made the jungle a lot more dangerous for them. The biggest beneficiaries of the VAT cut are the fast food and takeaway businesses that are directly competing with bottom to mid-market restaurants.
The value of the VAT cut to the likes of McDonald’s, Supermacs and Dominos has been well ventilated. It’s estimated at be €30 million, €12 million and €13 million a year respectively. But hundreds, if not thousands, of other smaller businesses that compete with sit down restaurants also stand to benefit.
It’s hard to understand why the Government chose to die in the ditch over an economically dubious VAT cut. Simon Harris, the Tánaiste, would seem to be the driving force. Having been elected leader of Fine Gael on the back of his populist instinct for getting on the right side of every issue no matter how trivial he would appear to have painted himself into a corner.
Harris would not have been the first or the last politician to abandon a commitment in the interests of expediency but instead he doubled down on his “solemn promise” at the National Economic Dialogue in June, which kicks off the annual budget dog-and-pony show.
The only concession to reality seems to be postponing the introduction of the lower rate until July. A winter of discontent might yet see that postponed again despite the inevitable spate of restaurants closures in the new year as the culinary circle of life keeps turning.
