The experience economy occupies a crucial position within our economic ecosystem, encompassing various sectors such as hospitality, tourism, and entertainment. It not only supports businesses across the country but also provides substantial employment in sectors that are often difficult to reach, including SMEs, youth employment, and rural areas.
As we enter the final third of the year, a convergence of factors is posing a further threat to the cost base in this important sector. The government must exercise caution to avoid compromising its viability.
One of the primary challenges faced by businesses and consumers this year has been the rampant inflation in costs. Additionally, two significant new challenges are emerging for Ireland’s experience economy businesses—in the form of the expiration of the 9% VAT rate at the end of the month, and the potential 12% increase in minimum wage next year, followed by further increases in subsequent years towards the living wage in 2026.
Ibec acknowledges the government’s ambition to implement a living wage, but highlights the need to recognize its potential impact on low-margin businesses. Support measures are necessary to offset these increases.
The introduction of a living wage would be counterproductive if it undermines the viability of businesses providing employment in sectors with high labor costs and low profit margins, such as tourism and hospitality throughout the supply chain and in regional areas.
The Low Pay Commission has recommended a €1.40 increase in the national minimum wage next year, with substantial incremental changes over the next four years to approach the target living wage at 60% of the median wage.
These changes could lead to a wage bill increase of 13% by 2026 and 17% by 2030 in the experience economy. The immediate concern is next year’s recommended 12% increase, which is four times the government’s inflation forecast. This poses a threat to the viability of businesses and raises the risk of further inflation in an already inflationary economy.
While businesses must adapt to the introduction of the living wage, it is unfair to expect them to absorb the additional costs without support from the government during the transition.
Other recent cost increases include statutory sick pay, pending legislation for auto-enrolment for pensions, and enhanced protective leave entitlements. The Low Pay Commission itself has proposed the introduction of an enterprise support scheme to aid eligible businesses during the transition to a living wage.
To support this transition, Ibec recommends increasing the top-rate employer PRSI threshold above the living wage on an annual basis, and introducing a temporary PRSI employer credit for lower-earning workers relative to the yearly increases in labor costs from next year until 2026.
Additionally, Ibec supports the need for a clear roadmap on changes to PRSI, Universal Social Charge, and social welfare payments. This will ensure that the introduction of the living wage does not result in high marginal effective tax rates that discourage work.
In our pre-Budget 2024 submission, we proposed the permanent retention of the 9% VAT rate. This rate has played a crucial role in supporting businesses during and after the pandemic.
Reverting back to the 13.5% VAT rate would place Ireland among the countries with the highest VAT rates in the EU for hospitality and tourism, negatively impacting the sector’s competitiveness on the international stage.
Moreover, the timing of this change, given the current level of cost inflation, is unfavorable. It is a regressive step, and we urge the government to reconsider.
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