Old truisms are hard to put down. Take, “there is no smoke without a fire”. The Finance Minister’s Budget speech on Monday gave ample proof that the saying remains as correct as ever. In the process he proved me completely wrong. Over the weekend I was told that strong rumour had it that the Finance Minister would be raising the Value Added Tax on the tourism accommodation rate from the minimum five per cent to an unknown level. I immediately replied that was very unlikely.
I said so because, in addition to my role as a writer of an opinion column on finance, I have some direct experience of the tourist industry. From my little niche in it, bolstered with exchanges of view with hoteliers and fellow analysts, I know that the sector is in no position to absorb any increased costs. Even the statutory cost-of-living increase, low as it is, will erode margins.
That was not a welcome scenario. The tourist industry, quite well looked after by the Parliamentary Secretary for Tourism and his troops, has done well up to September. With higher arrivals, an increase in spending and average stays, there was some improvement in margins, but not such as to allow a decent rebuilding of them.
The improved figures are certainly not enough to act as a good buffer against a projected weak winter and a possible downturn in the tourism year starting in November with inflows from markets that are in the early throes of severe austerity programmes. One such market is the United Kingdom, which still accounts for a third of total inflows. I, for one, have been quite preoccupied with the effect of the British Tory – Liberal Democrat coalition’s savage austerity measures could have on bookings of foreign travel, including to Malta.
Maybe not this winter since, as the president of the Malta Hotels and Restaurants’ Association observed, most of our British visitors in the winter months come from among the pensioned elderly. Later on could be another story.
As it happened on Monday morning the MHRA chairman was reported by The Times to have said just that. The newspaper also sought the views of the Parliamentary Secretary for Tourism. His summarised comments showed that he too saw the danger. At the same time he optimistically looked ahead to a time when Britain’s austerity measures might work to help that economy recover. It could go that way. If so, it will take around three years or more. It could also go in the opposite direction – Britain’s joint winner of this year’s Nobel Prize for economics has just given such a warning.
For those various reasons I did not believe the Finance Minister would really be tempted to raise the VAT rate on accommodation. Rather, I hoped he would definitely announce he was burying his intention to introduce a room charge. On Monday evening he did just that – only to announce that he was raising the VAT rate on accommodation from five to seven per cent. And, with effect from the coming January, if you please.
Unlike in some past Budget speeches the Minister did not provide listeners with an estimate of how much the increased VAT rate would rake in. For an approximation one has to turn to the Financial Estimates for 2011, as I did the moment the minister confirmed that if there is smoke, there is fire. Page eight of the estimates, which gives details of heads of revenue, states that estimate of VAT receipts in 2011 is put at €538.225million, against a comparable estimate of €478million this year.
The projected €60million increase in next year’s estimate may not all be due to the increase in VAT on accommodation. But that’s where much of it is coming from. Perhaps the minister will be less coy and give full details during the debate on the estimates.
Whatever the additional amount raised from the VAT increase, to the extent that it hits hotels it will come out of their profits, such as they are, and could easily push some hoteliers towards fresh losses. That is for the simple reason that most bookings for next year have already been made and hoteliers cannot pass on the increase in the VAT rate, even if operators and tourists were prepared to accept the increase.
Hoteliers will have to absorb the hike themselves. And, to the extent that they try to pass it on to tourists who book over the internet, still a minority, though growing, they will find price conscious enquirers who will also be looking at competing destinations. Another valid point made by the chairman of the MHRA was that tourists are very price conscious.
The Finance Minister and the government do not seem to share his view. They will point to the fact that the Malta Tourism Authority will be receiving a somewhat higher allocation. The increase, well reduced in real terms, will go mostly towards low cost airlines.
The Finance Minister also showed that he is able to start a fire without any advance smoke showing. He imposed other increases in taxation, on the excise duties front, raising his estimated take quite heftily there as well. But the hardest blow will be to the tourism industry.