While the differential in prices will rise, sagging cross-Border trade could be hit by weakening euro

COULD A two percentage point VAT hike in the next Irish budget really propel more shoppers through the doors of retailers in Northern Ireland?

Major high street stores and supermarkets will certainly be hoping for more than a VAT hike south of the Border to boost their takings if latest industry research is anything to go by.

New figures from the British Retail Consortium show there has been a major slump across the board in the number of shoppers crossing thresholds. Jane Bevis, from the Northern Ireland Retail Consortium, says the number of people going into local stores dropped sharply in the three months to October.

Overall, Northern Ireland suffered a 5.5 per cent drop year on year in footfall between August and October. Not only did the number of shoppers drop sharply but there was also a major increase in the number of empty retail premises, Bevis says.

“Obviously trading is tough; Northern Ireland recorded one of the highest vacancy rates in the UK of 12.9 per cent, which is very significant.

“There is evidence that cross-Border trade has fallen off a bit this year. Major retailers and supermarkets have invested heavily in shopping locations close to the Border and obviously they would like to see an uptake in the numbers again.

“I think a VAT rise could cause a major leakage problem for the Irish Government particularly around Border locations,” Bevis says.

She believes that it is not just the large British multiples that might benefit from a rise in VAT rates in the Republic.

“Smaller retailers and shops also enjoy an associated benefit from any increase in footfall – the more shoppers going into shops the greater the benefit for the whole economy.”

But not everyone is convinced. Northern Bank chief economist Angela McGowan acknowledged the proposed VAT rate rise to 23 per cent – as opposed to the current 20 per cent in the North – will “widen the consumption tax” but she said cross-Border trade is heavily influenced by exchange rate movements.

“Although the euro has fallen only very slightly against the pound during of the ongoing sovereign debt crisis, any further weakness in the euro could easily erode the VAT incentive for people in the Republic to shop north of the Border,” McGowan warns. She believes the current economic backdrop is radically different to 2008 and 2009 when the cross-Border shopping boom was at its height.

“The exchange rate is not quite as favourable. The North’s inflation rate is significantly higher and there remains a significant differential in the VAT rate for the tourism sector – the level of VAT tourism in the North is much higher than the new 9 per cent rate for tourism products in the Republic.

“The last differential serves to remove the incentive for southerners to take a weekend shopping break in the North,” McGowan says.

According to Northern Bank, the North’s retail sector has been one of the hardest-hit local sectors in the economic slowdown. In its latest quarterly sectoral forecast report this week, it estimates there will be growth of just 1 per cent next year and possibly 2.3 per cent for 2013.

It also warns that the odds of the North slipping into recession have increased – to 20 per cent – and that risk could rise depending on how the euro crisis plays out.

The tightrope the economy currently walks is never more evident than in Newry, once regularly glancing over its shoulder at the Celtic Tiger and still the capital of cross-Border shopping. The city is successfully nurturing local exporting successes, such as Norbrook Laboratories and First Derivatives while trying to tend to casualties from the construction crash.

Conor Patterson, president of the Newry Chamber of Commerce and Trade, said the city “like the rest of Northern Ireland, Britain, Ireland and Europe” is trying to find a way out of the economic fog.

“We are not focusing on VAT rates or the like in Newry just now. Times are tough in Newry – it has been a tough 11 months so far and, like the rest of Northern Ireland, we are just battling to hold on to business.

“We have some great manufacturing and local tradeable services companies who are very successful exporters so in one sense it is a mixed bag for us.

“We’re focusing on Newry standing on its own merits – whether or not there is a VAT rise in the South.”