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Sustainable Border Retailing

An assessment of the epidemic of cross-border shopping and the issue of


commercial rates reform in local authority financing.

Peter Berry

May 2010

Introduction

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The aim of this report is to highlight, as effectively as possible, the ravaging effects that cross
border shopping is having on the local economy and retail sector of the Border County
region. The report itself does not contain any new statistical evidence but is based on the
most up-to-date sources available with most of the research based on the period up to mid-
2009. The report aims to highlight the growing trend in cross-border shopping which will
soon reach a tipping point which will spell the end for local retailers in the Border County
region.

This problem has been lightly addressed before in the media, but largely around the
Christmas period when consumers from all over Ireland will make once-off trips, attracted by
cheaper priced goods and cheaper alcohol. The media very rarely take into account that
throughout the year the Border County region is losing business to a lower VAT rate and the
power of globalised retail multiples. This report intends to raise the issue of the relative
inability of local authorities to tackle cross border shopping because of their imposed fiscal
constraints through the commercial rates systems. These financial constraints on local
authorities are discussed in this analysis. This report aims to offer suggestions for local
authority financing, but does not intend to promote any one solution. Rather, the purpose of
any suggestion is to raise awareness and facilitate a debate which should already be of
paramount importance.

Cross Border Shopping

Cross-border shopping from the Republic of Ireland to Northern Ireland is no longer an issue
for just the Department of Finance but is a crisis that is rapidly evolving. As times elapses,
inaction is costing the Irish Exchequer millions in revenue, but more worryingly, this is
facilitating the emergence a trend of cross-border shopping that is becoming part of the fabric
of everyday life for thousands of householders. Although these householders are saving
money in the short-term, each shopping trip is contributing to the rapid deterioration of the
Irish retail industry and cutting into the jobs market. There have also been links made
between cross-border shopping and rising emigration.1 The key to solving any crisis is to first
recognise the problem and then create a plan to implement changes that tackle these
problems.

1 th
Irish Times. Paul Cullen. Cross-Border Shopping link to emigration – economist. 4 Feb 2010

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There is an ongoing effort to create jobs through the smart economy, foreign direct
investment and through fostering indigenous high skilled industries. Many of those employed
by retailers in the Border County region are not primarily third level college graduates or
high-skilled workers. Also, most of those retailers are not part of retail multiples and may
seem small when compared to the potential of a new pharmaceutical factory, for instance.
However, these small retailers represent real jobs for the community, whether full-time or a
part-time. The political onus should not just be on the creation of new jobs, but sustaining
what is already there.

The effects of globalisation and modernity are changing the lives of Irish citizens. In the past
century Ireland has been rapidly transformed from a colloquial, localised and largely rural
economy into a more urbanised, industrial and spread out landscape. Transport systems in
Ireland mean that there is no part of the island which is more than a few hours away. Usually,
on an island nation there should be no financial or fiscal incentive to travel further than
necessary, unless it would be for pleasure purposes. However, the Irish situation is largely
different because both States share a land border and one of those States offer valuable
currency exchanges and lower tax rates. This is having a varying detrimental effect on the
local economies of different areas of the Republic of Ireland.

The most recent evidence from the Journal of Cross Border Studies in Ireland (2010)
provides statistics of cross-border shopping from the period of 12 months previous to the
second quarter of 2009. Under the auspices of the Quarterly National Household Survey,
evidence was gathered which highlights a concerning trend. The survey found that 16% of
households in the Republic of Ireland made at least one shopping trip to Northern Ireland in
this time period and of this 16%, the average number of trips was 6.7. This is the equivalent
of over one trip for every household in the country. A geographical breakdown of these
shopping trips reveal where these householders come from:

 41% of households in Border region


 22% of households in the Mid-East
 21% of households in Dublin
 14% of households in the West
 5% or less below the Wicklow-Galway axis

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The evidence shows that the number of households from the Border County region which
engage in cross border shopping is almost double that of any other region. The Quarterly
National Household Survey reveals that 23% of respondents from the Border County region
said that they intended, for the period 2009/2010, to carry out their regular shopping in
Northern Ireland. The Border County area is exceptional from all other regions in the
frequency with which householders shop in Northern Ireland. All other regions recorded no
more than five shopping trips in 12 months. In the Border County region, this number jumps
to 14.4 trips in twelve months. This means more than one trip per month for those living in
the Border County region indicating that these households will be most likely to purchase all
of their goods across the border.

The same Quarterly National Household Survey suggests that spending on cross border
shopping in the year long period up to April 2009 was €435m. When calculating this
spending the survey questioned households on how much they spent. The figures show that
88% of Border County households spend less than €299 on each trip indicating that they
engage in frequent and regular shopping trips. This activity is trending to become the norm
for many border county families.

This endemic activity is destroying the livelihoods of businesses and retailers in the Border
County region and around the Republic. This increasing trend was indicated from research
conducted by InterTrade Ireland which shows that the proportion of Southern-registered cars
in shopping centre car parks in Newry, Enniskillen and Derry has increased 40-50% over
Summer 2009 to 70%.2 UCD partnering with the Marketing Institute of Ireland launched their
Consumer Market Monitor Q4 results which show an estimated €810m has been lost by the
Irish Exchequer in 2009. This represents 3.5% of the Irish retail market. The results indicate
that cross-border shopping has increased 25% over 2009 and 250,000 households now do
their regular grocery shopping in the North.3

This trend cannot continue without some sort of action to protect the retailers and the
unemployed of the Border County region where the damage is most acute. There have been a
number of positive actions taken to protect business and retailers in the region such as a small
reduction in commercial rates by local authorities or the formation of various local groups,

2 th
Irish Times. Paul Cullen. 25% Jump in cross-Border shopping – survey. 26 Oct 2009.
3
Marketing Institute of Ireland. Consumer Market Monitor Q4. UCD Smurfit. 2010.

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such as the Sligo Fair Dealers, who have a common goal of helping each other to support
business and maintain jobs.

Although local initiatives such as the Sligo Fair Dealers are to be commended and
encouraged; there has to be a substantial and meaningful response from local and central
government. There have been some mutterings of a different rate of value added tax for the
Border County region, but this idea has been discouraged because it too could lead to
problems for other regions. A more acceptable solution would be to empower each local
authority to make the appropriate fiscal changes in their own jurisdiction depending upon
how severe their particular situation may be. Ideally, if a local authority in the Border County
region had the power and resources to reduce its commercial rates by a meaningful 30% it
could give retailers in the Border County region a chance. If the current trend continues there
will be fewer commercial rates to collect anyway since retailers and businesses will fold
under the pressure of cross border shopping.

A reduction of this kind in commercial rates would not facilitate the retailer to dramatically
slash prices but could go towards the cost of paying some bills, employing a part-time worker
or offering a better deal which might persuade a consumer to shop local. It would be a
positive and tangible action which would help many struggling businesses through a period
of great turbulence. However, the precarious structuring of local authority financing means
that at the moment such a possibility is almost impossible to implement.

Local Government Finance

The issue of local government financing has been a topic of significant attention for the past
three decades. Local authorities in Ireland are disadvantaged in the sense that they enjoy little
financial autonomy in comparison to their OECD counterparts. The lack of fiscal autonomy
which currently afflicts local government means that there is increased pressure on central
government to provide financing. This in turn is preventing local authorities from providing
adequate levels of public services.

The 2006 Indecon International Economic Consultants report on local government financing
stated that significant increases in central government funding need to be implemented in
order to maintain the current service provision standards at local level. The report also
recommended that the current form of local government financing needs to be revised with

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greater emphasis on locally based sources of funding.4 The 2008 OECD report echoed the
sentiment that Ireland must move towards local forms of financing.5

Currently in Ireland, local taxation is accumulated in the form of commercial property rates.
These commercial rates are not exchanged for any particular service, but are in effect
collected to meet the deficiencies arising in local government financing. It should be
highlighted that commercial rates are ‘not related to specific benefits received by the
individual ratepayer since the benefits of local expenditure are not confined to ratepayers’.6 In
2004 the commercial rates intake constituted about 25% of funding for local government.7
Commercial rates represented 28% of total revenue income for local authority budgets in
2009.8 This trend represents a greater financial dependency by local government on the
commercial sector.

Local government in Ireland is being forced to place a greater financial burden on the
commercial sector of the economy as they attempt to balance deficits incurred from current
and capital expenditure. The 2009 OECD report shows that in comparison to other European
nations very little tax revenue goes directly to local government. The figures in the OECD
report from 2007 show that the average amount that goes to local authorities is 2.2% in
Ireland which is well below the 10.6% average of 18 other European countries. 9

The current local government financing arrangements place undue strain on the ability of
authorities to successfully manage their localities. Under the Planning and Development Act
2000, development contributions are payable by persons developing property to ensure an
appropriate contribution toward the cost of public infrastructure and facilities.10 However, the
downturn in the construction industry leaves the future of this revenue in doubt. Likewise, the
proceeds of the motor tax industry cannot be depended upon as a stable source of funding for
local authorities through the Local Government Fund.

4
Indecon International Economic Consultants, 2006. Review of Local Government Financing. Dublin.
Government Publications.
5
OECD, 2008. Ireland: Towards an Integrated Public Service. Paris. OECD.
6
Review of Rating Law: Report of Working Group, 2001. Dublin. P5.
7
Indecon International Economic Consultants, 2006. Review of Local Government Financing. Dublin.
Government Publications. P.ii
8
Local Authority Budgets 2009. Department of Environment, Heritage and Local Government. 2010.
9
OECD, 2008. Ireland: Towards an Integrated Public Service. Paris. OECD.
10
Commission on Taxation Report, 2009. Dublin. Stationary Office.

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Alternative Finance

The need for a more stable source of financing has been highlighted in almost all reports
regarding the financing of local authorities. The introduction of the levy on non-principle
private residences may be seen as the first step on the path towards more stable and regular
financing. It could be argued that a form of a domestic property rate may be an equitable way
to provide some measure of fiscal stability for local government. If the nation were in a more
secure economic position to pay such a domestic rate then it would offer a more stable fiscal
footing for local authorities. However, the current emphasis solely on commercial properties
unfairly distributes the tax burden upon a retail sector that is struggling in the face of an
economic downturn.

The need for the implementation of some form of domestic property tax is an attractive
concept for the equitable, sustainable and fair distribution of fiscal responsibility in local
government financing. It is true that rates on domestic dwellings were never fully abolished,
rather the liability for their payment was transferred upon central government.11 The current
unsustainable situation is not only creating a financing gap between rural and urban councils
but is also targeting a commercial sector that cannot afford to carry the fiscal responsibility
alone.

The unpalatable nature of domestic property rates would never win popular favour with the
public and this has always prevented the incumbent from tackling the issue. It could been
argued that domestic rates would provide financing for a greater quality of public service at
local level as it does in many other countries. Another benefit of a stable source of local
finance would be greater financial autonomy for local authorities who could spend the funds
as it best serves the local community, whether that would be helping local retailers maintain
jobs and their businesses in a tough economic climate through reduced commercial rates or
providing funding for a new local amenity or service.

Clearly, there must be an alternative to the current form of local government funding. The
buoyancy created through development levies has proved to be unsustainable. A situation
now presents itself where local authorities are overly dependent on revenue on commercial
rates. Local authorities must be empowered through a stable and dependable source of
financing.

11
Healy, David. ‘Financing Our Local Authorites’. 2006. PSAI.

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Any alternative to the current form of local authority financing must strive to keep the overall
tax burden low and maintain the integrity of the tax system. Secondly, the implementation of
any new tax must aspire to increase economic activity within the Republic of Ireland and
increase the ability of the Irish commercial sector to trade on a more cost effective basis. A
restructuring of the current tax system must observe the promotion of employment and the
ability of the commercial sector to provide employment.

Conclusion

Across the Republic of Ireland businesses are fighting to stay afloat in the face of
unprecedented challenges. This report does not intend to detract from the fact that there are
businesses all across the Republic of Ireland that could benefit from cheaper yearly rates or a
restructured tax system. However, the sheer extent of the challenge that is facing retailers in
the border county region must be acknowledged through tangible, effective and immediate
action.

Each retailer that loses their business because of cross border shopping represents the cutting
of a thread that holds the community together. In a time of great despair and an unclear future
for businesses and retailers it would be disingenuous of those who have been given the power
not to make a difference or not to be seen to be exhausting every possibility in trying to solve
this problem.

A restructuring of the current way in which local authorities finance their budgets could go a
long way to create a sustainable business environment in areas where there is economic
inconsistency. Although local authorities set the rates, it is almost an artificial privilege
because they cannot realistically give businesses in the Border County region, and elsewhere,
the temporary economic advantage that they need in order to compete meaningfully with
Northern Ireland.

Action needs to be sooner rather than later as any prolonged period of response will lead to a
worsening situation, where upon going across the border to shop will become a common
feature of life for many more. A situation such as this will ravage local communities slowly
and over time. Until there is some action taken, possibly in the form of a 30% commercial
rates rebate funded directly from central Government, there can be no assumption that the
situation will suddenly improve at some unspecified point of time in the future.