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Thursday 08 June 2017

Tom Ferris is a Consultant Economist specialising in Better Regulation. He lectures on a number of PAI courses and contributes blogs regularly to PAI. He was formerly the Department of Transport’s Senior Economist.

Ireland is becoming a better place to do business in, according to the National Competitiveness Council (NCC). The evidence is set out in the NCC’s Report published last week on Costs of Doing Business in Ireland.[i]

In general, Ireland performs well using the main business costs across over 70 indicators. However, there are no grounds for complacency, as there are some areas where Irish enterprise costs are out of line with those of key competitor countries.

 

Improved competitiveness

Ireland’s competitiveness has improved considerably in recent years. The improved competitiveness of our exports sector has been one of Ireland’s greatest strengths and has been central to sustained economic growth and job creation. It has been critical to the success of Irish-based exporters, allowing them to maximise the opportunities arising from increases in global demand. However, it is not all plain sailing. As Prof Peter Clinch, Chairman of the NCC, commented on the launch of the NCC Report:

“The recent appreciation of the euro vis-à-vis sterling and the higher international price of oil provides a timely warning about just how vulnerable Irish firms are to external international shocks. The appreciation of the euro has placed Irish exporters under increased cost competitiveness pressure. Higher international oil prices exert a significant influence on energy and transport prices. This reinforces the importance of prioritising policies and actions that are within Ireland’s control to enhance cost competitiveness”.[ii]

While there have been improvements in Irish cost competitiveness, there are a number of threats to continued economic success. The global economy is not proving particularly robust, with growth prospects curtailed by lower consumption, investment, trade and productivity levels. Accordingly, efforts are needed to further improve competitiveness, to sustain economic growth and to spread the benefits of economic growth wider.

 

Costs are critical

The NCC Report recognises that the cost base for enterprises has improved across a range of measures since 2010, for example, the cost of starting a business, communications costs and average income taxes. Ireland, however, remains a relatively high-cost location and already the return to sustained levels of growth has resulted in a series of upward cost pressures. Accordingly, the NCC Report expresses concern about a number of areas where costs are increasing. In particular, it is concerned about the rise in commercial and residential property costs. The Report also highlights the high costs associated with a range of business services including postage and courier services, legal services and market research. Services associated with the construction sector, namely architecture and engineering, have also been significant drivers of the service-price increases over the past year.

The cost of credit for enterprise in Ireland is another area that that NCC focuses on. While the cost of finance and the supply of credit have undoubtedly improved in recent years, Irish firms face higher interest rates than their competitors abroad on loans of up to, and including, €1m. While most firms are, understandably, mainly concerned about accessing credit rather than the cost of that credit, the interest rate differential between Ireland and the Euro Area places Irish-based enterprises at a distinct disadvantage.

Finally, in relation to labour costs, the NCC notes that although demands for wage increases are understandable, after a period of economic stagnation and wage cuts, Ireland’s relative competitive position will be negatively affected if wage growth outpaces that in competitor countries. Therefore, to ensure that wages are sustainable, wage growth should not outpace productivity growth. At the same time, there must be a relentless focus on protecting real living standards by avoiding, as best as possible, significant increases in the costs of living.

 

Overview

The NCC tracks some positive statistics in terms of improvements in costs in its latest report. However, it also signals some negative trends in a number of areas. The NCC has made twenty-three specific recommendations to counteract the negative trends.  The recommendations relate to:

  • utility costs (5),
  • property costs (5),
  • transport costs (4),
  • labour costs (3),
  • credit and financial costs (3), and
  • business services and other input costs (3).

They embrace both the public and the private sector. As Professor Clinch puts it,

“There is a role for both the public and private sectors alike to manage proactively the controllable portion of their respective cost bases, drive efficiency and continue to take action to address unnecessarily high costs. Such actions will ensure that improvements in relative cost competitiveness are more sustainable, leaving Ireland better positioned to cope with external shocks”.[iii]

Notes


[i] Report available here.

[ii] NCC Press Release available here.

[iii] Press Release available here.

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