I thank the Chairman and members of the committee for inviting me here today. I am accompanied by Dr. Marie Bourke who is head of the council's secretariat and Mr. Manus O'Donnell who is an economist with the council's secretariat. As the Chairman has said, we recently published the Cost of Doing Business in Ireland 2019 report that sets out how Ireland is performing on a cost-competitive basis relative to competitor jurisdictions. A copy of the report has been circulated to the committee. I look forward to discussing our report this afternoon. I also intend referring to the research and recommendations to Government in the council's annual report entitled Ireland's Competitiveness Challenge 2018 that we published last December.
The National Competitiveness Council was established by Government in 1997 as part of the Partnership 2000 agreement. The council reports to the Taoiseach and the Government through the Minister for Business, Enterprise and Innovation on key competitiveness issues facing the Irish economy. We offer recommendations on policy actions required to enhance Ireland's competitive position.
In accordance with the European Council recommendation of September 2016 on the establishment of national productivity boards by euro area countries, in March 2018 the Government designated the council as the body responsible for analysing developments and policies in the field of productivity and competitiveness in Ireland. The council serves as an independent voice. In an advisory capacity to Government, it offers recommendations on areas to improve competitiveness and productivity. The council members serve in a voluntary capacity. They are appointed by the Minister and drawn from civil society. These members have an interest in and an understanding of the factors that affect competitiveness and what might improve them.
The work of the council is underpinned by research and analysis providing an evidence base for its policy recommendations. Each year, in accordance with our terms of reference, we publish a number of reports as follows: the Cost of Doing Business in Ireland report is a statistical report that benchmarks key business costs and highlights areas where Irish enterprise costs are out of line with key competitors; Ireland's Competitiveness Scorecard provides a comprehensive statistical assessment of Ireland's competitiveness performance, including a wider range of metrics and indicators other than costs; Ireland's Competitiveness Challenge uses the information generated in the reports to outline the main challenges to Irish competitiveness; and we produce a productivity statement that tracks the productivity performance of the Irish economy. We also produce a series of short two-page or three-page competitiveness bulletins, submissions and other papers on specific competitiveness issues such as electricity, insurance, legal and rankings. In the past the council has made submissions to the Action Plan for Jobs and, more recently, the Future Jobs 2019 plan.
Ireland's ability to compete in international trade and sell our goods and services abroad is a key determinant of our wages, living standards and ability to finance social services like health, social protection and education. It allows our economy to be a successful member of the eurozone and withstand the shocks that are beyond our control. Competitiveness is part of the DNA of sustainable jobs. If we want to provide and sustain good, well-paid jobs for our citizens and ensure that these are sustainable then maintaining our competitive edge is crucial.
Competitiveness is a complex concept and results from many factors. Along with labour force participation, two of the principal factors determining competitiveness performance are productivity and cost-competitiveness. In the medium term productivity improvement will be the primary driver of competitiveness, employment, wages, living standards and the financing of public services.
Costs are a key element of national competitiveness. Maintaining cost competitiveness is critical to the overall competitiveness of firms based in Ireland and to maintain the virtuous circle between the cost of living, productivity growth and wage rates. If costs in Ireland are too high relative to productivity, it damages Ireland’s competitiveness and threatens jobs. Irish businesses would find it more difficult to export and internationally mobile firms would be disincentivised from locating here. Ultimately, prohibitive costs would make international trade and investment more expensive, reducing the economy’s beneficial exposure to the international economy. To be competitive, however, an economy does not need to be low-cost if it can find ways to boost productivity.
Ireland’s overall economic performance indicates that we are continuing to maintain a strong competitiveness position. The recovery has continued apace. Economic growth is strong and unemployment is relatively low. This is very good news. However, as the economy continues to grow, ensuring our model is sustainable and balanced takes on even more significance. The risks to Ireland’s prosperity are increasing. International economic uncertainty and the return to protectionist trade policies in certain key global economies, along with developments in US tax policy and an evolving international tax landscape, pose a threat to our future economic growth and stability. Domestically, a fraction of firms provide the major part of Ireland’s productivity performance, value added, exports and corporate tax receipts, disguising the majority of underperforming firms where productivity growth is stagnant or falling. The narrow range of exporters, products and services exported, and the reliance on a small number of export markets, pose serious concerns.
The vulnerabilities in the fabric of the economy, coupled with the challenging global environment, endanger the hard-won medium-term sustainability of our economy. It has never been more important in the economic life of our country that we recognise these vulnerabilities, and that government policy strengthens our productivity performance and competitiveness to secure Ireland’s future prosperity.
The council tracks the three main international competitiveness indicators for Ireland. While Ireland still ranks highly in these indices, we have been falling down the rankings in recent years. In the 2018 IMD World Competitiveness Yearbook Report, Ireland is ranked 12th, a fall of six places on the 2017 rankings. In addition, Ireland fell six places from 17th to 23rd in the World Bank's Ease of Doing Business Report 2019. Ireland is ranked 23rd out of 140 countries in the World Economic Forum's global competitiveness report.
The council’s competitiveness challenge report, published in December 2018, identifies a range of recommendations that address both immediate competitiveness issues, and more medium-term challenges aimed at enhancing Ireland’s competitiveness and productivity performance. As in previous years, the council has sought to strike a balance between addressing issues that are well known, housing, climate action and the availability of talent, with challenges that are emerging, such as traffic congestion, and the combined hidden costs of proposed regulation, for example the new water tariff regime, water abstraction, work-life balance and pension reform. Three overarching themes are considered to address what I have just raised: ensuring the sustainability of the economic model; maintaining cost competitiveness; and narrowing the productivity gap between the best and the rest. We may be able to talk about these later.
The council published the Cost of Doing Business in Ireland report on 12 April. As mentioned, the report has two main aims: to flag any areas where business costs in Ireland are out of line with our international competitors; and to build the evidence base for the next competitiveness challenge document, which makes recommendations regarding those areas of policy emphasis to deal with competitiveness issues. The report achieves this by benchmarking the costs of doing business in Ireland relative to international competitors using the latest available data on various cost indicators. It is a statistical exercise. The report describes the overall cost profile in Ireland as "high-cost, slowly increasing". In 2018, prices in Ireland increased by 0.7%. This was the slowest rate of inflation of all euro area economies, and it was the joint slowest rate of price increases in the EU. Inflation was faster than in previous years, but still well below the price growth rate for the euro area as a whole and the UK. Our low growth being below comparator countries is very welcome from a cost-competitiveness perspective. However, we note that Ireland remains an expensive location. So, while average prices are increasing slowly, they are doing so from a comparatively high base. We need to avoid too much focus on averages.
The report identifies a number of emerging pressure points in our economy which have the potential to significantly erode our competitiveness further. The major cost factors for Irish businesses are labour costs, the rental price of commercial property, interest rates and the continued increase in insurance costs. Labour costs are broadly in line with the euro area average but above those in the UK. They grew by 2.9% in 2018, four times faster than the rate of inflation. Labour costs vary considerably between different sectors in Ireland. The latest EUROSTAT data show that labour costs in certain sectors of our economy are also out of line with UK and euro area. For example, labour costs in the utility sector are €53 per hour in Ireland compared with €37 per hour in the UK and €48 per hour in the euro area. In the ICT sector, labour costs are €47 per hour in Ireland, €35 per hour in the UK and €41 per hour in the euro area. In 2018 in most sectors of the economy labour costs were greater than, or equal to, those in the UK. Hourly labour costs in Ireland grew by 6.1%, 4.5% and 4.3% in the ICT, construction and financial sectors, respectively, compared with 4.1%, 5.4% and 2.4% in the UK.
Residential property prices are now roughly where they were at the start of 2005. The average rent in Dublin was €1,527 in quarter 1 of 2018. Rents have been growing since 2013 and have been increasing by over 5% per annum for the past four years. Over the past year, there has also been a steady increase in commercial property prices and the cost of constructing office space. In 2018, the construction cost per square metre of a prime office building in Dublin was $3,065, lower than in London but above that which applies in cities such as Amsterdam and Munich. In the office rental market, in the past five years prices have increased by 15.9% in Dublin suburbs and by 16.5% in Galway.
In recent years, aggregate transport sector prices in Ireland have increased moderately. In 2018, the average prices per litre of petrol and diesel were €1.43 and €1.34, respectively. Over the course of 2018, petrol prices increased by 2.8% and the price of diesel increased by 4.6%. Traffic has increased across the road network and traffic congestion in the cities has worsened as highlighted by the fact that 11% of all commuters spent an hour or more commuting to work in 2017, the most recent data available. At the same time the congestion level in Dublin was higher than major European cities such as London, Paris and Brussels. This is a form of hidden inflation which is not picked up in price indexes.
Utility prices have fallen due to the reduction in global oil prices. Electricity prices in Ireland have fallen since the first half of 2014 but in the first six months of 2018 remained higher than the UK and euro area average. Similarly, gas prices here have also fallen since the first six months of 2014. However, the fall was lower than in the euro area and the UK, which points to a relative competitiveness loss.
Businesses in Ireland face higher interest rates than the average business in the euro area. The cost of credit remains very high compared with the euro average. In 2014, Irish companies faced a similar interest rate, 3%, to counterparts in Germany and France, whereas now the rate is higher for Irish companies at 3.3% and lower in those economies at 2%. This means that Irish businesses face costs that are 65% higher than their EU counterparts.
The service sector continues to be the main source of upward price pressure, as it has continued to rise since early 2015. The CSO services producer price index, which measures changes in the average level of prices charged by producers, shows that prices for a range of business services, such as freight transport, postal and courier activities, computer programming and consultancy, legal, accounting, advertising and market research services have been increasing in Ireland. In the year to 2018, service producer prices increased by 3.1% in Ireland and were 7% higher relative to 2015. In comparison, the corresponding figures for the euro area were 1% and 1.8%.
The average tax rate for those earning the average income is low compared with other OECD countries. However, the marginal rate for a person earning the average wage is the second highest marginal tax rate at 49% among the high-income OECD countries. The council acknowledges the measure introduced in budget 2019 which raised the entry point for the higher rate of income tax from €34,550 to €35,300 for a single worker. We must continue to reform our tax system and make it internationally competitive so that Ireland continues to attract highly qualified talent to these shores.
The Cost of Doing Business in Ireland 2019 report gathers information and provides a snapshot of the cost profile in Ireland. It is a significant input into the subsequent analysis of policy implications and associated structural reforms required to address Ireland’s cost base, which are included in our report, Ireland’s Competitiveness Challenge, published annually. In the challenge report we published last December, these were addressed under the theme of maintaining cost competitiveness, along with other recommendations to address the challenges under the other two themes of ensuring the sustainability of the economic model and narrowing the productivity gap between the best and the rest.
Some of the key recommendations relating to cost competitiveness, included in the report, relate to measures to address housing affordability through the intensified delivery of housing supply measures in the Rebuilding Ireland action plan; expediting the implementation of the recommendations from the cost of insurance working group; the need to develop sectoral-level data on water and waste; and the development of a more comprehensive and representative data set on the cost of legal services.
I acknowledge the Government's commitment to improving Ireland’s productivity and competitiveness through various policies and initiatives including the actions to be progressed in 2019 in the Government’s Future Jobs Ireland initiative.
The council welcomes publication by the Government of the plan and believes it will be an important policy document in framing enterprise and economic policy in the years ahead. The council will continue to advocate for competitiveness and productivity to be central pillars of economic policy.
I thank the Chairman and committee members for affording the council the opportunity to meet them. I look forward to our discussion.
