I thank the joint committee for the invitation to address it. For the purposes of the presentation and given the events of the past week, the focus of my submission will be confined to the impact Brexit is having on the retail industry in Ireland and what we consider to be possible solutions.
Like many members, I was disappointed with the outcome of the UK referendum on leaving the European Union, which is not to say the European Union is perfect. It is certainly not perfect and requires reform. It must do less and do it better. However, what Brexit has taught us is that elections and referendums have become polarising, have been driven by division and hate and are not in a country's best interests. We saw this in recent months in Austria, to a lesser extent in the referendum in Italy and to a greater extent in the United States with the election of Donald Trump. This is a regrettable feature of international politics. However, this broader issue is not the focus of the meeting, although the consequences of such political shifts are pertinent to our discussion.
We cannot underestimate the potential threat a hard Brexit poses to the economy, which is highly dependent on a close trading relationship with Britain. To put its significance in perspective, the UK is the second largest economy in the European Union behind Germany and the fifth largest economy in the world. More critically, it is Ireland's biggest trading partner, with more than €1 billion in goods and services exchanged between our countries on a weekly basis and 100,000 Irish households dependent on this relationship. These factors sum up the breadth of the challenge facing the retail industry, the largest private industry employer in the country. The retail sector provides 282,000 jobs spread across every village, town and city, accounts for 42,000 businesses which survived the recession, of which 83% are Irish owned and 75% are family businesses, and contributes €5.7 billion annually to the Exchequer.
Now that Article 50 has been invoked, the period until the full termination of the UK's membership of the European Union will be defined by uncertainty, unpredictability and destabilisation. This does not make it easier for us to strategise on ways to stave off the worst excesses of a post-Brexit hangover. Early indicators show the difficulty we face. Two negative retail industry reports were released in January, one from KBC Bank on consumer sentiment and a second known as the visa spending index. Both reports recorded a downward trend for the industry and concluded that in December 2016 - with Christmas approaching, December is always a good time for the retail industry - overall expenditure by householders was down; consumer confidence declined to a 22-month low; online spending increased by 15.4%, much of it focused on British retail operations; face-to-face spending in shops decreased for the third successive month; and, unusually, no increase was reported in clothing and footwear.
It is clear the leaking of significant expenditure to the UK is hurting Ireland and its businesses. This process is being aided and abetted by the virtual phenomenon of increased online sales and the return of cross-Border trade driven by the devaluation of sterling. The statistics are alarming for Irish retailers. Recent figures produced by the Department of Communications, Climate Action and Environment show that €850,000 is spent every hour online, of which 70% leaves the country. Given that 17% of small and medium enterprises are not online and that, of those which have an online presence, 75% cannot process payments on their websites, the challenge facing retail is clearly enormous. We are trying to abate this challenge with continued engagement with State agencies, particularly Enterprise Ireland.
More broadly, the further depreciation of sterling will continue to push up Irish import prices and will make exports less competitive. Differing packaging requirements will become necessary for Irish goods and products and long delays and queues of trucks at points of entry will affect the cost of goods, impact on the freshness of produce and create new pressures on margins. Hard border controls cannot be tolerated given the country's unique geographical position. I urge the Government to ensure it uses the precedent set in the Munich agreement in this regard.
Above all, instead of presenting problems, we must offer solutions to the challenges we face. The actions necessary to lessen the impact of Brexit on the largest private industry employer in the country include the following. The next budget must be Brexit-proof and VAT must be reduced to allow us to compete with the UK rate. A 3% reduction rather than incremental reductions of 1% is required because many firms will not pass on smaller incremental reductions. Employment costs, specifically in the area of PRSI, must be reduced. We would like the current PRSI rate of more than 8% reduced to 4.25%. Upward-only rent reviews should be abolished retrospectively. While legislation prohibits upward-only rent reviews in all new contracts, many retailers negotiated leases during the Celtic tiger era and the problem persists. Furthermore, retailers need to be empowered to get online and have full access to State supports.
We would also like the Government to negotiate a special position deal for Ireland with the powers that be in Europe, similar to that which Spain is seeking to achieve in the case of Gibraltar, which is on the Spanish mainland. Moreover, the recommendations in the Retail Excellence Ireland and Retail Northern Ireland report, Building Retail: North and South, should be implemented. The recommendations include establishing a North-South retail forum; using State agencies to create cross-Border shopping breaks; ensuring retail forms part of the tourism strategy of both Fáilte Ireland and Tourism Northern Ireland; increasing investment in the Dublin-Belfast Enterprise network; and launching a campaign, North and South, on VAT back entitlements for people from outside the European Union who make purchases in retail outlets. My colleague, the chief executive officer of Retail Northern Ireland, Mr. Glyn Roberts, will discuss these recommendations in further detail.
Earlier today, I received a number of telephone calls from retailers who want the Bus Éireann debacle resolved as a matter of urgency. The dispute is damaging Ireland internationally and having a major impact on footfall and retail sales activity. When we are trying to benefit from Brexit and the invocation of Article 50 it is foolhardy in the extreme to fail to show leadership on this issue.
The opportunity must be used to support the largest employer in the domestic economy with favourable measures targeted at ensuring rising costs do not outstrip growth. These actions are critical at this juncture as the impact of Brexit is not a well-defined scenario for Ireland. This country is the collateral damage caused by the referendum outcome.
Disentangling Ireland from the UK involves the most brutal break-up of a long-standing relationship. We need to ensure we secure the best possible terms to safeguard Irish retailers and the 282,000 jobs and 100,000 businesses that are dependent on this relationship. For many local businesses, this is a difficult and uncertain time.
A post-Brexit Ireland needs to remain a self-confident, outward-looking innovative country and we cannot let anything jeopardise that. I thank the committee members for listening and I appreciate the opportunity to present on behalf of my organisation. I look forward to further questions.