I refer to the first slide. The National Competitiveness Council is often confused with the Competition Authority but it is not the Competition Authority. The Competition Authority does a very important job. A clumsy definition of competitiveness is that it encompasses all those factors which impact upon the ability of firms in Ireland to compete successfully in international markets. By competing successfully we mean they compete profitably and bring added value to the economy and which, in turn, means improving the quality of life for people in Ireland and laying the foundations for social progress. As might sometimes be feared, we are not an organisation which is concerned with promoting a race to the bottom in Irish business; we are concerned with promoting a race to the top. This is where we want to be.
The next slide shows interesting information. Despite the sharp decline in Irish living standards, we remain close to the euro area average. The slide shows Irish living standards measured as a percentage of GNP and as a percentage of GDP. I will not waste the time of the meeting by explaining the difference between why one measure is more important than the other. One indicator of the measure of our competitiveness is one which happens after the music stops each year, so to speak, and it is our performance in terms of net exports. The saga of the so-called Celtic tiger period, the post-2005 period is shown in the green box on the chart in the slide. It shows that net exports, exports minus imports, were performing very well up to 2003, flat in 2004, negative in 2005 to 2006 and recovered in 2007. There was strong recovery in 2009, aided in part by a very strong performance by some Irish export industries — I emphasise some industries because the base of the export recovery was quite narrow. The contribution of net exports was aided very considerably by a steep decline in imports. I will finish the analysis with this information. One of the constraints on growth in the economy is the very high debt position of Irish households. This chart shows the level of private households debt. It shows that Ireland has moved from being the most indebted country in the European Union as a percentage of gross national product into second place. Much de-leveraging remains to be done and approximately three quarters of this household debt is mortgage debt. As we are aware, the public sector finances deteriorated very suddenly and dramatically during that period. We are left with two very strong deadweights around our economic performance which we must address, namely, very high levels of private and public debt.
I will refer back to some of the charts but I wish to add that the economy should not be seen as analogous to a cork bobbing up and down on the waves of the ocean with no control over what happens. We must consider our case irrespective of what happens to the international economy. Although the job will be easier if the international economy is on a rebound, what we do ourselves in the way we structure our competitiveness and our ability to win market share in other countries will determine our fate. Irish exports account for 2% of world markets in manufactured exports and somewhat more in the world market in terms of the export of services. If we position ourselves correctly, have good strategies and are competitive across a range of competitiveness factors, which include cost — cost competitiveness is improving — and such areas as innovation and the quality of infrastructural provision, then we can do very well. One small and similar economy has already demonstrated this lesson to us. Singapore has rebounded remarkably quickly from the effects of the world recession. It is closer to China than we are and it is more familiar with the Chinese market than we are but, none the less, it is an example of when small can mean effective and produce results.
I refer to our policy directions and what we recommend. These are the final two slides. An earlier chart showed that foreign direct investment, FDI, companies — multinational companies in Ireland — account for a very high proportion of our exports — 85% or 90%. They employ approximately 125,000 people. The contribution to exports made by indigenous manufacturing companies, referred to in an earlier slide, is much smaller, approximately one tenth. Their contribution to employment, however, is somewhat, not significantly, greater, but greater nonetheless. One interesting feature of Ireland compared with some other stressed international economies — I will not use any acronyms, distasteful or otherwise — is that we do not have a balance of payments problem and the FDI companies contribute very significantly to ensure that outcome. They are also very important in terms of linking our economy with the international economy and as a method of diffusion of good quality management practices into our economy. They form a remarkably important part of our economy and it is difficult to see how we could change this reliance.
I refer to the point about the race to the top. Our essential infrastructure, including soft and hard infrastructure, such as education, research, broadband, energy, waste, road and rail infrastructure, must be among the best and most competitive in the world. Public sector reform is a remarkably important issue. We have a reasonable quality public service as measured by international studies but the quality of a public service says a good deal about the society of which it forms a part. If the public service is good, à
la the Nordic model, it has a significant impact on the ethos of the society. Public services also have an impact on business costs. These are two areas where the contribution of the public sector is vital. The Joint Committee on Finance and the Public Service has heard a good deal in this regard in recent times. The public service is also vital in terms of the delivery of services. The council is in the camp which believes that more funding does not necessarily mean better services. One can be smart in a constrained environment.
I refer to another issue which relates to the serious distortions that entered into the Celtic tiger period, that is, the phenomenon of enterprise and resources being sucked into non-externally traded activities. We know the consequences of this and, I am certain, every member of the committee is aware of the bitter personal consequences of this in terms of young people, especially those who set out on careers in the building and construction industry and who now see their future bitterly disappointed. We take a strong view that all incentives, tax expenditures and tax breaks which favour non-traded economic activity should be disposed of. There is significant movement in this direction but we export to survive and our public policy should reflect this. We have become famous, or infamous depending on one's point of view, in recent years for advocating a broadly based property tax. We have particular reasons for so doing. First, there is large gap in our revenue. A substantial although not horrendous residential property tax could raise between €1.5 billion and €2 billion annually per year. We became extraordinarily dependent on stamp duties and capital gains taxes from the construction industry. The figure of €1.5 billion can be put in the context of the €4 billion adjustment that had to be made in last year's budget. We believe that making greater use of user charges is rather important as well. The important thing about strengthening and broadening the tax base is that it enables us not to go down the ultimately self-defeating road of increasing marginal rates of tax. Despite what the British Chancellor of the Exchequer is now proposing, our VAT rate is around the limits of sustainability. If we increase income tax rates, the workplace incentives begin to decline. This does not relate simply to high income people but to anyone in the tax net.
There must be extensive and forceful application of competition policy. It is important in areas that may not seem relevant to business, including law, health and especially finance and other sectors. Accountancy and especially legal costs in Ireland are quite high. One chart in the presentation shows a very different pace of adjustment by the legal profession. I am not in any sense directing these remarks at the Chairman because of his professional background. Although costs have remained largely flat in the legal profession, there has been a very rapid adjustment in the accountancy profession. We raise the question of whether this has something to do with the different structures of regulation and competition in these sectors. The Competition Authority is in place. It is reporting comprehensively and copiously across several sectors. It is fair to say there has been a higher level of activity from the Competition Authority than from the implementation of its recommendations. We must never again have a property speculation bubble. We saw the terrible damage which it did to the economy and people's lives and job prospects and the way in which it has blighted parts of our countryside. We raise the question of whether there is a case for a review group of the property market and dynamics in the economy.
I refer to the four letter word, NAMA. We take the view that it is preferable to promote exports and economic growth through enhanced competitiveness. Let us remember that cheaper property is better for competitiveness than dearer property. It could be a higher priority than securing an accounting positive rate of return from NAMA.
