2. Discuss the key elements necessary if Ireland is to regain its competitiveness in the future.
National competitiveness on its most basic level states that a countries competitiveness
requires the most effective use of human and natural resources for a country to accomplish a
certain goal. As countries look to prosper as they emerge from the recession, regaining their
national competitiveness is a must. It is one of the biggest challenges facing the Irish
Government at present. As they strive to improve their national competitiveness at present, it
is also important to maintain a high standard and improve upon it in years to come. The key
characteristics that must be met for Ireland to regain its national competitiveness that will be
discussed in this report are:
Cost of Doing Business
Macroeconomic Stability and Public Investment
Developing the Skills and Enterprise Base
Access to Finance
It is vitally important for Ireland to have a strategy to improve the competitiveness of the
country. One area that must be looked at is the cost of doing business. Although there has
been evident improvement in this area in recent years, the need for further improvement in
the area of cost competitiveness is still clear through high levels of unemployment and low
levels of business investment. It is also important to address cost factors of energy while also
taking a look at the current rapid increase in both house prices and residential rent. This could
possibly have an adverse effect on wage expectations and prices throughout the country.
These three sub-areas need to be looked at in order to make sure that Ireland remains cost
competitive.
Labour
To improve labour cost competitiveness, reviewing areas such as Income Tax, PRSI and
Social Welfare Rates are a necessity. High Income Tax rates generally tend to discourage
entrepreneurs and also individuals moving to Ireland to take up employment. (NCC N. C.,
2014) It’s important that Ireland has a competitive tax regime to attract workers to remain in
or return to the labour force. When levels of Income Tax are high, it makes employment
unattractive in comparison to staying on social welfare. Why go through the effort of working
when the majority of your wages are taxed if you can stay on the dole or other benefits and
do far less work. If economic conditions continue to improve then it would be beneficial to
review income taxes to support income but making sure to protect labour cost
competitiveness. The current PRSI step effect is proving to be a discouragement for full time
workers to work overtime and part-time workers to seek extra hours. If working these hours
brings workers above €352 a week, they know this will increase their PRSI that they are
forced to pay. (Protection, 2015) Ireland should consider changing this system to provide
incentive for employees to work at all earning levels to ensure the labour force remains
competitive. In relation to the social welfare rates, if an individual is comfortable on the rates
3. they are receiving they will have no incentive or motivation to return to the labour force.
Changes should be made to reduce payments the longer individuals are out of work and on
the dole. It is also essential to provide adequate training to those that have not been working
for long periods of time and continue to have difficulty obtaining employment.
Energy
Ireland is faced with the challenge over the next few years of delivering on their
environmentally friendly and beneficial energy projects while also managing to lower energy
costs. If businesses are faced with high energy costs, profitability will be affected and
multinational and even new developing firms will be reluctant to establish firms in Ireland.
With the option to relocate to relocate to other countries almost always available, Ireland has
to ensure it remains as attractive as possible to businesses. New companies starting up not
only benefit the labour force but will also benefit the economy through increased revenue and
taxes. However, as of the second half of 2013, Irish prices for large electricity users had
become the 4th most expensive in the EU-28 (Sheehan, 2014). The EU’s industrial electricity
prices are more than twice that of the U.S and within the EU Ireland has the 4th highest
prices. Remaining competitive with energy prices so high in comparison to other countries
round the globe is a lot to ask. Efforts must be made to lower these costs while also acting to
introduce greater use of environmentally friendly options. New homes should be supplied
with renewable energy sources while reducing energy consumption in general should be
highlighted and enforced by the Government.
Property
With housing prices rapidly increasing again, there is a direct impact on the standard of living
and also wage demands throughout the country. With this happening it is essential to ensure a
sufficient supply of both housing and commercial property (NCC N. C., 2014). One way that
has been suggested to aid this is the imposing of a Site Value Tax. This tax would have to be
paid regardless of what is built on the land or what the land is used for. Unlike the PRSI step
effect, this wouldn’t distort supply in a similar way as it is non-discrimatory (NCC N. C.,
2014). With this tax in place it would encourage people who have land with nothing built on
it, or who aren’t using it, to sell the land to people looking to build houses or businesses that
wish to set up in the area. This would help with the supply of housing and commercial
property. Further changes are needed regarding the high rent rates certain businesses have to
pay. While the changes in 2009 that enabled rents to be reviewed downwards was a great
start (General, 2009), Businesses who still have excessively high leases that can only be
amended on an ‘upward only’ basis must be aided to ensure their continued presence in the
country.
Macroeconomic Stability and Public Investment
4. Economic stability and Public investment is vital for Ireland if it is to regain its
competitiveness over time. It is difficult to achieve a stable economy and constant public
investment and it is easy for it to go wrong. If it goes wrong high deficits are known to limit
the range for growth and productivity enhancing investments, also it can arise difficulties to
borrow in the future and therefore leave Ireland vulnerable to external events.
Many areas to Ireland’s economic stability and public investment must be considered to help
Ireland gain back its competitiveness:
Ensuring a Sustainable Revenue Base
To regain its competitiveness it is essential that the Irish government continue to implement a
plan to restore and maintain the levels of public finance needed. The government must also
make sure they are also maintaining the support needed for entrepreneurship and job creation.
According to the NCC (NCC N. , 2014) the identified two main areas that are essential for
ensuring a sustainable revenue base are:
Broadening the Revenue Base
The layout of the tax system, no matter how much revenue is earned can affect
competitiveness. To maintain the existing levels of employment and encourage job creation it
is vital to maintain a taxation system that encourages enterprise which will in turn broaden
the tax base. This also offers the opportunity to regain public finances and maintain the
current levels of public spending in the areas of science, technology and research and
innovation.
The ‘Celtic Tiger’ eras problem was the narrowing of the revenue base which caused Ireland
to be mainly reliant on property related taxes. The article by the NCC I referred to earlier
states that the use of the Universal Social Charge would help the government and Ireland
itself to reduce the risk of being over reliant on income tax receipts which are paid by a slim
number of earners. We must continue to find new ways of broadening the tax system that will
cause as little damage to our competitiveness as possible. (NCC N. , 2014)
Fáilte Ireland carried out a survey when the decrease of VAT occurred in 2011 (13.5% to 9%
on tourism related categories) within the Irish tourism sector (including employment within
the sector). The results concluded that reducing the rate of VAT caused an increase in the
levels of employment and an increase in the Irish tourism sector without causing too much
stress on the exchequer. (NCC N. , 2014)
International Tax Competitiveness
Investment decisions are decided by looking at many different factors including the cost of
doing business and access to different markets. The business sector classes Ireland’s current
tax regime as competitive. Ireland has a corporate tax rate of 12.5% at the moment. This
5. should not be changed as the low rate attracts foreign global companies to set up in Ireland.
(Department of Finance, 2014)
The current focus of the international tax regime is on the OECD/G20 Base Erosion and
Profit Shifting project (BEPS). This project concerns the tax planning strategies that expose
gaps and mismatches in tax rules to falsely shift profits to little or no tax locations to areas
with little or no economic activity. (OECD, 2014)
This corporation tax rate is essential for Ireland to maintain to increase our competitiveness.
Increasing and Targeting Public Investment
To increase Ireland’s job creation and support economic growth it is essential that the
government offers them high quality industrial and commercial property and upgrade the
current key urban centres to make them a more attractive place to live and work. Although
there has been a big improvement over the last two decades within Ireland’s quality of
infrastructure, a survey carried out by Ireland’s Competitiveness Scorecard showed that
Ireland is currently still lagging behind countries we compete for trade and investment with.
(Revenue, 2015)
Irelands Public capital expenditure has fallen dramatically since 2008. Government spending
in 2013 is a 1.8% of the GDP compared to 5.8% of the GDP in 2008. The fall in numerical
terms is a €5.7 billion difference in the two percentages (€3.3 billion spent in 2014 compared
to €9 billion in 2008). We as a country must continue to grow and match the GDP of our
competitors. (NCC N. , 2014)
Infrastructure Investment Priorities:
This year a new Infrastructure Investment Plan will be released by the government to aide
future economic growth following a review of the infrastructural requirements. I have
identified some of the infrastructural priorities which support competitiveness:
Water Services: In the short term it’s vital to fix current water services constraints in Dublin.
In the medium to long term it’s essential to create an investment plan to balance the water
services needed for Irelands competitiveness.
Telecommunications: Enhancing Ireland’s current national and international connectivity is
essential to support the needs of existing and future companies in the IT sector. The
government must increase the connectivity of broadband across Ireland to increase our
connectivity and overall competitiveness.
Social Housing: An expansion in the number of social housing is critical due to the
increasing rent rates and property prices. The establishment of the Housing Supply
Coordination Task Force for Dublin (discussed in construction 2020) is vital at the moment to
address problems areas at the moment like the rising housing challenge.
Transport: Effective and efficient national transport systems and national roads are needed to
transport goods and people faster than before.
Energy: Although it is not funded by public capital expenditure, public policy ensure that’s
the current and future needs of enterprises are met. (NCC N. , 2014)
6. Ireland’s Competitiveness Scorecard has shown that private sector funding has collapsed. The
government must try and focus on increasing the amount spent on the private sector and
ensure the markets are working correctly to maximise return to the public and private sector.
Overall all of the points above prove how economics stability and public investment are key
characteristics to help Ireland regain its competitiveness.
Developing Skills Base
Labour and skills challenges are impeding competitiveness and are limiting how the gain
from improved competiveness in the country are shared. The skills of the workforce are a
primary driver of productivity and long term competiveness. For example the more you are
educated the more you will be competitive in the long run. Skills development across all
levels of the education and training system must remain a priority for policymakers. Like
everything the more you study and work your way to the top the more you will progress for
policymakers it is important that people have developed the skills before they reach this
stage. Labour and skills challenges are limiting how the gains from improved
competitiveness are shared as certain cohorts of the labour force and they have difficulty
accessing these opportunities. Many long term unemployed workers, are ill equipped to work
in these sectors for example ICT occupations across all sectors of the economy, export
sectors and occupations requiring of multi lingual and technical skills.
Addressing the unemployment challenge and providing a targeted response to meeting skills
is an everyday challenge of the Council and they are always looking for ways to improve the
education and training system.
Implementing a new training strategy and delivering structure to provide better high
quality with a particular focus on the unemployed to focus on getting them back into
permanent work.
Modernizing the apprenticeship system to bring a much greater focus on – on the job
learning.
Throughout Europe in high classes college’s they are trying to bring in a more practical side
to work in the course. This is similar to what the Council are trying to do here. They are
saying anyone can be smart on paper but we don’t really want to worry about that we are
more interested in solving cases and how would you go about it. They will learn quicker and
also have a greater knowledge of the job in hand. In terms of numbers for how much people
will attend courses in Ireland the figures currently stand at 200,000 people will enroll in
Department of Education and Skills which will be funded by Further Education and Training
this year. The Department will spend a total of €826 million this year alone to fund the
project.
Employer Engagement
Employers have a key role in this system being a success. They are constantly in contact with
the tutors for each programme to ensure that high standards have been met. They are also
consulted on the type of work which will go on in the course. Also Employers can also
facilitate work placement which provides on the job learning, enhancing the quality and
balance of education training programmes.
7. Developing the Enterprise Base
Ireland’s economic growth is dependent and on a sustainable, competitive enterprise base
encompassing both indigenous and foreign owned firms that trade internationally, those that
currently serve local markets with potential to internationalize, and those that will continue to
play a key role in serving local demand. To achieve sustainable economic growth and create
meaningful jobs, therefore, we need a strong and dynamic range of MNC’s, large enterprises,
SME’s and a steady flow of new business startups.
Investment – Investment is very important in the development of the Enterprise Base and it
can determine our competitiveness and future growth. The collapse of investment has hurt us
heavily in recent years. In Ireland investment fell by 71% between 2008 and 2013, this was
the second largest decline in the euro area. Ultimately, Ireland’s relative attractiveness to
investors is shaped by a combination of factors ensuring that our tax regime is competitive
and also the availability of skills a funding when an MNC might set up in Ireland can all be
deciding factors.
Foreign Direct Investment has been a key contributor to Ireland economic development, with
the developing agency supported foreign owned companies’ directly employing 172,000
people in 2013. Global competition for the attraction of FDI has intensified significantly in
recent years.
Supporting Entrepreneurship
It is recognized that small startup firms tend to bring about pioneering idea and that
significant job opportunities come from young firms. Data published by the Central bank in
2013 concludes that 67 per cent of new job creation comes from new companies within the
first five year of them being in existence. The focus of entrepreneurship policy is to stimulate
higher levels of entrepreneurial activity by influencing a greater supply and quality of
entrepreneurs to create new businesses. In order to facilitate the development of
entrepreneurial culture, it’s very important that the states administrative system operates as
efficiently as possible and minimizes the costs placed on firms. In response to this the
government has introduced a new system which allows new companies to have access to the
prompt registration of business taxes. It remains very important that Irelands performance in
this space is continually monitored, particularly versus our competitors, through for example,
the World Bank’s doing business index. Planned changes will happen to the index, which will
result in an increased emphasis on the quality of regulations which will challenge all
countries including Ireland, to review and improve their performance.
8. Access to Finance
Finance is the lifeline for every business. If a business didn’t have the necessary funds
required then it wouldn’t be in operation to begin with. The requirement to have access to
finance grows as a business grows. Without finance a company wouldn’t be able to expand or
make an increased profit. Diversifying sources of finance offers significant competitiveness
advantages (National Competitiveness Council, 2014). There’s two main sources of finance:
Bank Funding
Non-Bank Funding
Bank Funding
While economic growth is possible in the absence of credit, credit less recoveries are on
average substantially weaker than normal recoveries - growth is on average one third lower.
In their latest review of the Irish economy (May 2014), the IMF notes that: “A sustained job-
rich economic recovery hinges on reviving healthy lending. Investment is beginning to
rebound from depressed levels, largely financed by retained earnings. In the medium term,
however, a paucity of credit would impede the domestic demand revival which is critical for
job creation” (National Competitiveness Council, 2014). In order to secure finance from a
bank, you must prove your business is viable or potentially viable (McBride, 2012). The
process starts off by applying for a loan which requires the owner of the business to provide
the bank with a loan proposal. The Small Business Administration says loan proposals must
include a written description of the company’s history, who its competitors are and what the
funds would be used for, such as an explanation of the project (Sheahan, 2015). If your bank
loan is approved then between the business and the bank they work out the fine details e.g.
loan duration, interest rate and the repayment grace.
Non-Bank Funding
Business bank loans are only one source of finance. There is an array of non- banking
funding. These sources are,
Equity finance
Accounts receivable/payable
A loan from a family member
Off Balance sheet financing sources
Government financial support through the state enterprise agency
Equity Finance
Equity finance is made up of business angels and private investors, venture capital, private
equity and government equity. Since 2008 there has been a rapid growth in the use of shares
and equity by Irish businesses. Most businesses will require private equity to be invested in
the business to either expand or to start off as some banks will classify a business as too risky
to reward a business loan to.
9. Accounts Receivable/Payable
Accounts receivable/payable can entail the business solely relying on their suppliers and their
consumers to help finance their business. It’s more of an old style way of doing business
which can be an advantage as they’ve a competitive edge over the likes of a business who has
a bank loan as they won’t have any repayments. Therefore they retain a greater profit .It’s a
bigger risk then the likes of a bank loan or even equity finance as they’re relying on their
product to be of top quality in order to sell well and make a reasonable turnover in order to
keep the business up and running.
A Loan from a family member
A loan from a family member can be viewed at in two ways. It can be seen as an investment
or simply just as a loan. A loan from a family member has plenty of advantages but it also has
a few disadvantages. The advantages being,
You pay no interest
You pay back what you can when you can
On the contrary the disadvantages can sometimes potentially outweigh the advantages as
the disadvantages are that,
It can lead to a family rift
If the business fails how do you plan on paying them back?
Off Balance Sheet financing sources
Off balance sheet financing sources would be the likes of hire purchase and leasing. Again
you’re when dealing with finances there is always going to be advantages and disadvantages.
The advantages of hire purchase would be that,
You’ve use of the product then and there
Offers a way of spreading the cost of the acquired asset over its life time.
There is obviously going to be some downfalls with hire purchase as there’s always a catch
with a buy now pay later scheme. The disadvantages of hire purchase would be,
You don’t own the asset until your last payment and by then it may be worth nothing
due to depreciation
The total amount paid back at the end of it all will be considerably more then what the
asset cost at the time.
10. Government financial support through the state enterprise agencies
There have been 69 substantial commercial enterprises in existence at some point
since the first such organisation was established (Forfas, 2005). An example of this
would be Enterprise Ireland. Enterprise Ireland is the government organisation
responsible for the development and growth of Irish enterprises in world markets.
They work in partnership with Irish enterprises to help them start, grow, innovate and
win export sales on global markets (Enterprise Ireland, 2015). In return this allows
Irish businesses to have the competitive edge over some other European countries as
it allows small Irish businesses to potentially become global with the help of their
funding and guidance which in return promotes economic growth and provides
employment.
From doing our project we have found that there is various aspects needed for Ireland
to be considered competitive as a nation. In terms of the cost of business in Ireland the
various aspects that we looked at were labour, energy and property. In terms of
looking at labour we found that what makes Ireland competitive is the fact that they
have a widely educated population and also they have low tax levels which
encourages people to set us a new business in Ireland. In terms of energy we found
that the government wants to ensure that rising energy prices will discourage new
firms setting up in Ireland. Property is to ensure that Ireland will have the most
effective use of land space also that property levels are kept low which will keep the
standard of living low. We also looked at how Ireland can develop the skills base as a
whole. Firstly we looked at how we as a nation can further develop our education and
training. We can also offer apprenticeships to people who are out of work which will
in turn will qualify people for a skill and help find them a job. We then looked at
developing the enterprise base. We looked at how new companies setting up in
Ireland produce 70% of new jobs for people within the first 5 years of setting up. We
also found out how new companies need an extra bit of help from the government in
terms of finance and Ireland’s Government offers a set up cost for MNC’s who chose
to locate in Ireland. Also the Irish Government realizes that it is very important to
promote entrepreneurship from within the country as it will result in jobs being
created and in return money will be pumped back into the Irish economy if we have
close to full employment. In terms of Irelands Macroeconomic stability and Public
investment the Irish Government must ensure a sustainable revenue base by providing
support for entrepreneurship and job creation by broadening the revenue base and
making the correct decisions for our International Tax Competitiveness. They must
also aim to Increase and Target levels of Public investment through Infrastructure
Investment priorities such as Water services and Telecommunications. In order for
Ireland to be competitive as a nation the government has provided a helping hand
when it comes to expanding or creating a new business through state enterprise
agencies. For businesses in Ireland it’s not always easy for them to have access to
finance as there’s many factors that have to be considered, so the government have
stepped in by offering these sustainable commercial enterprises which in return is a
step towards Ireland regaining its competitive edge.
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