Y2S2 - Public Finance (2)

Regain Competitiveness 1
Running Head: REGAIN COMPETITIVENESS
Discuss the Key Elements Necessary if Ireland is to Regain
Competitiveness in the Future
Robert Bowens
Anna Clarke
Diane Duffy
Caroline Dullaghan
Public Finance
Dundalk Institute of Technology
School of Business and Humanities
Bachelor of Arts in Accounting and Finance (Level 8)
David Coggans
March 2011

Introduction
National Competitiveness is important for small open economies, like Ireland, which rely heavily on
international trade and Foreign Direct Investment (FDI) to enhance and maintain productivity.
Competitiveness is primarily driven by productivity i.e. the level of output per input used. It is the
ability of a nation to create and sustain value through its enterprises and provide good living
standards for its citizens. A nation’s standard of living depends on the capacity of its companies to
achieve high levels of productivity.1
An economy needs to continually upgrade itself in order to
achieve sustained productivity growth.
A country’s long-run competitiveness position can be influenced by its policy towards research and
development, and by its achievement in product innovation and technology. Therefore
competitiveness measures the degree to which a nation can, under free market conditions, produce
goods and services that meet the test of international markets while simultaneously expanding the
real income of its citizens.2
The competitiveness of a country in international markets encompasses
a range of influencing factors from costs, price, quality, education and training, infrastructure and
the policy inputs of government.3
Maintaining competitive advantage requires constant monitoring
and improvement of these factors.
Competitiveness is measured annually by the International Institute for Management Development,
who publishes the World Competitiveness Survey.4
The broadest measure of cost competitiveness is
the Consumer Price Index-deflated Harmonised Competitiveness Index (HCI), real HCI. Real HCI
provides a consistent and comparable measure of Ireland’s price and cost competitiveness. This
index climbed steadily throughout 2006, 2007 and early 2008, but in mid-2008 the real HCI dipped
from its high of 127.5 to under 120.5
Towards the end of 2009 the index dived to below 110 and
clearly indicates that Ireland has lost competitiveness. This is mirrored by the extreme slowdown
the Irish economy has suffered since 2008.
Ireland experienced the largest economic boom in Europe during the Celtic Tiger years. If an
economy is booming and there is excess demand, then prices are going to rise. The huge growth in
1 Hughes, D., (2010), Ireland’s Experience with Measuring and Benchmarking Competitiveness, Dublin, Organisation for
Economic Co-operation and Development.
2 O’Hagan, J. and Newman C., The Economy of Ireland – National & Sectorial Policy Issues,
10thEd., (2008, Dublin), p 51.
4 There are many indicators of competitiveness. For example, for much of the 2000’s, Ireland was referred to as ‘Rip-off
Ireland’. Cross-border shopping is another indicator, as is net exports, investment in the economy, unemployment levels
and so on.
5 Irish Business and Employers Confederation, (2011), Business Bulletin, Dublin.

the Irish economy put upward pressure on prices resulting in inflation and increasing wage demands.
‘When a regions prices and costs rise relative to other regions, this is termed a loss of cost
competitiveness.’6
When there is inflation in the economy, the country becomes less competitive
relative to others. The rising costs and prices in Ireland led to a decrease in Irish exports as
foreigners went elsewhere for cheaper goods. Imports increased as Irish domestic goods became
more expensive than those taken in from abroad. These trends led to a deficit on Ireland’s balance
of payments current account.7
This shows that, having been in a favourable competitive position in
the early 2000’s, the economy of Ireland has subsequently lost competitiveness due to a range of
factors, namely rising prices and production costs, particularly labour costs. The Irish economy is
also suffering loss of competitiveness due to a lack of business expenditure on R&D and innovation,
the share of the population that has completed second-level education and the countries current
physical infrastructure.
Costs
Costs are an integral part of competitiveness and during the last decade, Ireland has seen relative
costs rise due to a combination of the appreciation of the euro against other currencies of our
trading partners and higher price inflation in Ireland. This has hurt Ireland’s capacity to compete in
world markets and Irish goods are now more expensive in its two main markets, The U.S. and The
U.K.8
Business costs are made up of 4 constituents – labour, property, utilities and business services
and 82% of businesses believe these will remain high over the next 12 months.9,10
In order to
correctly analyse Ireland’s competitiveness in relation to costs, each of these 4 key inputs must be
examined.
Labour costs include wages, taxes on income and employer social security contributions. Typically
labour costs make up about 45-55% of all costs in a manufacturing operation, whilst in services and
research & development, labour costs account for approximately 70-75% of all costs.11
Since 2001,
driven by pro-cyclical Government policies and huge increases in public sector wages, wages have
risen above competitive levels. Labour cost growth rates illustrate the difference in the cost of
employing labour over time. Between 2004 and 2007, Ireland’s growth rates exceeded the
6 O’Hagan, J. and Newman C., The Economy of Ireland – National & Sectorial Policy Issues,
10thEd., (2008, Dublin), p 51.
7 Ibid.
8 Leon, R., Petersmeyer, W., Piedrahita, V., Walter, J., and Zaninovich, D., (2010), The Celtic Tiger’s Tale: Ireland’s
Information and Communication Technology Cluster, thesis, Harvard Business School, Boston.
9 National Competitiveness Council, (2010b), Costs of Doing Business in Ireland 2010 Vol. 1, Dublin.
10 Suzanne Lynch, ‘Costs of running a business continue to rise’ in The Irish Times, 21 February 2011.
11 Lyons, R., (2010), Five things you need to know about Ireland’s competitiveness, <www.ronanlyons.com> [accessed 1st
Mar 2011].

European average.12
However this huge growth in Irish labour costs slowed in 2008 and the first half
of 2009 and fell below the European average.13
While Irish salary levels remain significantly below
those in countries such as Denmark and Germany, they still remain considerably greater than
Eastern European countries such as Poland and Hungary.14
Unfortunately these are the exact
countries we are directly competing with for trade and FDI. Whilst Ireland has taken the first step on
the road to becoming more cost competitive by reducing the minimum wage, more must be done if
we’re to become a more attractive option in the world marketplace. However, the incoming
Government plans to reverse this reduction.
Property prices in Ireland peaked in the 4th quarter of 2007.15
However due to the downturn in the
economy, between Q4 2008 and Q4 2009 the value of retail properties, offices and industrial
premises fell on average by 28%.16
Office rental costs fell by almost 25% in Ireland in 2008 and fell a
further 18% in 2009.17
Following these declines, Ireland is now a cheaper office rental location than
countries such as the US.18
However, Spain and others experienced even greater significant price
falls in 2009, 49%, and are now cheaper locations to rent office space than Ireland. In truth, there
are always going to be countries that are more expensive and cheaper locations to set up base in
than Ireland. However, it is vital that actions taken by Government, The National Asset
Management Agency and the banking sector support an appropriate adjustment in property prices
to the levels justified by their underlying potential for adding value or earning rent.19,20
Utility costs are effectively made up of the costs of energy, waste treatment, water services and
telecommunications. A reliable and competitively priced supply of energy is vital for Irish businesses
and their ability to compete successfully in international markets and also for to entice foreign firms
to set up here. In 2009, industries in Ireland had the benefit of the third biggest fall in energy prices
in Europe.21
This dramatic decrease was due to the fall in the price of fossil fuels. However
InterTrade Ireland still reports that energy costs represented a huge expense for businesses in the
Q4 of 2010, with 69% of businesses reporting an increase in energy costs.22
To improve in this facet
of competitiveness, we must continue to make long term structural changes. We must continue to
12 National Competitiveness Council, (2010b), Costs of Doing Business in Ireland 2010 Vol. 1, Dublin, p 9.
13 Ibid.
14 Ibid.
15 Ibid.
16 Ibid.
17 Ibid.
18 Ibid.
19 National Competitiveness Council, (2010a), Annual Competitiveness Report 2010 Vol. 2: Ireland’s Competitiveness
Challenge, Dublin.
20 NAMA is a body created to help ease the banking crisis in Ireland. They are State-owned and the largest property
owners in the country.
21 Sustainable Energy Ireland, (2010), Understanding Electricity & Gas Prices in Ireland, Cork.
22 Suzanne Lynch, ‘Costs of running a business continue to rise’ in The Irish Times, 21 February 2011.

concentrate on harnessing our abundant renewable resources, wind and wave power. This source
of energy provides added competition and so prices should fall accordingly. An example of a
government scheme to promote the utilisation of Ireland’s natural resources is The Ocean Energy
Strategy. Its aim is to establish Ireland as a leading Ocean Energy Centre with a target of 500MW of
ocean energy-generated electricity installed by 2020. This new energy source has the potential to
significantly contribute to Ireland's competitiveness and represents an emerging opportunity for
major economic benefit through new investment and employment.23,24
The Irish government must
continue to take advantage of the assets lying right on our doorstep. Due to Ireland’s relatively
small and sparse population, the cost of operating telecommunications networks is high. Almost
69% of engineers stated that their companies cannot compete effectively at international level as
long as Ireland’s broadband connection is below the EU average.25
73% of these engineers believe
The Government must immediately introduce tax incentives to support the development of
technologies that would enable Ireland to improve its competitive position.26
A well-developed
broadband network has now become a basic requirement for all businesses wishing to compete
internationally. If Irish companies are to compete with others from all over the world, and if Ireland
wishes to attract FDI, this area must be greatly improved upon.
Business service costs cover key professional services, such as legal services, computer services and
accounting services. According to the Services Producer Prices Index (SPPI), the price of business
services fell by 4% in Q1 2010, another 3.6% in Q2 and a further 1.3% in the 3rd quarter.27
Whilst
the figures are heading in the right direction, more must be done if Ireland is to become more
competitive. Increasing the number of college places for courses relating to, for example accounting
and law, would lead to a greater number of practicing lawyers and accountants. This greater supply
would logically decrease the prices of such services. Quality is also a major issue though, meaning it
would be to Ireland’s detriment to have too many accountants and lawyers practicing who weren’t
fully up to the task in hand. The government must try to get the balance right between quality and
quantity in order to improve competitiveness.
23 Electricity Supply Board, (2010), ESBI and Vattenfall Agreement on Ocean Wave Energy, <www.esb.ie> [accessed 2nd
Mar 2011].
24 It will also mean more price stability as energy costs won’t be as dependent on fossil fuel prices.
25 Kennedy, J., (2011), Broadband woes stifle Irish Engineers’ competitiveness, <www.siliconrepublic.com> [accessed 2nd
Mar 2011].
26 Ibid.
27 Central Statistics Office, (2010d), Services Producer Prices Index Quarter 3 2010, Dublin.

Infrastructure
A country’s physical infrastructure greatly impacts on its level of competitiveness – the more
advanced the level of infrastructure a country has, the more likely it is to attract inward
investment.28
In order for an economy to function effectively it requires well developed
infrastructure to allow for the movement of goods, services, people and information. High quality
infrastructure is important for the functioning of domestic business and it also has an impact on the
country’s ability to attract FDI. ‘Ireland competes for FDI against some of the most advanced
economies in the world and a key aspect of our ability to secure such investment is our
infrastructure.’29
Therefore future growth of our economy is partially dependent on the quality and
standards of our infrastructure.
According to Ireland’s Competitiveness Report for 201030
, the country has made progress in
updating its physical infrastructure but challenges do still lie ahead. In a survey carried out as part of
the Global Competitiveness Report 2010, the ‘inadequate supply of infrastructure’ appears in the
top three ‘most problematic factors for doing business in Ireland.’31
It is clear that Ireland needs to
improve its infrastructure as part of its efforts to regain competitiveness in the future.
A key element of Ireland’s infrastructure that needs to be improved for competitiveness reasons is
the quality, speed and availability of information and communication technology. High quality
information and communications technology are central in modern, competitive, knowledge-based
economies. To grow successfully in the future Ireland must develop a high speed, large capacity
information highway. Currently Ireland’s broadband speeds rank well below the EU average. Only
3% of broadband subscribers have download speeds greater than 10mbps.32
The development of a
high speed communications infrastructure will allow Ireland to make the most of future growth
opportunities. The government has stated in their ‘Infrastructure Investment Priorities 2010-2016’
that the main investment in high speed fibre-optic networks will be through the private sector.33
If
this investment happens it will certainly increase Ireland’s attractiveness for FDI.
Ireland should also place emphasis on improving public transport, particularly in its main cities.
Competitive global economies are largely urbanized and use high quality public transport as an
29 Connolly, M., Building the future: Infrastructure insights for Ireland, (2010), Dublin, KPMG, p 1.
Challenge, Dublin.
31 Schwab, K., (2010), The Global Competitiveness Report 2010-2011, Geneva, World Economic Forum, p188.
32 Irish Academy of Engineering and Engineers Ireland, (2010), Infrastructure for an island population of 8 million, Dublin.
33 Kennedy, J., (2010), Private sector to build Ireland’s next digital infrastructure, <www.siliconrepublic.com> [accessed
22nd Mar 2011].

effective means of travelling to and from work. ‘The quality of public transport is a key
consideration in determining the competitiveness aspect of any location.’34
In Ireland, main city
regions desperately need to develop more intelligent transport systems. Dublin, which was a major
centre of economic growth in the boom years, still suffers from traffic congestion problems with
heavy reliance on car transport and long distance commuting.35
There would be a marked
improvement in city centre traffic if a more advanced metro system were put in place and further
developments were made with inter-urban rail lines, for example, the development of a rail-link
between Dublin and Navan.36
Improving the quality and frequency of rail links between major cities is of crucial importance in the
creation of close communications between people and businesses. Developing more high-speed and
high-frequency inter-city rail systems which are linked to urban rail and bus services would be a
major step in reducing the overcrowding of current public transport and bring us on par with
successful European economies.37
There may be concern that due to Ireland’s current economic
situation, infrastructural investment will fall down the list of priorities. However, funding for these
improvements in transport could be sourced from Public Private Partnerships. These proved to be a
successful source of financing for infrastructure projects in the past and could prove successful again
in the future.38
Another factor to consider in Ireland’s infrastructural competitiveness is electricity supply. Ireland’s
industrial electricity prices are currently 28% above EU average.39
Electricity is an important
commodity in conducting any business and Ireland will have to look at cheaper alternatives if it is to
attract future investment. Investment in renewable energy sources such as wave and wind power
will create flexibility in the energy supply market leading to more competitive pricing.
Small Business & Entrepreneurs
Monetarist theory suggests that the only way an economy can grow in the long-run is to enhance
the productivity of the economy. As productivity increases, an economy becomes more competitive.
In this sense, small businesses are vital to an economy as they are the largest employer. They
therefore contribute the largest portion of productivity driven growth. Innovation in the three
34 Irish Academy of Engineering and Engineers Ireland, (2010), Infrastructure for an island population of 8 million, Dublin, p
26.
35 National Development Plan, (2007), National Development Plan 2007-2013: Transforming Ireland - A Better Quality of
Life for All, Dublin.
36 This has the additional benefit of more efficient use of fossil fuels through the reduction of stationary traffic.

productivity variables of labour, capital and management drives productivity and small businesses
are a massive source of this innovation.40
If a larger company merges with such a small company,
they can inherit their ideas and innovations and process them on a more significant scale. However,
according to the CRO, the numbers of businesses being registered are in decline.41
This decline may
shift the economy away from a more perfect competition-like environment to a more monopolistic-
like environment. The net effect in the long-run is that prices will be higher with reduced sources of
innovation.
Ireland has just four world class brands and all were developed before the Celtic Tiger.42
This may
suggest a lack of quality entrepreneurs, in the economy. However, The Celtic Tiger has seen Ireland
transform into a country of many entrepreneurs with innovative ideas.43
These entrepreneurs need
support to start-up businesses and Ireland ranks well on measures such as the ease of starting a
business.44
This is complimented by the many State-funded bodies that provide free or inexpensive
consultancy to entrepreneurs and small businesses. For example, Enterprise Ireland provides
inexpensive courses teaching basic business skills.45
Free publications are also made available
providing learning material, information and contacts for business.46
There is currently a significant barrier to small businesses and entrepreneurs conducting business.
Their main source of finance is through bank loans, but the banks are in serious financial difficulty
and are not providing adequate finance.47
As mentioned, The Government has intervened in various
forms, including the recapitalisation of the banks.48
An alternative source of finance can come from
venture capitalists. However, there is currently a shortage of venture capitalists in Ireland.49
Since
40 For example, labour productivity can be improved by a healthier, more educated workforce. Capital productivity can be
improved through the investment of better tools. Management are responsible for ensuring that labour and capital are
put to effective use. Smarter management can dramatically improve productivity. Source: Heizer, J., and Render, B.,
Operations Management: Flexible Version, 9th ed., (New Jersey, 2009), pp 17-18.
41 Just 13,573 new companies were registered in 2009 compared with 19,298 in 2006. Source: Companies Registration
Office, (2010), Companies Registration Office Report 2009, Dublin, p 32.
42 These are Baileys, Guinness, Jameson and Kerrygold. Source: Rogan, D., Marketing: An Introduction for Students in
Ireland, 3rd ed., (Dublin, 2007), p 199.
43 ‘After the race,’ in The Economist, vol. 398 no. 8721, (2011), pp 23-26, p 26.
44 The World Bank and The International Finance Corporation, (2010), Doing Business 2011; Making a Difference for
Entrepreneurs, Washington, p 170.
45 These skills include marketing, accounting, management and microeconomics.
46 One such publication ‘Boost Your Company’s Productivity: Simple Steps’ is available to download at the Forfás website.
47 The most problematic factor for doing business in Ireland according to one survey is access to finance. The same survey
also ranks Ireland very poorly for ‘ease of access to loans’. Source: Schwab, K., (2010), The Global Competitiveness Report
2010-2011, Geneva, World Economic Forum, pp 188,457.
48 Encouragingly, a recent report states that the banks are lending at a higher level to small businesses. Source: Credit
Review Office, (2011), Quarterly Report from John Trethowan, Credit Reviewer, Dublin, p 1.
49 Schwab, K., (2010), The Global Competitiveness Report 2010-2011, Geneva, World Economic Forum, p 458.

2008, The Government has raised capital gains tax from 20% to 25% and this has been a disincentive
to venture investment.50
The lack of available finance compounded by weak domestic demand has seen commercial
investment in the economy decline dramatically since 2007.51
Capital is a driver of productivity;
therefore, a lack of investment may see foreign firms gain a competitive advantage through more
modern technology. The difficult economic conditions have also led to cash-flow difficulties for
businesses and this in many cases has meant insolvency.52
As these businesses couldn’t pay their
debts, their creditors then come under pressure to remain solvent. One source of cash-flow is to
reduce prices on current inventories, which is temporarily boosting Ireland’s competitiveness.53
The Labour Market
With the weak domestic economy, there is plenty of excess capacity among firms, particularly in the
non-trading sector. Firms are reacting by reducing their productive capability, which includes labour
redundancies and assets been auctioned to foreign firms. Since these assets have left the country, it
would take substantial planning, capital and time to restore these assets for job creation. With
unemployment sharply rising to 13.6%, it means recovery to full employment will be slow and over a
long time-frame.54,55
This weakens the ability of the nation to return to substantial economic
growth. The automatic stabilisers associated with high unemployment further strain the public
finances.56
On the positive side, skilled labour is plentiful and Ireland is recognised for its productive
workforce.57
Companies hiring will have little trouble locating staff willing to work at lower rate of
pay, increasing Ireland’s cost competitiveness. As high unemployment is forecast to continue by
many commentators, Ireland’s wages will likely remain stable for the foreseeable future.58,59
50 Finance Act 2009, s14.
51 2009 investment levels were about 40% lower than 2007 levels. Source: Calculated using data from Central Statistics
Office, (2010a), Quarterly National Accounts Quarter 3 2010, Dublin, p 5.
52 Since 2007 to 2009, 32,864 businesses were taken off the Register. Source: Calculated using data from Companies
Registration Office, (2010), Companies Registration Office Report 2009, Dublin, pp 10,32.
53 For various reasons, the decline in domestic demand for goods and services has seen the demand curve shift to the left,
reducing prices. The cash-flow difficulty that has resulted in many firms struggling to pay their bills and has resulted in the
supply-curve shifting to the right, further reducing prices. As noted, this supply shift may be temporary due to the
possibility of less long-term competition in the domestic market.
54 Central Statistics Office, (2010b), Quarterly National Household Survey Quarter 3 2010, Dublin, p 1.
55 Many economists consider full employment to be at the Non-Accelerating Inflation Rate of Unemployment (NAIRU).
Generally speaking, a rate around 4% or 5% is desirable, but the NAIRU can vary considerably depending on the
macroeconomic situation.
56 Automatic stabilisers are structural, counter-cyclical measures that are mainly tax receipts and social welfare payments.
The Government has relatively little control of these levels. The recession has seen tax intake fall dramatically and social
welfare payments rise in an equally dramatic fashion.
57 KPMG, (2010), Investing in Ireland, Dublin, p 17.
58 The Economic and Social Research Institute, (2010), Quarterly Economic Commentary Autumn 2010, Dublin, p 1.

However, as firms downsize, feelings of uncertainty and insecurity dampens morale and motivation
among existing employees, reducing labour productivity. The lack of opportunities in the labour
market further lowers productivity through employees remaining in roles not best suited to them
and preventing more suited candidates from filling those roles. This is of particular concern
considering Ireland’s poor ranking relating labour costs to productivity.60
Ireland is experiencing net emigration. The CSO reported a net outflow of 34,500 people for the
year ending April 2010 of which non-nationalists make up a large portion.61
However, the real
concern is that the difference is generally made up of skilled labour and graduates. This is eroding
the competitiveness of the labour force. Some are proposing a national internship program to
maintain and develop the skills of this demographic.62,63,64
There is also a future opportunity to bring
many of these back to Ireland with new skills and ideas. With the digital age upon us, cost-effective
efforts to maintain ties with the Irish living abroad should be attainable. Another related issue is
that immigration may be needed to meet skill shortages. This may prove to be politically difficult to
achieve and the undesirable social problems associated with high unemployment may deter
potential candidates.
Long-term unemployment is fast becoming a major issue, particular as many of these have come
from the construction sector.65,66
The long-term unemployed are seen as unattractive to employers.
In the context of competitiveness, an effective policy may be to educate and train those most in
need and that have the best ability to significantly benefit.67
This is especially true if the courses are
relevant for skills in demand and meeting the needs of existing and emerging export sectors. The
Government has taken this long-term view and is targeting opportunities while increasing
availability.68
The National Competitiveness Council also believes policies should be developed to
keep long-term unemployed close to the labour market.69
As mentioned, a national internship
programme is one such tactic. The minimum wage has been reduced by €1 to help get people back
59 Irish Business and Employers Confederation, (2011), Quarterly Economic Outlook, Dublin, p 6.
60 Schwab, K., (2010), The Global Competitiveness Report 2010-2011, Geneva, World Economic Forum, p 449.
61 Central Statistics Office, (2010c), Population and Migration Estimates, Dublin, p 1.
62 Fine Gael, (2010), 5 Point Plan to Get Ireland Working, Dublin, p 9.
63 National Competitiveness Council, (2010c), Pre-Budget 2011 Submission, Dublin, p 2.
64 The Government has introduced a limited Work Placement Programme where 2,000 positions will be State-funded for
up to 9 months. Source: Government Publications, (2010), National Recovery Plan 2011-2014, Dublin, p 39.
65 To put this in perspective, 299,000 are currently unemployed, of which 47% are long-term unemployed. Source: Central
Statistics Office, (2010b), Quarterly National Household Survey Quarter 3 2010, Dublin , p 1,4.
66 About 156,800 construction jobs have been lost since 2007. Source: Calculated using data from Central Statistics Office,
(2010b), Quarterly National Household Survey Quarter 3 2010, Dublin, p 2. Skills developed in construction are generally
not transferable to other industries and this is compounded by a lack of computer skills.
67 There are other benefits that will indirectly help competitiveness with this policy, such as increasing morale and
prevention of crime levels from rising.
68 Department of Enterprise, Trade and Innovation, (2010), National Skills Strategy Implementation Statement, Dublin, p 8.
Challenge, Dublin, p 16.

in employment.70,71
This is being complimented by a restructuring of the social welfare system to
incentivise employment as Jobseeker’s Allowance is seen as an alternative to low income work.72,73
The Public Accounts
The impact of the automatic stabilisers and the large-scale recapitalisation of the Irish banking
system has seen public debt rise to about 94.2% of GDP since 2007.74,75
Borrowing to run the public
sector is also adding considerable strain with the gap between public revenues and expenditure at
about 31.9% for 2010.76
Due to the bond markets loss of confidence in Ireland’s ability to repay its
loans, The National Treasury Management Agency auctioning Government Bonds as a means of
finance is not an option for the time being.77
The European Union (EU) and International Monetary
Fund (IMF) have provided Ireland with emergency funding at a lower interest rate with additional
terms and conditions.78
This has brought some certainty in terms of doing business in Ireland,
however, with the exception of the bank recapitalisation, Government discretionary policies since
2007 have been pro-cyclical. This is discouraging business activity through higher taxes and lower
levels of Government spending, thus lower aggregate demand, aggregate output and employment
levels. This is affecting the ability of small Irish firms to compete and there is the added danger that
public investment in pro-competitive areas, such as human capital and infrastructure may be
sacrificed.
Ireland’s rate of corporation tax (12.5%) is a source of competitive advantage and is significant in
attracting FDI. However it is controversial as other EU countries believe members should behave
more oligopolistic in nature, meaning that taxes should be more closely aligned. The reasoning is
that the low rate is preventing job creation in other EU countries and also tax intake may be lower in
these countries due to the suspected activity of transfer pricing by multinationals.79
The high level of
debt and foreign political pressure raise doubts whether The Government can sustain this rate. As a
70 Government Publications, (2010), National Recovery Plan 2011-2014, Dublin, p 36.
71 The idea is to lower the price floor in the labour market so that demand for labour (employers) and supply of labour
(employees) are closer to equilibrium, thus increasing employment.
72 Government Publications, (2010), National Recovery Plan 2011-2014, Dublin, p 74.
73 In economic terms, this may shift the supply (of labour) curve to the right, meaning, that people will work for less pay.
This may then bring the labour market closer to equilibrium and increase employment.
74 The Government has taken numerous, expensive measures since 2008 to ensure that the banking system remains in
place for the country to function. The details of these are beyond the scope of this assignment.
75 Department of Finance, (2011), Monthly Economic Bulletin February 2011, Dublin, p 12.
76 Ibid.
77 The yield on 10 year Irish Government Bonds closed at an unaffordable 9.4% on the 4th March, 2011. Source:
Bloomberg, Ireland 10 Year (GIGB10YR:IND) Index Performance, <www.bloomberg.com> [accessed 4th Mar 2011].
78 Department of the Taoiseach, Government Statement – Announcement of joint EU – IMF Programme for Ireland,
(November 2010), <www.taoiseach.gov.ie> [accessed 4th Mar 2011].
79 Transfer pricing is an illegal accounting activity where value placed on work carried out is under-valued in higher tax
jurisdictions and over-valued in lower tax jurisdictions as a form of tax evasion.

large portion of the economy is made up of foreign companies, many commentators believe that
sustaining of the rate as being critical both to retain and attract foreign firms.80
Raising the rate at
this point would be pro-cyclical and may see a Laffer-effect, in that despite a tax increase, less tax
will be taken in. Corporation tax revenues are dependent on profitable businesses. Currently, the
most profitable companies are in the export sector that is largely made up of foreign-owned firms. A
raise in the rate may see many of these companies either leave Ireland or downsize, hence less tax
revenue.
Efficiency means doing the job well using minimum resources and waste. The State pays for
inefficiency with reduced competitiveness in the long-run. This is due to fewer resources available
for more productive means that also drives prices up through the need to cover wastage costs and
the added competition for scarce resources. The public sector is seen as a being a major
uncompetitive driver in the economy due to its relative ineffectiveness and inefficiency.81,82
The
State cannot afford to sustain the current public sector and reform has been on the agenda for a few
years now.83
Imaginative and aggressive use of resources is needed as well as a tighter, more
flexible link between all public bodies and departments. The Government has negotiated a deal to
help accomplish this with the trade unions.84
This can improve overall effectiveness, efficiency and
competitiveness through lower prices and faster transactions necessary for conducting business.
This will also allow The Government to direct more resources to areas such as infrastructural
development. Action to date has seen public sector employment fall by about 13,000 since 2007
and further job losses are expected.85,86
Conclusion
Significant challenges remain if Ireland is to regain competitiveness. Public and bank debt servicing
is diverting capital from the rest of the economy, in particular The Government’s ability to fund pro-
competitive initiatives. As Argentina has been unable to return to the capital markets since
defaulting nearly 10 years ago, we do not advocate a default unless it is unavoidable.87
Avoiding a
default will also go some way to restoring Ireland’s reputation, which has been hit hard during the
80 NCB Stockbrokers, (2011), Ireland Moves Forward, Dublin, p 52.
Challenge, Dublin p 34.
82 Inefficient government bureaucracy ranked 2nd in the most problematic factors for doing business in Ireland. Source:
Schwab, K., (2010), The Global Competitiveness Report 2010-2011, Geneva, World Economic Forum, p 188.
83 Government Publications, (2008), Transforming Public Services, Dublin.
84 Department of Finance, (2010), Public Service Agreement 2010 – 2014, Dublin.
85 Central Statistics Office, (2010a), Quarterly National Accounts Quarter 3 2010, Dublin, p 3.
86 Fine Gael, (2010), 5 Point Plan to Get Ireland Working, Dublin, p 14.
87 Default Settings, (2010), <www.economist.com> [accessed 21st Mar 2011].

downturn. Restoring Ireland’s reputation must be a key priority going forward in the international
media as investment may be deterred due to the uncertain economic conditions.
The problem of finance is likely to remain for the foreseeable future and a creative solution must be
found. It is preventing many businesses from remaining solvent and entrepreneurs from starting up
green-field businesses. This means higher unemployment, less competition and economies of scale,
and a loss in comparative advantage through reduced investment in up-to-date technology. This
may be detrimental to Ireland’s cost-competitiveness through higher prices in the longer-term.
High unemployment has seen labour costs fall, but issues with the qualitative aspects of the labour
force urgently need to be addressed to improve competitiveness. The Government must focus on
getting the employable back to work and getting the unemployable employable again through
education, training or another innovative scheme.88
However, the current Government’s plan on
reversing the reduction in the minimum wage is in our opinion a step backwards. We need to get as
many people back into the workforce, but this simply isn’t viable if the minimum wage reduction is
to be overturned.
Job creation is most likely to stem from exporting firms and attracting FDI. Ireland’s assets include
its well-educated and highly-skilled workforce, low corporation tax, and technological capability.
These remain attractive to many of the world’s leading multinationals and emerging companies, and
building on these strengths will position Ireland to win further FDI and contribute to an export led
economic recovery. However, Ireland’s value proposition for exporting firms and MNCs also
includes the high costs of doing business in Ireland. Labour costs have come down and improved
Ireland’s competitiveness since 2008, however they are still too high in Ireland. While we must
ensure we remain competitive in terms of property, utilities and service costs, we don’t believe it is
the definitive factor considered by multinationals when choosing where to locate their operations.
The Government has agreed in the National Development Plan 2007-2013 that ‘there is a need to
decisively tackle infrastructure deficits which continue to impact on the countries
competitiveness.’89
Without modern infrastructure we run the risk of failing to attract future FDI
thus increasing unemployment and hampering our economic recovery. ‘A world class infrastructure
for Ireland is not without cost; however a failure to invest will surely cost much more.’90
Now is a
particularly a good time to invest as this will mean job creation for a large number of unemployed
88 Job creation will see an increase in tax receipts and a decrease in social welfare payments, thus improving the public
finances. This is how the automatic stabilisers behave during boom periods.
89 National Development Plan, (2007), National Development Plan 2007-2013: Transforming Ireland - A Better Quality of
Life for All, Dublin.

construction workers at a low cost and the employment boost will also help stimulate the weak
demand in the economy.91
As a small open economy, Ireland is dependent on economic recoveries in The U.K. and The U.S.A.
However, Ireland does have control over action it can take to repair competitiveness and The Celtic
Tiger arose from a somewhat comparable situation in the 1980’s. While significant challenges
remain, building on strengths, sound decision-making as well as Ireland’s greatest asset, luck, may
soon see a return to competitiveness, significant economic growth and prosperity for her people.
91 Hiring unemployed construction workers will cost even less due to them already being in receipt of social welfare
payments and through income taxes they will need to pay. This provides significant value for money.

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