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Irish structural reform is needed to deliver enduring cost competitiveness - - National Competitiveness Council
By Finfacts Team
Jun 23, 2011 - 2:28 PM
|Figure 4.2: Cost of Constructing a Prime Industrial Unit, 2005 - 2009|
The National Competitiveness Council (NCC) today published its latest study on
theCosts of Doing Business in Ireland 2011
(pdf) and it said Irish structural reform
is needed to deliver enduring cost competitiveness. The report evaluates
Ireland’s relative cost competitiveness, identifies barriers to competitiveness
and sets out actions needed to improve and sustain Ireland’s competitiveness.
Dr. Don Thornhill, chairman of the NCC commented:
“Costs in Ireland are moving in the right direction and as a result Ireland has
become a more attractive location to do business, but we cannot rest on the
oars. Cost reductions have resulted primarily from cyclical factors like the
collapse in consumer demand, domestically and internationally. If we are to face
down emerging threats such as increasing global oil prices and a resumption of
inflation, Irish policy must deliver outcomes which embed lasting, structural
reform. Only structural reform will ensure that the gains are permanent and will
not be quickly be eroded upon any resumption in growth.”
The report highlights that restoration of cost competitiveness is central to any
economic recovery. As a small, open economy, dependent on trade as a source of
revenue, Irish enterprises need to be in a position to compete successfully for
business in international markets and cost competitiveness is one of the key
determinants of any firms’ success.
The report finds that while there have been significant improvements in cost
competitiveness over the last two years, further progress is required. Even
though prices in Ireland have fallen since 2008, the cost of a range of business
inputs remain relatively expensive compared to other jurisdictions, including
property costs, calls from landlines and legal fees. The NCC notes that a large
number of these inputs arise in the locally traded sector.
Martin Shanahan, chief executive, Forfás commented:
“The cost of doing business in Ireland is falling and this is very much to be
welcomed. We need to keep focused on the how Ireland can return to a
sustainable growth path. Cost competitiveness is a key part of Ireland’s
international offering and implementation of the Council’s recommendations would
represent a major step in ensuring Ireland’s future competitiveness and
The NCC says labour cost growth
rates in Ireland slowed significantly in 2008 and through to 2010. Over this
period, growth rates were lower than the EU-27 and euro area-16 average growth
rates. Meanwhile the cost of constructing and renting both industrial and office
units declined sharply in Ireland during 2010. However, the impact of these
decreases on Irish cost competitiveness has been reduced as there have also been
significant cost decreases in many other countries.
The cost of industrial electricity
for large energy users in Ireland decreased significantly (-27%) in 2010 and
costs are lower than the euro area average. Despite reductions also being
recorded for electricity costs for SMEs in 2010, Ireland remains the fourth
most expensive location benchmarked. The NCC says cost reductions would
appear however to be temporary in nature - - the phasing out of a temporary
rebate for large users and global fuel price changes are likely to result in
higher prices in the future.
The average cost of treated water
services in Ireland increased by 0.85 between 2010 and 2011. Based on the
internationally comparable data (2009 is the most recent data available) Ireland
is competitive with our main trading partners on this measure.
The NCC says based on 2010 survey
data, the average price that could be negotiated for landfill fees in the Irish
market ranged from €86 to €111 per tonne (including the levy). Ireland’s cost
competitiveness is likely to have improved as Irish prices have continued to
fall sharply over the last year.
Ireland is the eighth most expensive
location of the 13 countries benchmarked for a basket of business calls and is
the fourth most expensive for a high usage basket of mobile calls including VAT.
The NCC said over the course
of the economic downturn, most business and professional sectors have shown
substantial corrections in prices. Since 2006, however,
CSO price data shows that legal services prices have increased by 12%.
In 2005, health and education cost indices (which are influenced by public
sector policy, but which contain significant private sector elements) were
15% above the overall CPI. Despite falls in the overall CPI in 2010, prices for
both health and education continued to rise. In March 2011, they were 28 and 35%
higher than the CPI respectively.
Minister for Jobs, Enterprise and Innovation Richard
Bruton TD said he is writing to Government colleagues with responsibility for
each of the recommendations asking them to report next month to the cabinet
sub-committee on jobs and economic planning, of which he is convenor, on the
possibilities for implementing the recommendations.
“I have been saying for some time that if we are
going to create the employment and economic growth we need so badly, we must
focus on three things: increasing competitiveness, improving access to finance,
and encouraging innovation.
“A key finding of this report is that although
competitiveness has improved substantially in recent years, most of that has
been due to the downturn in the economy and risks being immediately reversed
when growth returns. Price levels in Ireland remain above euro area averages
despite three years of negative economic growth.
“If we are to get back to the formula
that created the real economic success of the mid/late 1990s and achieve
sustainable growth, we must urgently address the structural problems in the
economy identified by today’s report: in the labour market, in property, in
utility costs and in business and professional services.
“For too long reports like this have
sat on shelves and gathered dust: and although many of these recommendations are
already being progressed by the new Government, it is crucial that we achieve
reform across the board if we are to achieve growth again. That is why I am
immediately starting a process across Government to set about implementing the
recommendations, by writing to relevant colleagues asking them to identify what
can be done, and asking them to report on this to the cabinet subcommittee on
jobs and economic planning at its next meeting next month.
“I am determined that we must act
urgently to implement reforms across the economy, in order to achieve real
growth that can get people back to work both in the short term and for years to
Additional taxation measures must be designed to protect job creation and
facilitate a recovery in consumer demand. A competitive wedge between take
home pay and gross pay is vital;
High replacement ratios between social welfare and net pay for employment
weaken the incentives to return to the labour force. A major challenge
exists to protect those on low incomes and social welfare benefits while
ensuring that incentives to remain in or return to the labour market are
strengthened and that businesses are incentivised to take on additional
There are risks of workers disengaging from the labour force as they
experience long term unemployment. The education and training system must
address the challenges confronting the unemployed and workers in vulnerable
sectors through activation, upskilling and targeted interventions designed
to boost participation.
To provide certainty about the long term viability of the commercial
property market, NAMA should provide more information on the loans that it
has acquired and how it proposes to deal with unfinished developments, as
well as its criteria for future provision of development finance, and on how
NAMA assets will be disposed of;
The Property Services Regulatory Authority should collect data on both
purchasing and leasing relating to (1) Price (2) Quantity (e.g. floor space)
(3) Quality (e.g. location, finish) for commercial and residential property.
A broadly based and equitable valuation based residential property tax
should be introduced as quickly as possible;
The feasibility of introducing legislation to facilitate downward rent
adjustments for existing leaseholders should be explored further;
Local authorities need to develop more robust and transparent charging
mechanisms for local authority charges that match levies with the economic
cost of providing development;
Coordination in the rollout of different infrastructure services should be
improved to maximise efficiency and reduce costs.
Subsidies for peat generated electricity should be phased
out due to the cost implications for electricity customers and the impact on
Applying much higher, or new, waste levies will increase the
costs of doing business further, particularly for those in manufacturing.
Increases in the landfill levy should reflect the pricing of externalities
(i.e. putting a price on environmental and other damage caused by landfill);
A waste-to-energy levy should not be considered until a
competitive waste-to-energy market is established here;
A volumetric levy on incineration levels should not be introduced as it
stands to inhibit economies of scale which are essential to bringing Irish
waste costs more into line with our competitors.
Business and Professional Services
Government Departments should be formally required to
consider and respond to recommendations of the Competition Authority, with
specific timelines set down for such consideration and implementation of
Stakeholders and the Central Statistics Office (CSO) should continue to
work together to further develop the Services Producer Price Index, and to
develop comparable data on price levels.
The NCC recommends the establishment of an independent
regulator for the legal profession. This new body should incorporate the
regulation of training for solicitors and barristers, and would be tasked
with approving those institutions who wish to provide such training;
In order to deliver increased transparency and efficiency to legal
services costs the NCC recommends that a Legal Costs Assessment Office be
established to replace the Taxing Master’s Office. The Legal Costs
Assessment Office should have a remit to cover costs arising from all
courts, not just the High and Supreme Courts;
Legal costs should be assessed on the basis of work done, rather than on
the size of awards. The general practice of allowing junior counsel’s fees
at two-thirds that of senior counsel has been recognised as anti-competitive
- parties with responsibility for overseeing legal costs should ensure that
the practice is no longer tolerated;
Where practicable, legal services to be provided to the State by
solicitors and barristers in private practice should be procured in
accordance with the guidelines set out by National Public Procurement Policy
Unit (NPPPU), requiring prospective legal service providers to compete with
one another on the basis of cost and quality;
Consider the creation of a single tier counsel system;
Solicitors should be permitted to act as lead counsel when
advocating in court with a barrister;
Suitably qualified professionals, in addition to solicitors, be allowed to
provide conveyancing services.
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