Friday 15 November 2019

Warning strong economy hiding need to boost competitiveness in face of Brexit and US risks

The Irish economy faces significant downside threats, including Brexit. Stock image
The Irish economy faces significant downside threats, including Brexit. Stock image

Colm Kelpie

The country's strong economic performance is masking threats to competitiveness, a watchdog has warned.

The sustainability of growth and improvements in living standards is under serious and imminent threat if efforts are not redoubled to improve competitiveness, the National Competitiveness Council has said.

In its latest report the body warns that while the overall economic outlook for Ireland is positive, the economy faces significant downside threats, including Brexit, a potential shift in trade and taxation policy in the US, and the uncertain nature of global growth.

Chairman Professor Peter Clinch said the Government must ensure that the fiscal position remains sustainable.

"The scale of the challenges which confront us have magnified over the past year since the Brexit referendum result," Prof Clinch said.

"It brings into sharp focus the need for Ireland to maintain and improve our competitiveness performance across a range of areas such as infrastructure, ease of starting a business, talent, tax and innovation. Only a renewed focus on competitiveness will enable us to achieve sustainable improvements in living standards help us withstand external shocks and factors beyond our control."

Careful management of the public finances within the EU budgetary guidelines will remain a challenge, particularly in light of the need to address growing infrastructure and funding deficits, and to ensure the economy does not overheat.

"Ireland's exposure related to the concentration of corporation tax receipts among a very small cohort of firms remains a risk and it is essential that the tax base is broadened in line with the OECD tax hierarchy for growth," the Council noted.

"Any loosening of fiscal discipline (ie unsustainable current expenditure increases, or narrowing the tax base) at this stage would undo much of the progress achieved to date, and would have potentially significant negative implications for future competitiveness."

The report noted that Ireland remains an expensive location to do business - its price profile is described as 'High cost, rising slowly'. The return to robust economic growth has resulted in a range of price pressures emerging with regard to labour, property, insurance and business services costs.

It comes just a day after the Government announced the minimum wage will rise to €9.55 from January 1 on foot of recommendations from the Low Pay Commission.

It will be the fourth increase in the past five years and will benefit at least 150,000 workers.

The move was welcomed in political circles but met with concern by business representative groups.

The Council also said that while access to and affordability of credit has improved, Irish firms continue to face higher interest rates and greater volatility in those rates than their competitors abroad.

In terms of the positive messages emerging, overall economic growth is being sustained, resulting in employment growth and a more favourable fiscal balance. Ireland performs relatively well in objective measures of well-being (income, education attainment, air and water quality) and health. Conversely, factors weakening our competitiveness include Ireland's continued high cost base, our dependence on a narrow range of exporting sectors, a series of labour market challenges (ie relating to long term and youth unemployment), infrastructural bottlenecks and relatively weak productivity performance in many sectors of the economy."

Meanwhile, data from the Central Statistics Office showed that the Government recorded a deficit of €1.8bn last year, an improvement of €5bn on the 2015 figure,

The change was driven by an increase of 2.8pc in government revenues to €72.6bn in 2016 coupled with a 1.6pc decrease in expenditure to €74.4bn between 2015 and 2016, the CSO said. The upward trend in tax and social contribution revenue continued in 2016 with increases of €2.1bn in taxes and €600 million in social contributions.

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