Public FinanceCA – March (David Coggans)

Prepared by: Jake Plunkett, Magdalena Zenderowska, Dara Mitchell, Karen McEvoy, Qing Cao

QUESTION

Discuss the key elements necessary if Ireland is to regain its competitiveness in the future.

Table of ContentsEU membership..................................................................................................................3Background................................................................................................................................3Comparison of UK and Germany..............................................................................................3Current Benefits of EU membership..........................................................................................4

Infrastructure.....................................................................................................................5‘Soft’ Infrastructure: Education.................................................................................................5Improving Competitiveness through Education.........................................................................6The Background of Irelands ‘Hard’ Infrastructure....................................................................7Future Investment in Infrastructure............................................................................................8Fiscal Policy and Taxation.........................................................................................................9Background................................................................................................................................9Comparison to Germany and UK.............................................................................................10Current Prospects.....................................................................................................................11

Economic growth and Unemployment..................................................................................12

Productivity......................................................................................................................13Background..............................................................................................................................13Comparison to Germany and UK.............................................................................................14Planning for the future.............................................................................................................15

Cost of Doing Business in Ireland......................................................................................162002 - 2008..............................................................................................................................16Cost of business: Ireland compared with other countries........................................................18Cost of doing Business in Ireland: 2008 – 2014......................................................................19

Conclusion........................................................................................................................21

Bibliography.....................................................................................................................22

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EU membership

BackgroundBefore people of Ireland voted ‘Yes’ to join European Economic Community (EEC) in 1973 now known as a European Union (EU). Ireland was regarded by most countries as a small and insignificant island with agriculture based economy heavily depending on UK’s market. Lack of connection with other countries resulted in huge unemployment, poverty and emigration. But after joining the EU, immediately trade barriers were reduced and Ireland was able to do business with all of the EU members. That also meant bigger competition but despite that, Irish export represented 34% of GDP in 1963 the proportion went up to 92% in 2002, one of the best in the world. Ireland also adapted Common Agricultural Policy and received EU transfers of 44 billion (1973-2008) (European Commission, 2015)1. Ireland also received 17 billion in ‘structural funds’ such as Social, Cohesion Funds and Regional Development despite the fact that most of EU transfers went to farm-related issues. Overall EU membership brought significant change to Irish economy and improved the quality of life for Irish citizens. A reported 700,000 jobs have been created since 1973. Foreign investment increased from 16 million in 1972 to 30 billion supported by Freedom of movement which allows Irish people to work and live within any EU member states (O'Hagan & Newman, 2014)2.

Comparison of UK and GermanyGermany was one of six countries to form the coalition now known as EU. Launching the single market initiative in the mid-80s was central to the rehabilitation of Germany's international credentials. Since 1990 Germany has become a ‘net contributor’ to the EU budget. This helps to support the poorer members of the EU (Bulmer & Lequesne, 2005)3.

Germany’s conservative approach, size and economy place it at the top of large member states among France and United Kingdom. So we are going to look closer at the UK.

Even though the UK has been a member of EU since 1973, it is still considered an uncertain member state. Uncertain about benefits of the membership, relationship with the other leading members. All uncertainties come from government failures to build a support with visible benefits among the UK public. Benefits like: being part of the world’s largest single market, an estimated 3.5 million jobs are linked to trading with other member states and other business, personal, Health & Social Benefits (Euromove, 2015)4.

1 European Commission. (2015, February 15). Retrieved from European Commission: http://ec.europa.eu/2 O'Hagan, J., & Newman, C. (2014). The Economy of Ireland: National and Sectorial Policy Issues (Vol. 12). Dublin: Gill and MacMillan.3 Bulmer , S., & Lequesne, C. (2005). The Members States of European Union. New York: Oxford.4 Euromove. (2015, March 01). Retrieved from Euromove: http://euromove.org.uk/

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Current Benefits of EU membershipIreland has gained numerous benefits by joining European community in 1973 which help contribute to Ireland’s competiveness. Ireland is a part of the world’s largest single market which means continual flows of services, goods, capital, people and data on the global scale (European Commission, 2015)5. New studies show that Ireland is the 14th most connected country in the world. However despite this fact very few Irish businesses decide to compete globally. The same study warns against an over reliance on low corporate tax to bring long term investments as this tactic can be easily adapt by other countries (McKinsey & Company, 2015)6. 2014 European Commission reports states that around 75% of foreign direct investment comes from UK and US and it has been for the past 20 years, which suggest that government should rethink and adapt a new strategy to attract emerging new markets which most likely will constitute nearly 50% of the 500 global companies in the next 10 years (European Commission, 2015)7.

Another very important aspect in gaining competitiveness is reputation. Recent study conducted by Reputation Institute places Ireland in the 13th position out of 55 countries, higher than some of the biggest economies in EU such as UK, France, Italy and the global giant US. Reports suggest that the most important quality in driving reputation is a friendly and welcoming population. A safe environment and Ireland’s green complexion earned Ireland 8th place in a category ‘Is a beautiful country’. Countries best reputed are Switzerland, Canada, Sweden, and Finland (European Union, 2015)8.

EU contribution has been very important in Ireland’s economic growth and helped place Ireland on the competitive map. All EU member states contribute to the EU budget and receive funding. Some of them contribute more then they receive, making them net contributors such as Germany. Ireland has been a net receiver since 1973, receiving 67 billion and only contributing 25 billion suggesting substantial benefits of 42 billion from EU membership (European Commission, 2015)9.

5 European Commission. (2015, February 15). Retrieved from European Commission: http://ec.europa.eu/6 McKinsey & Company. (2015, Febuary 28). Retrieved from McKinsey & Company: http://www.mckinsey.com7 European Commission. (2015, February 15). Retrieved from European Commission: http://ec.europa.eu/8 European Union. (2015, March 01). Retrieved from eu2013: http//eu2013.ie/9 European Commission. (2015, February 15). Retrieved from European Commission: http://ec.europa.eu/

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Infrastructure

‘Soft’ Infrastructure: EducationThe Irish Government has continuously measured education and established it as a major support in the development of the Irish economy. A review of Irish secondary level education in 1962 found that half of all children were leaving school by the age of 13, which would result in a shortage in qualified labour. This report led to the development of new policy measures which supported the ‘free education’ initiative of 1967. The initiative saw an increase in the number of students progressing to second-level education and a greater demand for places at third level institutions.

This graph shows the rise in numbers progressing to secondary level education

 (Daly, 2011)10

Funding from the European Union over the past three decades has helped improve education standards in Ireland. Irish students have more opportunities than ever to broaden their horizons and get the qualifications needed for top Jobs (Europe, 2015)11.

As service and production systems develop, a more skilled workforce will increase output and attract greater FDI. The individual returns of education leads to participation in the labour market, employment and higher earnings. The Organisation for Economic Cooperation

10 Daly, S. (2011, May 13). Retrieved March 2015, from The Journal: http://www.thejournal.ie/more-students-finishing-secondary-education-than-e May 13 10:07 AMver-before-135865-May2011/11 Europe. (2015). Ireland. Retrieved March 2015, from Europa: http://ec.europa.eu/ireland/ireland_in_the_eu/impact_of_membership_on_ireland/index_en.htm

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and Development (OECD) promoted investment in human capital to aid economic growth. The higher education sector has altered significantly since the 1960s.

It is now ranked ninth for education achievement compared to the rest of the world. Public spending on education was 13.1% in 2011 compared to 9.8% in 2010 (OECD, 2012)12.

In comparison, GDP in the UK fell by 2%, between 2008 and 2010, the same as the average across OECD countries. But public expenditure on education in the UK rose by 8% over the same period while the OECD managed a slightly more modest 5% increase (OECD, 2012)13.

Germany spends 5.3% of its GDP on combined levels of education –an increase from 2005 levels which were 5.0% but below the OECD average (6.2%). Germany devotes 10.5% of its total public spending on education up from 2005 level of 9.8% but below the OCED average of 13.0% (OECD, 2012)14.

Improving Competitiveness through EducationEducation is fundamental for the recovery of the Irish economy, as it improves labour productivity, supports inclusions and equity. Reviews and reforms must be implemented in our education system and strong relationships should be established with employers and possible foreign investors to determine labour skill needs. Although the Irish government has created various learning and development programmes and schemes especially those in the IT sector. The onerous approach does not reflect the urgent needs of most jobseekers. Employers should provide ‘real work experiences’ which lead to real jobs. This will provide incentives for jobseekers to participate.

Funding of ICT in education policy initiatives (Table)

Initiative Year Began Funding

Schools IT 2000: A Policy Framework for the New Millennium 1988 52 Million

Blueprint for the Future of ICT in Irish Schools 2001 78 Million

Networking Schools 2004 23 Million

Schools Broadband Programme 2005 30 Million

12 OECD. (2012). Education at a Glance. Retrieved March 2015, from OECD: http://dx.doi.org/10.1787/eag_highlights-2012-15-en13 Same as Footnote 1214 Same as Footnote 12

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The Background of Irelands ‘Hard’ InfrastructureIn 2005, the Government published the Transport 21 plan which included a budget of €18bn to improve roads networks and €16bn to improved rail networks. Over the past twenty years the Irish Government has invested heavily in the development of infrastructure to support economic progress (Department of Public Expenditure and Reform, 2012)15.

Competitiveness is hugely dependant on quality and efficiency of infrastructures. Societies have become more dependent on infrastructure for a more sustainable environment, clean water, better waste management, access to road and port to support trading. Although there has been improved investment in infrastructure over the last ten years, Ireland is still behind other EU countries. Despite the tight budget, a staggering €70 billion has been invested in infrastructure and the productive sector in Ireland over the past decade, whereas Germany, at the top of the European economic table spends just 1.5% of its GDP on infrastructure development which is substantially less than most European nations.

Between 2005-06 and 2011-12, the UK has spent in the region of £210 billion on infrastructure according to HM Treasury figures. Over the past 30 years, there has been a marked shift in the financing of infrastructure. In the 1980s it was financed primarily by the public sector but since 1997, the bulk of it has been financed by private sources. Overall, government investment has been lower than in other industrial countries (Department ofPublic Expenditure and Reform, 2014)16.

15 Department of Public Expenditure and Reform. (2012). Infrasture and Capital Investment. Retrieved March 2015, from Per.Gov.Ie: www.per.gov.ie/.../Infrastructure-and-Capital-Investment-2012-2016.pdf 16 Department of Public Expenditure and Reform. (2014). Retrieved March 2015, from Per.Gov.Ie: www.per.gov.ie/comprehensive-review-of-expenditure/

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Future Investment in InfrastructureIreland needs a reliable and efficient infrastructure to support future growth and remain competitive. Not doing so limits Ireland’s possibilities to trade. Investment in water and waste treatment to maintain a modern society as well as broadband facilities to improve connectivity should also be supported.

In the 2014 Budget the Government acknowledged the need for capital investment of €17.1 billion to improve Ireland’s infrastructure but the Government cannot achieve this level of funding (Competitiveness Review, 2014)17. However, they can overcome this obstacle by forming partnerships with the private sector to provide finance to fuel the necessary activity and support our infrastructure deficit. Public Private Partnerships (PPPs) are common throughout Europe and have proved to be successful on major projects and should be considered for projects on a smaller scale. By securing finance in partnership with the private sector, the Government can expand offerings and create much needed employment in the construction sector.

Ireland can achieve greater competitiveness by having better roads and rails for transport and improve efficiency by utilising renewable resources such as wave and wind power. "EirGrid is currently developing a large number of major transmission projects that will boost Ireland’s already impressive network. In 2012 almost 18% of the electricity we consumed was from renewable energy sources, mainly wind and because of this action, Irelands dependency on imported gas was reduced by 20%. Our increasing consumption of renewable energy increases our security of supply, provides a hedge against high fossil fuel prices and contributes to our climate change strategy". (EirGrid, 2012)18. Future developments in our energy sector will also support the export of smart energy technologies and services. "Energy markets have changed with the unbundling of the retail market and increased competition through interconnection and the Single Electricity Market. These have led to price benefits for consumers and firms." (Department ofCommunications, 2014)19

17 Competitiveness Review. (2014). Retrieved March 2015, from Competitiveness: www.competitiveness.ie/media/03122014-Competitiveness_Challenge_2014-publication.18 EirGrid (2012) EirGrid Group Annual Renewable Report 2012. Retrieved 26 March 2015,from EirGrid.com: http://www.eirgrid.com/media/Annual%20Renewable%20Report%202012.pdf 19 Department ofCommunications. (2014, May). Green Paper on Energy Policy in Ireland. Retrieved March 2015, from http://www.dcenr.gov.ie/NR/rdonlyres/ED7DCC31-9F0A-4350-8E2D-979DBEAE4034/0/DCENRSummaryofGreenPaperonEnergyIreland.pdf

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Available at: www.competitiveness.ie/media/03

122014-Competitiveness_Challenge_2014

-publication.[Accessed on 24 March 2015]

Fiscal Policy and Taxation

BackgroundGovernment spending and taxation are the two main components of Irish fiscal policy (O'Hagan & Newman, 2014)20. During the mid-80’s recession’, the Government expenditure was significantly restrained and tax rates were increased in order to raise revenue and pay back the huge Government debts (Whelan K. , 2014)21. During the ‘Celtic Tiger’ years, the Irish Government offered various tax incentives, such as a tax relief for owner-occupying properties and investment properties, which became a catalyst for the boom in the construction sector. Taxation has proven to be an effective tool for the government; not only to raise revenue for public expenditure, but also to intervene with the market in order to alter or correct market behaviour (O'Hagan & Newman, 2014)22. Ireland has a competitive corporation tax rate of 12.5%, which has attracted a huge amount of Foreign Direct Investments (FDI) from multinational companies (such as Apple, Microsoft and Google) and has encouraged them to establish European Headquarters in Ireland (Department of Finance,2015)23. This has huge impact on the promotion of competitiveness among the indigenous Irish firms (McKeon & Henry, 2004)24.

20 O'Hagan, J., & Newman, C. (2014). The Economy of Ireland: National and Sectorial Policy Issues (Vol. 12). Dublin: Gill and MacMillan.

21 Whelan, K. (2014, June). Research. Retrieved February 14, 2014, from Karl Whelan: http://www.karlwhelan.com/Papers/Whelan-IrelandPaper-June2013.pdf

22 O'Hagan, J., & Newman, C. (2014). The Economy of Ireland: National and Sectorial Policy Issues (Vol. 12). Dublin: Gill and MacMillan.

23 Department of Finance. (2015). Budgets. Retrieved February 14, 2015, from budget.gov.ie: http://www.budget.gov.ie/Budgets/2015/Documents/EIA_Summary_Conclusions.pdf

24 McKeon, J. H., & Henry, C. (2004). Retrieved February 14, 2015, from emeraldinsight.com.dkitlibs.dkit.ie: http://0-www.emeraldinsight.com.dkitlibs.dkit.ie/doi/pdfplus/10.1108/00400910410569551 [accessed 23 March 2015]

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Comparison to Germany and UKUK (20%) and Germany's (15%)25 corporation tax rate remained higher than Ireland's (12.5%) during the boom. Evidences have shown that the location of FDI is influenced by an attractive corporation tax rate and the growth of GDP (Lawless, 2014)26. Another advantage Ireland had gained in competing with Germany and UK was that its Tax wedge remained one of the lowest within EU member states (OECD, 2015)27. Germany has the highest tax burden for a single person and is 26% higher than Ireland and 18% higher than UK in 2005 (OECD, 2015)28. This advantage had brought more work forces and FDI to Ireland and helped contributed to the higher economic growth. In 2006, Germany spent 21.9 per cent more and the UK government spent 17.2 per cent more per person on social welfare expenditure than Ireland did (EAPN, 2009)29. However, lower taxation in Ireland offered incentives for employment and enterprises, but provides less money for Government spending on social welfare, education and infrastructure30.

25 Bundeszentralamt für Steuern (2014) German taxes at glance : key data 2014 [online], web link : http://www.steuerliches-info-center.de/EN/SteuerrechtFuerInvestoren/Allgemeine_Informationen/DieWichtigstenSteuernAufEinenBlick/dieWichtigstenSteuern_node.html [accessed 19 Feb 2015]

26 Lawless, M., McCoy, D., Morgenroth, E., O'Toole, C., Economic and Social Research Institute & Ireland. Department of Finance 2014, the importance of corporation tax policy in the location choices of multinational firms: Part of the economic impact assessment of Ireland s corporation tax policy, Department of Finance, Dublin.

27 OECD (2015)Tax wedges on earnings vary sharply in OECD countries [online], web link: http://www.oecd.org/general/taxwedgesonearningsvarysharplyinoecdcountries.htm [accessed on 23 March 2015]

28 OECD (2015) Earnings Income tax plus employee and employer contributions less cash benefits as a % of labor costs [online], web link : http://www.oecd.org/newsroom/36371703.pdf [accessed on 23 March 2015]

29 EAPN (2009) Social welfare: how Ireland compares in Europe [online], web link: http://eapn.ie/documents/1_Social%20Welfare%20How%20Ireland%20Compares%20in%20Europe.pdf [accessed 19 Feb 2015]

30 Reading list-GOV.UK (2015) Rates and allowances: Corporation Tax [online], web link: https://www.gov.uk/government/publications/rates-and-allowances-corporation-tax/rates-and-allowances-corporation-tax--2 [accessed on 19 Feb 2015]

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Current ProspectsThe need to reform the Irish taxation system to enhance its ‘simplicity, efficiency and equality’ has been one of the major goals of policy makers in recent years (O'Hagan J. &.,2014)31. Despite all the effort made by Government to restore public finance by introducing Universal Social Charges on personal income and property tax on owner-occupier properties, public expenditure for welfare payment, health and education and public debts is still exceeds intakes through taxation(Council, 2014)32. At the same time, there is a huge pressure from other EU member states on the Irish Government to change its low corporation taxation rate. It is crucial for Ireland to remain competitive by attracting new FDI in the technology and pharmaceutical sectors and to encourage existing MNCs to remain. As the previous research has suggested MNCs not only create employment but also help to ‘spill-over’ knowledge and skills for small and medium enterprises (SMEs) in Ireland even after departure. (McKeon J.&., 2004)33. The link between employment and taxation has been clearly established thereby providing a competitive taxation system which directly promotes a more competitive labour market.

31 O'Hagan, J. &. N. C., 2014. The Economy of Ireland: National and Sectoral Policy Issues. 12th ed. Dublin: Gill & Macmillan.

32 Council, N. C., 2014. Ireland's Competitiveness Challenge 2014. [Online] Available at: http://www.competitiveness.ie/media/03122014-Competitiveness_Challenge_2014-publication.pdf[Accessed 28 February 2015].

33 McKeon, J. &. H. C., 2004. Emerald Insight. [Online] Available at: http://0-www.emeraldinsight.com.dkitlibs.dkit.ie/doi/pdfplus/10.1108/00400910410569551[Accessed 14 February 2015].

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Economic growth and UnemploymentIreland has been recovering slowly but sustainably since the recession. As the National Competitiveness Council suggested, Ireland must encourage more exports and make credit more available to indigenous SMEs to help with economic growth (Council, 2014)34. The unemployment rate in Ireland is still high at 11.3% (CSO, 2015)35 and this is mainly due to the collapse of the construction sector. The introduction of a ‘centralized bargaining system for Irish Trade Unions has eased the problem of the growing number of employers’ hostility towards unionisation (Oireachtas, 2011)36. It has made it easier for employers to ‘hire’ and ‘fire’ fairly in Ireland hence improve the competitiveness in Irish labour market.

34 Council, N. C., 2014. Ireland's Competitiveness Challenge 2014. [Online] Available at: http://www.competitiveness.ie/media/03122014-Competitiveness_Challenge_2014-publication.pdf[Accessed 28 February 2015].

35 CSO, 2015. Seasonally Adjusted Standardised Unemployment Rates (SUR). [Online] Available at: http://www.cso.ie/multiquicktables/quickTables.aspx?id=lrm03_lra03[Accessed 28 February 2015].

36 Oireachtas, 2011. Spotlight-Trade unions, collective bargaining and the economic crisis: where now?. [Online] Available at: http://www.oireachtas.ie/parliament/media/housesoftheoireachtas/libraryresearch/spotlights/spotTradeunion040611_143334.pdf [Accessed 23 March 2015].

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Productivity

BackgroundProductivity compares the amount of outputs with the amount of inputs produced. It demonstrates how efficient an economy is in using its labour and capital. Although Ireland’s priority is to increase its level of productivity, there is also a strong focus on increasing employment levels which will provide further advantage to achieving economic growth. Ireland was recognised for having a low rate of unemployment, a high life expectancy and a good quality of life before the recession. (Forfas, 2006)37

Ireland’s productivity performance between 1990 and 2003 was roughly 3.3% a year. This was due to multinational companies investing in business operations in Ireland and most importantly the growth of the construction industry. They have achieved strong financial and technology sectors but since joining the EU, the tourism and utility industries remain poor. Some of Ireland’s demanding and highly productive products which are exported are chemicals, pharmaceuticals and electronics. (Forfas, 2006) The global aim is to achieve a higher GDP per capita, Ireland had a remarkable high GDP between 2000 and 2012.

37 Ireland. National Competitiveness Council & Forfas Ireland 2006, Annual competitiveness report 2006: Volume 2, National Competitiveness Council, Dublin.

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Comparison to Germany and UK

1980 1985 1990 1995 2000 2002 2008 2012 2013 20140

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

GDP, Total, US dollars/capita

Germany Ireland United Kingdom

OECD.(2015). Gross domestic product (GDP) (indicator). doi: 10.1787/dc2f7aec-en [Accessed on 23 March 2015]

Ireland is different from Germany and UK in terms of GDP per capita given the history of the emigration rate in Ireland. The GDP refers to the value of goods and services produced in an economy and deducting the value of the imports. As a small regional economy, Ireland stands out for exporting more products to the EU and non EU countries compared to Germany and UK. This is clear during the period from 2002 and 2008 where Irelands GDP is exceptionally higher than Germany and UK showing they are more productive by exporting more goods which reduces the unemployment rate and gives Ireland a competitive advantage. Irelands’ unemployment rate at this time was roughly 4% and Germany with the highest with nearly 9%. (OECD, 2015)38

38 OECD (2015), Labour productivity forecast (indicator). doi: 10.1787/cb12b189-en (Accessed on 22 February 2015)

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Planning for the futureSince the recession Ireland is being promoted as an attractive location for foreign direct investment which ranks third for performance on return of investment and encourages more exports into foreign markets. Irelands GDP currently grew by 3.2% which resulted in the unemployment rate falling. Ireland’s goal is to develop and grow new sectors, expand into new markets and produce new products and services. To achieve this Ireland will have to increase the amount of exports and continue to support foreign investments. To encourage productivity they must invest in research and development. Ireland provides high quality industrial property which promotes growth and makes Ireland an attractive place to work. To promote growth, Ireland must spend more on capital expenditure to support enterprise development. Ireland is recognised for having excellent trained staff which encourages productivity and long-term competitiveness. There was an increase in employment of 1.7% in 2014. There is high migration into the country adding to the existing skilled workforce. FDI is a major generator of export earnings. Ireland’s trade performance is positive since the recession. A third of the exports go to two countries- US 20% and UK 17%. A disadvantage is that Ireland is vulnerable to currency changes. Ireland’s exports mostly focus on a small number of sectors such as chemicals and pharmaceutical products account for 60% in 2012 from 51% in 2008. The EU is now able to negotiate agreements and Ireland must show their interest. The benefits to Ireland will be the non-tariff barriers in relation to food, chemicals and pharmaceuticals. Ireland intends to improve the tourism industry by reopening new air and sea access routes. Ireland intends to grow employment by 50,000 over the next decade in this industry. Irish productivity levels improved considerably between 2008 and 2013. (Forfas, 2014)39 The GDP per hour worked shows how efficient labour input as well as other factors involved in the production process are being used. This varies depending on capital, technology and efficiency changes. Ireland is now above the average at 111.74 in 2013. The information and communication technology (ICT) value added shows the technology processes, output and productivity growth. According to OECD Ireland is the highest with 11.9 in 2011 and they are the third highest with the number of people working in this sector. (OECD, 2015)40

39 National Competitiveness Council (Ireland) & Forfas, I. 2014, Ireland's competitiveness challenge, National Competitiveness Council, Dublin.40 OECD (2015), ICT value added (indicator). doi: 10.1787/4bc7753c-en [Accessed on 12 March 2015]

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Cost of Doing Business in Ireland

2002 - 2008Business costs are one of the most important aspects of having a competitive economy. It is one of the most significant factors considered when businesses are establishing a presence. Business costs can be divided under several headings: labour costs, property costs, transport costs, utility costs, credit costs, business services costs (e.g. postal costs) and the broader cost environment (e.g. inflation). A view of these costs as a percentage of firms overall expense is listed below.

(Forfas, 2014)

We can see here that labour is the most significant by far, excluding manufacturing. To further understand the changing cost of labour, we need to look at the trend.

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(CSO, 2013)

The above illustration shows us how wages have dramatically increased in the ten years from 1998 – 2008. From this we can conclude that Ireland’s labour costs were increasingly uncompetitive during this decade. If Ireland were to improve its competitiveness during these years, it would need to help business enterprises reduce labour costs by regulating the industrial wage level and providing incentives for tax breaks.

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Cost of business: Ireland compared with other countries.The highest cost of doing business in Ireland, as we already know, is the labour costs (Cost of Doing Business in Ireland, 2014)41. To understand how competitive Ireland is on a European scale, we need to look at the labour costs of two other countries: Germany and the United Kingdom. According to the Trading Economics Labour Cost Index, Germany has an indexed labour cost of 108.13, while the UK has an indexed labour cost of 104.2. In comparison, the indexed labour cost of Ireland is 101.26, well below the EU average of 106.04 (TradingEconomics, 2014)42.

(Forfas, 2014)

The second major cost for businesses in Ireland is the cost of property. Before the recession began in 2008, Ireland and the UK were clearly uncompetitive economies for property costs, while Germany enjoyed lower property costs for businesses. However, in the wake of the recession Ireland has massively gained in property competitiveness, with a drop in price of nearly a third. Ireland is now more competitive than Germany and the UK for business property costs.

41 Forfas. (2014). Publications. Retrieved March 2, 2015, from Forfas: http://www.forfas.ie/media/01042014-Costs_of_Doing_Business_in_Ireland_2014-Publication.pdf

42 Trading Economics. (2014, November). Germany Labour Costs. Retrieved March 2, 2015, from Trading Economics: http://www.tradingeconomics.com/germany/labour-costs

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Cost of doing Business in Ireland: 2008 – 2014To increase the level of business activity in Ireland, the Government had to decrease the costs of business in Ireland. The major cost for businesses is the labour costs and despite a sharp fall in labour costs after the recession, labour costs are increasing again. This is the result of an increase in the value of the Euro and due to the introduction of the Universal Social Charge (USC) (Forfas, 2014)43. The illustration below represents the growth rate pf labour costs in Ireland:

(Forfas, 2014)

For Ireland to reverse or reduce this increase, policies will need to be implemented which can reduce the unit labour cost. One way of doing this would be to reduce the Pay Related Social Insurance (PRSI) rates that employers must pay. Currently, the rate is 8.5% on all earnings up to €356 and 10.75% for all earnings over €356. (Public Servive Information, 2014)44. By reducing the amount of social insurance payable by employers, labour costs can be decreased and become more competitive as a result. Other possible areas for Ireland to reduce business costs are the energy costs and credit costs.

43 Forfas. (2014). Publications. Retrieved March 2, 2015, from Forfas: http://www.forfas.ie/media/01042014-Costs_of_Doing_Business_in_Ireland_2014-Publication.pdf

44 Public Servive Information. (2014, July 17). Social Insurance (PRSI). Retrieved March 2, 2015, from Citizens Information: http://www.citizensinformation.ie/en/social_welfare/irish_social_welfare_system/social_insurance_prsi/employer_s_duty_to_pay_social_insurance_prsi.html#l62fd2

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Currently, Ireland has among the highest energy rates in Europe (Forfas, 2014)45. This could be reduced by increasing Government spending on energy production facilities, which would increase supply in the market and, hence, bring down prices. Credit costs in Ireland are also among the highest in Europe. For a loan up to €1 million, the rate is 31.5% higher than the EU average. And for loans over €1 million, the rate is 27% higher than the EU average. (Forfas, 2014). Both these rates can be reduced by reducing rates at the Irish Central Bank.

45 Forfas. (2014). Publications. Retrieved March 2, 2015, from Forfas: http://www.forfas.ie/media/01042014-Costs_of_Doing_Business_in_Ireland_2014-Publication.pdf

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ConclusionFiscal Policy and Taxation - Ireland must maintain its competitive advantages of low corporation tax and low tax wedge by promoting a simpler, more efficient and equal taxation system. The 'seesaw' of Government spending and taxation needs to be more balanced in order to regain its competitiveness as a region amongst EU.

EU Membership - EU membership and the contribution helped put Ireland on the competitive map. Ireland has a very high reputation compared to other EU members such as UK and France.

Productivity - The widely available and highly advanced technology has equipped Ireland to compete in the global market. As Ireland exports a huge supply of products, its GDP remarkably high resembles the power in the global stage that the economy has in which similar countries hope to achieve.

Education and Infrastructure -Ireland needs further investment in both hard and soft infrastructures to improve our competitiveness. Capital investment now will assist in the economic recovery of the country in the longer term. Investment in capital projects needs to be increased. Our Government is no longer in a position to fund Ireland’s infrastructure and must seek opportunities from the private sector to deliver a more efficient infrastructure in Ireland.

Cost of Doing Business – As the Irish economy develops, business costs typically increase. The main cost rise is labour costs. One way to reduce labour costs is to reduce living costs by regulating the housing market. Another way is to reduce the tax burden of employers such as the PRSI tax. An appropriate mix of these methods should be used to curve costs.

Ireland’s fast recovery from recession has gained itself a high reputation within EU member states. More investments in technology, education and infrastructure must be sought from the private sector; a simpler, more efficient and equal taxation system must be adopted; every effort must be made to balance the 'seesaw' of Government spending and taxation; increasing exports of Irish goods and services in order to create more jobs and achieve a higher economic growth in GDP, and a more flexible labour force will attract Foreign Direct Investment from all over the world, making Ireland one of the most competitive places to do business.

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