In the shadow of Brexit, Ireland remains cost competitive but concern in certain areas

Apr 12, 2019
The Chairman of the National Competitiveness Council (NCC), Professor Peter Clinch, recently launched the Cost of Doing Business in Ireland 2019 – a report that uses the latest available international data to compare a wide range of costs that Irish businesses face relative to costs in key competitor jurisdictions.

The report flags areas where business costs in Ireland are out-of-line with Ireland's international competitors and builds the evidence base for the NCC's Competitiveness Challenge document, which makes policy recommendations to the Government on how to tackle these emerging risks.

If costs in Ireland are too high relative to productivity, it damages Ireland's competitiveness. Irish businesses would find it more difficult to export, and internationally mobile firms would be disincentivised from locating here. Ultimately, high costs would make international trade and investment more expensive, reducing the Irish economy's beneficial exposure to the international economy.

Professor Clinch said: "As a small open economy, Ireland is particularly vulnerable to a global economic slowdown and turbulent international trading conditions, most notably Brexit. Recent reports from key international organisations suggest that global economic growth is slowing. In this context, Ireland's economy is performing well. While Ireland is a high-cost economy, prices are increasing at the slowest rate in the whole of the euro area. This means that Ireland is becoming more cost competitive relative to the rest of the euro area.

"While the overall cost picture is positive, some areas are a cause for concern. After years of moderate growth, in 2018, labour costs increased by 2.9% – four times faster than consumer prices. Without similar increases in labour productivity, this increase in costs will simply put pressure on Irish prices.

“We also need to be mindful of the Irish tax system. In Ireland, the taxes paid by someone earning the average income relative to the employer's labour costs (i.e. the tax wedge) is one of lowest in the OECD, but people earning higher incomes face one of the highest marginal tax rates. This could create a disincentive to work for highly skilled employees.

"There are other pressure points. The rental price of Irish commercial property has continued to increase at a steady pace, Irish businesses face higher costs when accessing credit relative to the euro area, and the prices businesses pay for services (which includes legal and accounting services, human resources, and warehousing) was increasing at the fourth fastest rate in the EU.

"Interest rates (3.3%) in Ireland are considerably higher than rates in the euro area (2%) meaning that an Irish business, looking to borrow money to future-proof its operations, faces costs that are on average 65% higher than their EU counterparts."

The chair noted that "With the current international economic backdrop, especially with what is happening in the UK, we must do what we can to maintain the competitiveness of the Irish economy. To secure our prosperity, we must not price ourselves out of international markets."

Source: National Competitiveness Council.

Published: 11 April 2019.