To a considerable extent living standards, employment prospects and quality of life are ours to determine, writes DON THORNHILL
THE FOUR-year national recovery plan, the joint EU-IMF programme for Ireland and the forthcoming budget are critical steps towards a sustainable economic future for the country.
The enormity of recent developments and the attention, much of it critical, on Ireland in the international media should bring home to us that we need to be very clear minded on how we manage our economy.
The focus of attention must be on increasing export earnings of goods and services. The need to stabilise the public finances and the bank system is immediate and essential. These alone will not restore economic growth and avoid the risks of a debt trap. The third, necessary condition is to restore the economy to being one of the most competitive in the world. We can do this.
In the late 1990s and early “noughties” we were one of the most competitive economies in the world. Export earnings drove national prosperity. We threw much of it away through unsustainable property, construction and consumer spending and public spending increases funded by temporary revenues from these bubbles.
Despite the damage done, we continue to have a strong enterprise base. We remain a leading exporter of manufacturing goods and services, and attract high levels of inward foreign direct investment. Our highly open economy provides us with opportunities to grow that are not there to the same extent in other troubled countries. Growing our exports has a doubly positive effect. There are the direct gains in output and employment, and the secondary effect of meeting the requirements of these firms for Irish goods and services.
Exporting firms in Ireland have continued to grow as their cost base has fallen and as skills availability has improved. We need exporting companies to drive economic growth. We have benefited from competitiveness gains as a result of cyclical factors related to the recession. We must now ensure that action is taken to achieve more long-lasting structural competitiveness gains. This requires significant improvements in the business environment. Immediate and decisive actions are more important than ever.
National Competitiveness Council recommendations in its latest competitiveness challenge report can support improvements in competitiveness.
Our export success up to now is largely due to a small number of sectors and export performance is skewed towards foreign-owned firms. If an export-led recovery is to contribute significantly to improvements in employment, it will need Irish-owned SMEs internationalising and scaling up to take advantage of international demand for goods and services – particularly in new markets. We must prioritise actions to enhance the export activity of indigenous firms – these include ensuring viable businesses have access to credit, deepening links between domestic and exporting firms, and diversifying into high growth, emerging markets. The Forfás enterprise policy review, Making It Happen, outlines the opportunities and actions required to support enterprise development.
The competitiveness of our exporters is directly influenced by the competitiveness, in terms of price and quality, of those who supply them and their employees with goods and services. High costs and inefficiencies in sheltered sectors damage competitiveness and drive up the cost of living.
The measures in the four-year plan and the IMF-EU programme on removing restrictions on competition in sectors such as law and medical general practice are welcome and overdue. Broadening the tax base through a valuation-based tax on property and charges for water and third-level education is central to repairing the public finances. Without such measures, there is a risk that taxes on income would rise. This would be bad for competitiveness and the public finances. Higher income taxes are a disincentive to people to remain in, or return to, the labour market. It would be preferable to see a higher yield from the site-value tax and the abolition of stamp duties but we welcome the recognition that Ireland cannot have a sustainable tax system that, perhaps uniquely among developed countries, does not include an annual property tax.
This is a time to be positive and realistically optimistic. To a very considerable extent our long-term living standards, employment prospects and quality of life are ours to determine. Recent events and the responsibilities we have given to ourselves mean we have no more excuses for not taking the necessary actions.
Don Thornhill is the chairman of the National Competitiveness Council, an independent advisory body to Government and a board member of Forfás. The council’s Annual Competitiveness Report 2010, vol 2: Ireland’s competitiveness challenge, is available at www.competitiveness.ie/media/