Download Five Key Policy Challenges

Can Ireland Secure its
Competitive Edge?
Don Thornhill, Chair
National Competitiveness Council
ISME Conference
19th - October 2007
Who are the National Competitiveness
Council
The National Competitiveness Council was
established in 1997 as a Social Partnership
body. It reports to An Taoiseach on key
competitiveness issues facing the Irish
economy, together with recommendations on
policy actions required to enhance Ireland’s
competitive position.
What is Competitiveness?
‘…all those factors which impact on the ability
of firms in Ireland to compete on
international markets in a way which
provides our people with the opportunity to
improve their quality of life’
What is Competitiveness? (continued)
• Competitiveness is partly about costs, prices
and wages…
• …but more about better business performance
through innovation and productivity
• Competitiveness remains a foundation for
national economic and social progress
Recent Economic History
Growth in GDP & GNP in Ireland,
Compared to OECD Average, 1990-2005
12%
Ireland (GDP)
10%
Ireland (GNP)
OECD (GDP)
8%
6%
4%
2%
0%
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Levels of GDP per Capita, Ireland and Selected
Economies, 2000-2006 (Euro 000 PPPs)
40
35
Euro 000 PPPs
30
25
20
15
10
2000
2001
Ireland (GDP)
2002
Ireland (GNP)
2003
N.Ireland
2004
OECD
2005
NEU 12
EU 15
2006
US
Poland
Hungary
South Korea
Germany
New Zealand
Spain
UK
Italy
France
Denmark
Finland
Netherlands
Worse ranking
2004
Switzerland
US
Japan
Sweden
Ireland
Better Ranking
Ranking in the United Nation’s Human
Development Index, 2000-2004
45
2000
40
35
30
25
20
15
10
5
0
Contribution of Growth in Net Exports to
Irish Economic Growth, 2001-2007
8%
Consumption
Investment
Government
Net Exports
7%
6%
5%
4%
3%
2%
1%
0%
-1%
-2%
2001
2002
2003
2004
2005
2006
2007p
Sources of employment growth (000s jobs),
Ireland, 2000-2006
Manufacturing
160
140
120
100
80
60
40
20
0
-20
-40
Agriculture
International Services
Domestic Market
Services
Construction
Public Services
Productivity levels are high
Per Hour Output, Ireland and Selected
Economies, 2000-2006 (€ value added)
60
Ireland (GDP)
OECD
NEU 12
55
Ireland (GNP)
EU 15
N.Ireland
US
50
45
40
35
30
25
20
15
10
2000
2001
2002
2003
2004
2005
2006
But productivity growth rates
are falling
Annual Average Growth in Output per Hour
Worked, 2000-2006
5%
2003-2006
2000-2003
4%
3%
2%
1%
0%
NEU 10
-1%
N.Ireland
US
OECD
Ireland (GNP)
EU-15
Ireland (GDP)
Prices and household
indebtedness are increasing!
Price Level 2006, and Inflation 2003 to 2007, EU
Member States
3.5%
Low Cost, Rising Quickly
High Cost, Rising Quickly
Inflation (Change in Price Level)
3.0%
Spain
2.5%
Luxembourg
Portugal
Poland
Eurozone Inflation (2.0%)
2.0%
Ireland
Belgium
Austria
1.5%
France
Denmark
Netherlands
Sweden
1.0%
Low Cost, Rising Slowly
High Cost, Rising Slowly
0.5%
50
60
Less expensive
70
80
90
100
Price Level, Eurozone = 100
110
120
130
More Expensive
140
Household Borrowing per Capita (2003-2006)
€35,000
2006
2003
€30,000
€25,000
€20,000
€15,000
€10,000
€5,000
Ireland
Netherlands
Germany
Spain
Euro area
Finland
Austria
Belgium
France
Portugal
Italy
Greece
€0
Ireland’s Strengths
• Ireland continues to attract high levels of overseas investment
• Strong labour force growth, reflecting both natural growth
and immigration
• Competitive personal and corporate tax rates
• Relatively low levels of regulation (although perceived to be
increasing)
• High levels of public investment
• Improving school completion and third level participation
rates
• Productivity levels in ‘modern’, export-oriented,
manufacturing and services sectors are high by global
standards
Ireland’s Weaknesses
• Ireland’s international trade performance is weakening
• Ireland is losing employment in manufacturing – over 32,000
job losses since 2000
• Erosion of Ireland’s cost competitiveness
• Poor (but improving) infrastructure - road, air, seaports, waste
and energy
• Low levels of domestic competition and productivity in many
domestically trading sectors
• Young and undifferentiated R&D system
Back to the future?
• We need to shift back from the current domestic
driven phase of economic growth to export-led
growth?
• Also need to be aware of external risks, such as:
– Rises in oil and energy prices
– House price volatility throughout the OECD
– Weakening of the dollar, which will affect the cost
competitiveness of Irish exporters
Five Key Policy Challenges
1.
Need for enhanced productivity growth across all sectors
of the economy
•
•
•
2.
Investment required in all levels of education system
Investment in infrastructure - including broadband
Cost reduction
Promotion of competition
•
•
Nationally – removal of government and sectoral restrictions
on competition
Internationally – promotion of free trade and work with others
to get Doha back on the rails
Five Key Policy Challenges
3. Securing the competitiveness of the tax system
•
•
Broadening of the tax base
Efficiency of public services
4. Improving the capabilities of our companies to move
up the value chain
•
Pursue with relentless determination the implementation of
the strategy for science, technology and innovation, and
initiatives to enhance management capabilities
Five Key Policy Challenges
5.
Support for Internationally Trading Firms
•
Importance of internationally trading firms to our long term
success
Shift tax incentives from property related investments
towards investments in externally trading firms
•
Conclusions
• Ireland’s national competitiveness has been
central to Ireland’s success
• Ireland needs to recover some its lost export
competitiveness
• …requiring a more supportive environment for
exporters based in Ireland
• This is in the interests of all small/medium firms
– those that export directly and those that sell to
exporters.
END
On a personal note
Presentation given to the Dublin Economic
Workshop
Kenmare 12 October, 2007
Competitiveness and Pay Formation
Don Thornhill
and
Dónal de Buitléir
Disclaimer!
Three informing guidelines
1. Foreign earnings the only long run, sustainable
driver of economic growth
2. We must recover and enhance competitiveness
3. Pay formation should reflect these two
requirements
Necessary but not sufficient
The policy intent to move production of goods
and services up the so- called value added
chain is correct …but costs remain important!
…and some further guidelines!
1. Compensating ourselves for domestic cost
increases which are higher than those prevailing
in our markets is counterproductive
2. Real pay increases which are in line with
productivity increases allow us to maintain
competitiveness
The way forward?
Two elements in pay increases
1. Annual “platform” increase related to a trade
weighted measure of inflation for
internationally traded goods and services in our
trading partners
2. A growth related payment related to increases in
productivity per person at work
Illustration of the Pay Formation Model
2010 Budget Day - in December
2009.
Late - 2010
2011
Actions
Minister for Finance makes provision
For public service pay for 2010
1. Determines inflation related
“platform” increase
2. Determines “Growth related”
pay increase as per changes
in individual productivity across
the economy in 2009
Minster for Finance makes payment
to statutory “Growth Fund” based on
latest GNP and labour force
estimates for 2009
Payments of the “Growth Dividend”
made to individual employees in line
with negotiated agreements
Illustration of the Pay Formation Model continued
2011 Budget Day – December 2010
End - 2011
2012
Minister for Finance makes provision
For public service pay for 2011
1. Determines inflation related
“platform” increase
2. Determines “Growth related”
pay increase as per changes
in individual productivity
across the economy in 2010
Minster for Finance makes payment
to statutory “Growth Fund” based on
latest GNP and labour force
estimates for 2010
Payments of the “Growth Dividend”
made to individual employees in line
with negotiated agreements
The devil is in the detail!
Questions – room for debate?
1. Should there be a “platform” increase?
2. Why use GNP per person at work?
3. Should there be a one to one relationship
between productivity growth and pay increases?
4. Can the model be extended to the private
sector?
More questions
5. Tax reliefs?
6. Extension to public service pensioners and social
welfare beneficiaries?
7. Applicable if no social partnership framework?
8. Would payments be automatic?
9. Benchmarking?
10. Governance and trust