Competitiveness: Should we be concerned?

Competitiveness: Should we be concerned? Tourism Policy Workshop, 22 nd November 2014 Dr Don Thornhill, Chairman, National Competitiveness Council Conor Hand, Economist, Strategic Policy Division, DJEI

Costs of Doing Business / Ireland s Competitiveness Scorecard

About the National Competitiveness Council Established by Government in 1997 Provide a clear, authoritative, thorough, accurate and focused up-to-date assessment of Ireland s competitive performance Provide clear evidence-based recommendations to enhance competitiveness Reports to the Taoiseach and the Government, through the Minister for Jobs, Enterprise and Innovation Membership includes people with relevant expertise in competitiveness, business people, employer and trade union representatives, and a representative from the Department of Jobs, Enterprise and Innovation NCC is also advised by senior officials from 9 Government Departments including Taoiseach, Finance, Public Expenditure and Reform, Energy & Communications, Education, Justice, and Environment. Supported (research/ admin) by DJEI NCC provides an independent voice

What is National Competitiveness? How do we Measure it? Broad concept encompassing diverse range of factors and policy inputs Education and training, entrepreneurship and innovation, Ireland s economic and technological infrastructure and the taxation and regulatory framework Ability of Irish firms to compete successfully in international markets Not an end in itself Goal of national competitiveness is to provide Ireland s people with the opportunity to improve their living standards and quality of life

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Less competitive More competitive How is National Competitiveness Measured? International Rankings or a range of national indicators IMD WEF World Bank 1 Costs of doing business 6 11 16 15 13 Harmonised competitiveness indicators Export and market share data (the ultimate measure of success?) 21 25 Productivity 26 31 NCC approach assessment of a range of indicators but no single metric But current rankings are not always a great predictor of future success Not a review of macro economic performance Not tailored to measure those factors that matter to Ireland

NCC approach to competitiveness benchmarking Distinguish between the inputs to national competitiveness over which policymakers have greatest control and essential conditions 120 metrics, appropriate to changing economic & societal circumstances Internationally comparable data EU, UN, WTO, OECD for majority of indicators Indicators from specialist competitiveness bodies (e.g. World Bank Doing Business, WEF Global Competitiveness Report and IMD World Competitiveness Yearbook) Where of benefit, national sources such as Central Bank, CSO, and ESRI Subject to data availability, benchmark performance against 19 other countries (trading partners and competitors) Ireland also compared to a relevant peer group average (e.g. OECD or the euro area)

What does competitiveness mean for tourism? National Competitiveness Tourism: The Destination! Cost competitiveness Natural resources Cost Productivity growth Quality of service Overseas market Domestic market

Percentage of Costs If we focus on costs, which costs matter? Location Insensitive Costs Labour Property (Facility lease) Transportation Labour Utilities Property (Facility lease) Transportation Interest & Depreciation Taxes Utilities & Grants Interest & Depreciation Taxes & Grants 100% 100% 8.0 5.9 4.6% 5.5 7.3% 90% 90% 5.1 6.4% 7.7 11.6% 13.4 15.9 6.4% 80% 80% 70% 70% 60% 60% 50% 50% 40% 40% 13.9 24.9% 4.4 76.2% 71.0% 87.1 84.9 69.8% 80.5 30% 30% 20% 20% 10% 10% 0% 0% 54.2 54.1% 12.5% 16.3% 13.3% Manufacturing Digital Digital Services R&D R&D

Jan-97 Jul-97 Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Improvement January 2005=100 Disimprovement Maintaining cost competitiveness Harmonised competitiveness indicator for Ireland (HCI), 1997-2014 110 Nominal HCI Real HCI 105 100 95 90 85 80 75

Poland Hungary Spain Italy Ireland EU27 euro area-17 France US Finland UK Sweden Germany Netherlands Japan Denmark Switzerland Poland Portugal Hungary Sweden Belgium Finland Denmark Ireland euro area Netherlands Singapore Spain China Germany Austria South Korea Italy UK Annual earnings ( ) Euros per metre squared Labour costs Property Costs Gross and net wages Gross annual earnings ( ) Net annual earnings ( ) 80,000 70,000 60,000 50,000 40,000 30,000 20,000 Annual rental costs - office 2013 2012 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 10,000 0 2,000 1,000 0

Q1 2006 Q3 2006 Q1 2007 Q3 2007 Q1 2008 Q3 2008 Q1 2009 Q3 2009 Q1 2010 Q3 2010 Q1 2011 Q3 2011 Q1 2012 Q3 2012 Q1 2013 Q3 2013 Q1 2014 Sweden Finland Hungary Denmark France Poland Netherlands UK euro area Spain Ireland Germany Italy s per Kilowatt hour SPPI 2010 = 100 Energy Costs Service Costs 0.25 Electricity costs small user 2013 2008 Services producer price index 110 108 0.20 106 0.15 104 0.10 102 0.05 100 0.00 98 96

Annual inflation (Average annual change in HICP 2008-2012) Broader Cost Environment 6.0% 5.5% Low Cost, Rising Quickly High Cost, Rising Quickly 5.0% Hungary 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% Poland Spain EU-28 Germany UK Finland Italy euro area-17 France Netherlands Luxembourg Denmark Sweden 1.0% Ireland 0.5% Low Cost, Rising Slowly High Cost, Rising Slowly 0.0% 40 60 80 100 120 140 160 12 Less Expensive Price level 2012, EU28=100 More Expensive

Maintaining cost competitiveness Against backdrop of modest recovery, cost pressures emerging Particular pressures evident in the energy, legal and health sectors Significant concern about rapid (residential) property price increases Enhancing labour cost competitiveness through: Reform of income taxes Changes to the social insurance structure for lower paid workers Addressing replacement rates for those who face high rates Lowering energy costs over time by: Tackling controllable costs Taking measures to enhance energy efficiency and manage peak demand Managing property costs by: Replacing commercial rates with a site value tax Reforms to other local authority charges Supporting the long-term development of the property sector (e.g. planning)

Sweden Denmark Finland Poland Netherlands Hungary Germany EU-27 UK France Spain euro area-18 Ireland (GDP) Italy Ireland (GNP) South Korea Switzerland Denmark New Zealand Germany Italy Sweden Netherlands Poland Hungary euro area-17 OECD-30 Finland France Spain Ireland US UK Japan Percentage of GDP 122.3 Percentage of nominal GDP 149.8 Continued steady fiscal consolidation General government gross debt (% GDP), 2013(f) 160 140 2013(F) 2008 Required improvement in underlying primary fiscal balance to achieve debt targets, 2012-2030 Consolidation from 2014 to achieve debt target Consolidation 2012-2014 12.0 120 10.0 100 80 60 40 20 0 8.0 6.0 4.0 2.0 0.0-2.0

Continued steady fiscal consolidation Fiscal deficit & public debt elevated for foreseeable future Further consolidation needed in coming years Stable, sustainable public finances prerequisite for competitiveness The tax base distribution of taxes, expanded role for property taxes Availability of competitively priced world-class infrastructure Energy; telecoms; transport (road, public transport, airport, seaports); waste; water; and related services - critical to support competitiveness Reverse some of the cuts to the capital expenditure budget in recent years Focus on a range of infrastructure projects that support competitiveness

Germany Japan Netherlands Denmark US Finland UK Sweden EU-28 euro area-18 France Ireland Hungary Poland Italy Spain Percentage of under-25s Expenditure on labour market programmes (% GDP) Ireland Denmark Spain Netherlands Finland France Germany Italy Sweden OECD-28 Switzerland Hungary Poland US New Zealand South Korea Japan Supplying essential skills to enterprise and reducing unemployment Youth unemployment and long term youth unemployment rate, 2013 Youth Unemployment 2013 Long term youth unemployment Q4 2013 Public expenditure on active and passive labour market programmes (% GDP), 2011 Other passive programmes Other active programmes Public employment services Income maintainance Training 60 50 40 30 20 4.5 4.0 3.5 3.0 2.5 2.0 1.5 10 0 1.0 0.5 0.0

Supplying essential skills to enterprise and reducing unemployment Primary driver of productivity and long term competitiveness High levels of unemployment, long term unemployment and youth unemployment, allied to high replacement rates for specific cohorts Large spend on (passive) labour market activation programmes Indications of skills mismatch Continuing need to invest in all areas of the education system from pre-primary right through to fourth level education Languages, sales and marketing Implement the new Further Education and Training strategy Deliver structures to provide better high quality, flexible and responsive education and training programmes Focus on increasing employer engagement, enhancing the reputation/value of further education and training, & activating the unemployed Modernise the apprenticeship system Greater focus on on-the-job learning, engagement with employers Development of a wider range of relevant apprenticeships

Ireland Hungary Malta Netherlands Denmark Switzerland Germany Poland euro area-18 EU-28 Finland Spain UK Italy France Japan US Finland Germany Hungary Netherlands euro area-14 Poland Sweden Italy Denmark Ireland France UK Spain 107.8 45.9 44.9 Exports % GDP Percentage of GDP Developing a more sustainable enterprise base Exports % GDP, 2013 Exports to emerging markets (% GDP), 2012 120 2013 2008 5.5% 2012 1997 100 5.0% 4.5% 80 4.0% 3.5% 60 3.0% 2.5% 40 2.0% 20 1.5% 1.0% 0 0.5% 0.0%

Developing a more sustainable enterprise base Very open economy & an attractive investment location Strong productivity performance but concentrated by sector In export terms, narrow range of products and markets Reliance on US, EU and UK - weaker linkages with emerging economies Promoting investment Address tax competitiveness (e.g. income taxes, capital taxes, etc.) Promoting trade development and diversification Trade policy - focus on agreed priority markets & advance Transatlantic Trade and Investment Partnership Key skills - foreign languages and marketing skills, logistical skills Cluster development - enhanced linkages between indigenous & foreign firms Enhancing productivity, innovation and R&D Competition policy - legal Sustained investment in research, development and innovation Supporting entrepreneurship & using public procurement

Enhancing access to finance Notwithstanding sluggish demand, a shortage of finance is significant limiting factor on growth and competitiveness Key issues are limited credit availability and the relatively high cost of credit where it is available Addressing mortgage arrears and completing bank repairs Enhance bank funding Monitoring and encouraging bank lending particularly to the SME and manufacturing sectors Developing the range of products and services provided by the banks Developing/ attracting new entrants to the banking market Pro-actively dealing with legacy debt) Support other non-banking funding sources Encourage equity investment State support for other funding mechanisms such as peer-to-peer lending

Actions addressing trust (social capital, data protection and corporate governance) As a knowledge economy, trust in institutions and corporations is becoming ever more central to Ireland s ability to compete While trust is intangible, it is an important international currency A reputation as a secure and responsible location in which to do business is central to competitiveness Supporting corporate social responsibility Implementation of the National Plan on Corporate Social Responsibility Improving corporate governance Completion of the white paper on crime focus on actions designed to tackle white-collar crime Developing Ireland s data protection infrastructure Engagement on the proposed European data reform package Enhancements of the resources of the Office of the Data Protection Commission

Focus on Tourism Sector Ambitious employment & growth targets set out for the sector but to achieve (and surpass these) Are there issues NCC have not considered Commercial rates, insurance, JLC reform? What policy shortcomings need to be addressed? What can central Government do? Role for Local Authorities? Short term through the Action Plan for Jobs, marketing, better regulation, visas, maintain VAT rate Medium Term capital investment & planning, aviation policy to support access & connectivity, training (ETBs, SOLAS) What can firms do? Selling in mature markets Investment in human capital (EGFSN), management development, and ICT Maintaining price competitiveness

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