Ireland an ‘expensive location’ in which to do business

The State remains an “expensive location” in which to do business, with high consumer prices, climbing rents and the absence of affordable childcare threatening to undermine the State’s ability to attract talent, according to a major new report.

The Costs of Doing Business in Ireland 2018, published on Friday by the National Competitiveness Council, argues that, while the Republic is a "relatively competitive" location in which to do business, there are several areas that require improvement.

The council notes that the State is experiencing “strong economic growth”. But it adds that the openness of the economy means the enterprise sector is “particularly vulnerable” to negative price and cost shocks outside the influence of domestic policymakers.

Several risks have already emerged that could undermine national competitiveness, growth and living standards, including Britain’s exit from the European Union in less than a year.

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Echoing a report from the Organisation for Economic Co-operation and Development earlier this week, the council says it is “critical” that domestic policies do not contribute to overheating.

The State has a price profile it describes as “high cost and rising”. Irish consumer prices in 2017 were 23.7 per cent above the EU average, largely driven by services price rises.

“Persistently high rates of consumer prices lead to expectations of further price increases, and can create a vicious circle of increasing prices, reducing real incomes, increasing wage demands and reducing international cost competitiveness,” the report says.

Upward pressures

As the labour market tightens further, “upward pressures” on labour costs can be expected in several sectors as “skills shortages have emerged” and these, in turn, have knock-on implications for wage demands.

“Retaining employees, particularly in SMEs, poses difficulties,” the council says. “Certain skills needs are becoming more pronounced, as indicated by increased job vacancy rates in professional, scientific and technical services, financial, insurance and real estate services and ICT.”

The report also argues that the delivery of “a suite of competitively priced world-class infrastructure” and related housing is “critical” to support competitiveness in the medium term.

It highlights in particular the need for energy; telecoms; road, public transport, airport, seaports; waste; and water infrastructure.

“Well-planned infrastructure, including sustainable housing, high-quality public transport and adequate water infrastructure provides people with the opportunity to live near their work and enjoy quality of life, reduces traffic congestion and increases productivity,” it says.

“Increasingly, the shortfall and affordability of residential housing affects Ireland’s ability to attract and retain talent, and can indirectly impact on enterprise costs and influence the competitiveness of Irish goods and services.

“High rents affect decisions around labour mobility, entering employment and expansion of operations by enterprises. Therefore they are a significant infrastructure impediment, particularly in urban areas.”

Property inflation

Prices in the State “remain relatively high” and rents push the cost of living “out of line” with other developed European economies, it says.

“Despite an increase in construction activity, strong demand means property price inflation is likely to continue,” according to the council. “It is well understood that a significant increase in supply is urgently required.”

Furthermore, the report notes that “insufficient access” to affordable, full-time childcare “is a factor in deterring female labour market participation”.

“The availability of financially accessible, high-quality childcare would help to address skills shortages and would improve Ireland’s overall attractiveness as a location to work and live,” it says.

In terms of the cost of credit, it “remains relatively high”, particularly for SMEs. The impact of an interest rate shock on borrowing costs and the wider economy “could be significant”, and the council says it is “important that debt levels continue to be reduced”.

“Well targeted State intervention to address deficiencies in infrastructure provision and address market failures remains important,” it says, but cautions that it is “vital” policy interventions are not pursued in a “piecemeal or short-term way”.