POLITICS:IRELAND HAS experienced consistently higher inflation than the euro zone average and there is no escaping the fact that we have become an expensive place to do business. Restoring cost competitiveness will protect our attractiveness as a location from which to do business and is fundamental to arresting the rise in unemployment.
Currency devaluation is not an option for a euro zone member. It is imperative to control costs in areas where national policy can have a direct impact. While the current economic downturn is leading to price moderation, the challenge is to achieve a swift improvement in cost competitiveness. It is much better to have a sharp fall in the price level now, rather than a gradual decline in the price level over several years with persistently high unemployment.
The real pay and income cuts being felt across the economy, while painful, are a necessary part of this adjustment – this would also happen under a currency devaluation. There is a wide range of actions the Government can take to restore cost competitiveness.
Energy costs have increased dramatically in recent years – electricity prices for industrial users in Ireland are now the second highest in the EU-27. It is vital to ensure that electricity prices do not further outstrip those of competitor countries. The Government commitment to reduce energy prices by up to 15 per cent in the short term is a welcome development, as is the entry of Bord Gáis to the residential electricity market.
Options for improving energy cost competitiveness include a commitment to recover carbon windfalls for energy generators until 2012; and investment in improving energy efficiency and strategic infrastructure, such as interconnection. The regulatory framework needs to ensure that electricity and gas prices are transparent and sufficiently targeted to drive efficiencies in generation and distribution. Implementation of outstanding actions identified in the Energy White Paper should be accelerated, including the transfer of the transmission grid from ESB Networks to Eirgrid. Government also needs to balance ambitious renewables targets with cost competitiveness and provide certainty as to how these targets will be achieved.
Ireland’s poor performance in waste management in terms of both cost and capacity can be traced back to the failure to deliver key infrastructure. Regulatory and policy uncertainty continues to inhibit investment in alternatives to landfill. For waste management and water services, local authority boundaries are not best suited to providing an integrated service or to exploiting economies of scale. Inefficient, fragmented public services should be co-ordinated at national level. Ireland’s eight river-basin districts provide logical geographic structures for the planning and provision of water services on a scale that would maximise potential economies of scale and deliver reduced costs for water users.
Local authority charges add to the costs facing businesses, reducing the advantages of Ireland’s competitive tax rates on labour and capital. It is critical that local authority charges on businesses reflect the economic cost of serving their needs. Local authorities have been forced to rely too heavily on increases in development levies, commercial rates and waste charges to finance local services. Many of these charges fall disproportionately upon the enterprise sector; they penalise economic activity while bearing little relation to the true cost of providing services to local businesses. The broadening of the local authority revenue base to include a levy on non-principal private residences is welcome – hopefully this will forestall increased charges on business.
Restrictions on competition allow existing providers to produce goods and services inefficiently and/or to inflate prices artificially. While there are numerous examples of the benefits of greater competition in domestic markets – air travel, taxis and telecommunications for instance – a wide range of sectors are relatively sheltered from competition.
If sheltered sectors of the locally traded services sector – for example solicitors, barristers, banking, transport, energy and waste services – are not exposed to greater competition, the necessary improvement in the cost competitiveness of Irish firms will not be achieved.
Anti-competitive practices take many forms: barriers to entry; limited training places; limited recognition of overseas qualifications; and restrictions – on the ability of customers to switch providers, and on firms to advertise. There has been a need for a process of modernisation in the professions for many years. Now is the time for action. For example, the Competition Authority has advocated the introduction of independent regulation by a Legal Services Commission to replace the present system of self-regulation.
The Government focus on the retail sector is welcome. Sterling has depreciated sharply. Irish importers, distributors and retailers should be re-pricing new stock imported from the UK to reflect the euro’s purchasing power. That some may be profiting from the exchange rate differential is of deep concern. The fact that the strong euro does not appear to be translating in lower import costs worryingly suggests a lack of competition in the import, distribution and retail sectors.
Lowering the costs of doing business is critical for Ireland’s economic recovery and a return to export-led growth. We can no longer afford the complacency of recent years in toler-ating deteriorating cost competitiveness.
Don Thornhill is chairman of the National Competitiveness Council. This article was written in a personal capacity and may not reflect the views of all council members
