Urgent need for 'painful' steps to save economy

National Competitiveness Council report:"Painful" measures are urgently required to stabilise public finances and prevent the economy from going into a sustained period of decline, the National Competitiveness Council (NCC) said yesterday.

Among the measures proposed by the NCC in its annual policy report are a recurring property tax in place of stamp duty; a student contribution to the cost of third-level education; State intervention in the introduction of next-generation broadband networks; and more teaching time for maths, science and technology at second level.

NCC chairman Dr Don Thornhill said Ireland's economic survival depended on export-led competitiveness.

"Future success and prosperity will only be achieved if we apply ourselves to implementing the necessary policies to provide a competitive operating environment for Irish enterprises - particularly those which export," he said.

"There is no place for pessimism or defeatism about the future," he added, saying Ireland retained the economic advantages of a competitive corporation tax rate and labour tax wedge - the ratio of total labour taxes to total labour costs for an employer.

The NCC, an independent body comprising the social partners and others, said Ireland faced "harsh new fiscal realities" due to the "rapid and alarming" deterioration in public finances. Dr Thornhill said there was a risk that State borrowing would become "unstable" if new ways to boost the revenue base were not found.

The introduction of a property tax would not affect competitiveness in the way that income tax increases would, he said. Moving away from stamp duty would also free up the property market and increase the predictability of tax revenues.

Dr Thornhill said he believed there was now a "more receptive" public policy environment for the measures proposed by the NCC, most of which it had made in its previous annual reports.

A "short burst of deflation" could benefit the economy and improve competitiveness: long-term inflation rates urgently need to fall back to the euro-zone average, if not lower, the NCC said.

A strong euro relative to sterling is causing difficulties for exporters, Dr Thornhill said, adding that it was important for the economy that the decline in sterling fed through into lower euro prices as rapidly as possible.

However, a cut in VAT similar to that implemented in the UK would probably be used to pay off household debt rather than stimulate the economy through higher spending, Dr Thornhill said.

The labour tax wedge could be maintained by reducing employer PRSI, which could be paid for by introducing a carbon tax.

Main Points

• Further steps need to be taken toward introducing a recurring property tax in place of stamp duty.
This should be phased in over a period, with relief for low-income and other vulnerable households and those that have recently paid stamp duty.

• Continued investment needs to be made to address infrastructural deficits, including State intervention in broadband infrastructure given that there are "question marks" over the private sector's ability to deliver the services that are required, the NCC said.

• Greater competition is required in the sheltered sectors of the economy, including the legal and accountancy professions. The Competition Authority's recommendations on reducing the barriers to entry to these markets should be implemented.

• As with the broader public service, the education system needs to achieve more with fewer resources. Increased teaching time for maths, science and ICT skills are needed for the "knowledge economy". The Strategy for ICT in Schools is critical and should not be subject to cutbacks.

• Ireland's security of energy supply needs to be improved through the planned electricity interconnectors to the UK and then into Europe. A review of Ireland's future energy mix should include a technical study on the feasibility of nuclear energy.

• Better land-use planning would play a key role in supporting sustainability and competitiveness if there was greater focus on establishing higher residential densities. Dublin and other National Spatial Strategy cities should be prioritised.