National action plan required to consolidate Ireland’s manufacturing success

Innovation Profile: Ibec

A new report from Ibec has highlighted the scope and scale of the manufacturing sector and its importance to Ireland's economy. Spanning everything from successful indigenous Irish companies to global companies of huge scale, manufacturing is one of the high performing engines of the Irish economy according to the Manufacturing in Ireland: Today, Tomorrow and Beyond report.

The report quantifies the economic contribution of the sector, which employs 260,000 people, accounting for over 12 per cent of total employment. It is responsible for €12.5 billion in wages and employment taxes annually, €1.7 billion of tangible investment and 27 per cent, or over €3 billion, of corporation tax receipts.

In addition, the sector spends over €19 billion each year on purchases of goods and services from other suppliers in the Irish economy.

The export performance is no less impressive. Irish-owned manufacturing exporters grew sales globally by over 80 per cent between 2010 and 2019, while the FDI manufacturing sector grew its exports by 44 per cent over the same period. Approximately 60 per cent of those exports are now part of global supply chains, one of the highest such ratios in the world.

According to OECD studies, about half of Irish private sector employment is sustained by this foreign demand – the second highest rate in the OECD.

Challenges

Despite the sector's success, there are clear challenges ahead for manufacturing in Ireland, according to Ibec director of membership and sectors Sharon Higgins, who points to the results of a survey of members carried out by the organisation to coincide with the publication the manufacturing report.

While respondents expressed a high degree of confidence in business growth for the next six months, they expect increases in the cost of energy (95 per cent), raw materials (93 per cent) and wage growth (83 per cent).

Respondents also reported positive expectations of increases in export sales (60 per cent), productivity (48 per cent), growth in employment (44 per cent) and increased profitability (33 per cent).

"We believe there is an urgent requirement for a national action plan to address competitiveness in manufacturing and consolidate and grow its success on the world stage," says Higgins. "Areas of critical importance include improvements to tax regime issues, such as the R&D tax credit, support for digital transformation and the retention of free access to the UK market."

The report calls for improvements to the R&D tax credit regime to make it best in class internationally. These improvements would see the 15 per cent limit on qualifying outsourced expenditure to third level institutions and the restrictions on outsourcing to related parties removed. This would be consistent with the Knowledge Development Box rules as well as being in line with other jurisdictions.

On corporation tax, there is a specific call for full expensing of fixed investment for the sectors worst impacted by Covid-19 to be allowed for the years 2021 and 2022.

Capital Gains Tax entrepreneurs' relief also comes in for attention with a recommendation for the lifetime limit on capital gains to be increased to €15 million and an expansion of the relief to passive investors in areas with high growth potential. "This would send an important signal to serial entrepreneurs," says Higgins.

The Employment Investment Incentive Scheme (EIIS) is another area of focus. The report contends that investment and cashflow could be supported by doubling the annual limit and allowing up to €1 million on investments held over four years.

In line with the recommendations of the Indecon review, losses on EIIS investment should be allowed for CGT purposes and any gains on the sale of shares should be taxed as capital gains rather than income.

Digital agenda

On the digital agenda, the report calls for an acceleration in delivery of the national broadband plan to provide the 21st century infrastructure required to support digital innovation and digital entrepreneurship. In addition, administrative and planning delays to digital infrastructure should be addressed with priority being given to strategic physical and institutional infrastructure that supports advanced manufacturing.

“The export capability of indigenous Irish manufacturing can be further improved by introducing a state-supported export credit insurance scheme to make up for the anticipated gap in the supply of such insurance in the market,” says Higgins.

On sustainability, the report warns that a failure to reinforce climate ambition with adequate investment and policy supports could lead to “missed targets, higher energy costs, a weakening of national energy security and reduced industrial competitiveness”.

“Over the coming years, we will work with industry and other stakeholders to identify workable solutions to the many environmental challenges we face and enable Ireland to meet its targets in a way that is fair, cost effective and good for the economy,” says Higgins.