Dr. Tom McDonnell:

I thank the Cathaoirleach and members and staff of the committee for the invitation to Ciarán and me to appear before it. We are very grateful for the opportunity to present our views on competitiveness, the cost of doing business in Ireland and related matters. The most important of these "related matters" is of course productivity, because it is productivity that ultimately determines average living standards over the long run.

Competitiveness itself is a relative concept. It has no meaning by itself. It is a function of the economy's underlying productivity and its cost base and, crucially, how economy and firm productivity and cost bases compare with those of competitor countries and competitor firms. We can therefore improve our competitiveness either via productivity increases or via improvements in the cost base relative to competitors. As it happens, Ireland generally ranks as one of the most competitive economies on the entire planet, albeit one with clear and notable weaknesses.

Our most notable competitiveness failure is the weakness of Irish infrastructure across a slew of areas including energy, water, transport and housing. This reflects years of underinvestment in the public capital stock and suggests that the budgetary focus over the years ahead should prioritise capital spending over alternatives such as tax cuts. To complement this focus, we will also need a medium-term strategy to incentivise workers, both foreign and domestic, into the Irish construction sector. We will not be able to deal with our infrastructure problems if we cannot induce workers into the sector.

Irish labour costs are generally in line with those of other high-income western European countries, which are the relevant comparators. However, there are clear cost issues in a range of other areas. The most notable of these are the cost of energy and the cost of legal and insurance fees. Ultimately, the issue of energy costs will only be resolved by a massive programme of investment, including State investment, in renewable energy supply, including battery storage and grid upgrades. NERI is preparing papers on that topic, which we will release in the coming months. Our view, one that we explain in the new economic model document referenced in our submission, is that Ireland's competitiveness strategy should be based on a high-road strategy of steady improvements in the productive and innovative capacity of the Irish economy. Workers and business owners will both benefit from this in the long run. On the other hand, the alternative low-road strategy of driving down labour costs to improve competitiveness should be avoided. It will simply exacerbate our already high level of in-work poverty and slow down our economic development.

It is not clear that curtailing minimum wages or collective bargaining adds to or improves our competitiveness in the long run at all. To achieve a high-road outcome, we need to meaningfully increase public spending on research and development, which is about €1.2 billion below where it ought to be, as well as on education and training, including supports targeted at adults in order that we can respond quickly to technological and other disruptions, which we know are coming and in many cases are already here; better design incentives, both carrots and sticks, for businesses to invest in their own research, productivity and innovation, including horizontal innovation through worker democracy and collective bargaining; develop a set of policy initiatives to attract and retain human capital and diffuse technology more broadly through the economy; expeditiously reverse our glaring infrastructure deficits; and pursue inclusive policies that ensure we are properly utilising everyone's potential - for example, through policies to end child poverty.

As regards enterprise policy and return on fiscal investment, not all enterprise policy is good policy. For example, we do not support calls to reduce the VAT rate for the low-value-added hospitality sector. Such a policy has very significant fiscal and opportunity costs, will do nothing to improve the long-run well-being of the economy or its citizens and will provide negligible employment growth in what will inevitably be low-paid jobs. This is particularly true when the economy is already close to full employment. The fiscal resources are much better used elsewhere, whether the goal is employment in good jobs, productivity, poverty reduction or even just better fiscal resilience. We can give examples in each area. Not only do policies such as the VAT cut carry fiscal and other opportunity costs, but they are also likely to be counterproductive in the long run by pushing the economy in a lower value-added direction, thereby producing slower growth in the long run. To be clear, we are not against Government support for business; we simply believe it should be done in the context of achieving long-term strategic targets. There are many targeted areas where appropriate Government intervention could potentially enhance the long-run productive capacity of the economy via supports for enterprise. Three crucial ones are policies that increase the economy-wide rate of generation of high-potential start-ups or raise equity finance for such start-ups; policies that incentivise private research, development and innovation; and policies that attract and retain human capital and diffuse technology more broadly. This is articulated to a much greater extent in the longer submission that was given to the committee.

We should make a quick comment on the Department's Action Plan on Competitiveness and Productivity. It is broadly a step in the right direction. We note that the very first priority action is to increase expenditure on research activity in the higher education sector. This sets a good framing and tone for the overall approach. We need to strengthen our innovative and productive capacities and, as such, the thematic focuses on innovation and infrastructure are particularly welcome. We do, however, have concerns about certain priorities, such as the "SME test" and the "red tape challenge". We are happy to elaborate on these concerns in the discussion. We also note with interest action 24, on the potential of social partners to drive productivity, and action 59, on the development of an action plan on collective bargaining. Collective bargaining has an important role in nurturing horizontal innovation in the economy.

Our competitiveness strategy is ultimately to be a productivity strategy. That is the high-road strategy and it is the one that Ireland should pursue through the 21st century, facing into the mega trends that we do. A high-level checklist of appropriate policy reforms to enhance our innovation system might include: first, allocating higher levels of per capitaspending on public research and development and providing generous subsidies and tax breaks for private research; second, creating a safety net for entrepreneurship and risk-taking, including via social insurance reforms and lenient bankruptcy laws; third, establishing attractive career paths for STEM workers and for other researchers, particularly at PhD level and beyond; fourth, providing fiscal supports for ICT adoption and financial and other supports that encourage the lifelong reskilling or upskilling of workers and managers more generally; fifth, improving infrastructure especially in technologies that facilitate communication and learning, such as broadband and artificial intelligence; sixth, enacting patent reform at EU and UK levels to prevent the monopolisation or mothballing of technologies; seventh, building out an entrepreneurial State in which the State takes a leading and activist innovation and entrepreneurship role as proposed, for example, by Mazzucato; eighth, encouraging inward migration in order to bring a flow of new skills, new ideas and new perspectives into the economy, including dealing with existing labour shortages such as in construction; ninth, promoting horizontal innovations from within organisations by encouraging a greater degree of employee voice and autonomy, more active learning by doing and better communication of internal expertise; and, tenth, ensuring greater economic and social inclusivity, including the elimination of child poverty and the other barriers that prevent individuals from fully participating and flourishing in the economy. Greater inclusivity allows everyone to potentially contribute to or exploit the sum of knowledge that we all have cumulatively in the economy. That, in our view, is what a high-road enterprise strategy looks like. We are happy to take any questions.