Dr. Tom McDonnell:

I thank the Senator. There were about five questions. On whether there is a single policy lever on the high road to resolve the issue of SME productivity, there is not. I guess I am saying there is no silver bullet. It is a matter of a whole variety of policies put together that incrementally grind forward. Productivity is not something that just magically shoots up 20%; it is about deciding how to make incremental improvements year on year. Much of what productivity comes down to is the sector itself, so the biggest change to productivity you could make would involve shifting the composition of employment in the economy. That is not something you can do overnight, obviously. Making some of the changes we need in terms of making construction a larger part of the economy would actually reduce productivity, because construction is, by and large, a low-productivity sector. However, it is an investment in the future that makes the economy more productive in the longer term. I suppose that is where we want to keep the focus. How do we move away from thinking three or six months ahead, think about 2030, 2040 or 2050 and make sure we have the best Ireland we can have in terms of job quality, the number of jobs, and standards of living and well-being?

On SME productivity, it is really about an acknowledgement that certain sectors are inherently low in productivity. The food and accommodation sectors are inherently low-productivity sectors, but that does not mean you cannot make them more productive than in other countries whose sectors are in some ways more productive and have more of an online presence. That is relevant in some cases but, by and large, the gains are likely to be very small. Therefore, it is about identifying how can we move our research and development and education systems and all of these things so the next generation of companies will be high-productivity companies. Once you have established a business culture, it is very difficult to change it. Once a business is operating, there is very little time for a manager to go off and learn how to do such a thing or say certain technology will be diffused to them. It is a matter of the early stages. What is actually needed to improve productivity is acceptance of churn and of creating an environment in which it is okay to fail and the consequences of failing are minimised. After failing, one can try again, which means access to finance is very important. It is important to have no black marks and nothing held over you because you failed in the past. Where the private sector will not invest in SMEs, there is a role to be taken on by the State in some ways and, perhaps, in some sectors. This relates to the notion of the State taking risks as well.

If the State can take equity stakes in the new companies that are coming through, that will encourage venture capital and all that to come in and take risks as well, which builds up an ecosystem of these companies. About 90% of them will probably fail, but there will be some successes. It is more about the environment that is created rather than a single policy lever that can be pulled in 2025 to change everything.

On the point about tax cuts being counterproductive, we mean two things by that. The first is that the tax cuts have cuts have an opportunity cost in that if €500 million or €750 million is spent on them, that is money not spent on something else. It could be spent on education, child poverty, a different type of enterprise support or even on energy subsidies, which also could reduces costs for business. We are saying the employment gains from a VAT cut might be lower than the thing that has been forgone by not doing that and therefore on a net basis it is counterproductive. The second thing is that what the Nordics actually did to generate a high value-added economy over three generations was to create an environment that did not coddle low productivity, low value-added businesses. They said they would have a really competitive environment and if things fail they would put in place all the supports for people to recover, such as a social insurance system, retraining, upskilling, expeditious bankruptcy law and all these things so people can just keep going. It is a model of creative destruction. You do not protect the business but you protect the individual, whether it is the employer or the worker.