Mr. Fergal O'Brien:

I thank the committee for the invitation to attend. I am delighted to have the opportunity to discuss the budget with the committee in June, which is probably a first. Following the presentation, which I will keep short, we are happy to take questions and debate. We will make a formal pre-budget submission in the normal way this week. We have not made a formal submission yet, but have a fair degree of clarity on the emerging issues and priorities for business in advance of budget 2014. To provide some context, it will be useful for me to set out what IBEC is picking up from the business community and our 7,500 members on the performance of the economy over the first half of the year and the issues arising as a result.

A useful approach is to discuss our domestic and export economies. In the domestic economy, the jobs market, earnings growth, low inflation and falling interest rates look better than we thought they would halfway through 2013. These are the fundamentals facing Irish consumers but improvements in them have not translated into spending. The confidence genie remains absent from the Irish economy. People's finances are perhaps in reasonable condition, but they do not have the confidence to spend meaningfully. While clarity will be provided in the Central Statistics Office national accounts on Thursday, it appears that in the first quarter - and probably in the first half of the year - the consumer market was weak. Despite things being a little better for consumers, they are not going out to spend. The domestic side of the economy is quite disappointing. On the export side, it is a really a tale of two different economies. Our goods sector is finding trading conditions difficult. Goods exports are down approximately 10% in the first quarter as our trading partners in the UK and the main European markets remain in a difficult place. Our services sector continues to perform very strongly. Exports will do fine this year, but it will all be on the back of services.

We have made great inroads over the last couple of years on general competitiveness in the economy but still have a great deal to do. A number of cost pressures and concerns for business are emerging. Electricity costs, for example, are becoming a major issue. On the employment costs front, voluntary health insurance is feeding in as a major cost for employers. Approximately 70% of our members pay some or all of the voluntary health insurance contributions of their employees. While it is a big cost for households, it is also a big cost for business. It is a particular concern at the moment.

IBEC is very conscious of the need to avoid coming to the committee with a shopping list of 101 things business would like to see in budget 2014. We have clear priorities on the important issues and have five key messages on what government should do. The first recommendation is on the scale of fiscal adjustment. This feeds back very much to the weakness in the domestic economy. While fundamentals have improved, spending has not come through. The Government's plan to is to take a further €3.1 billion out of the economy to put us on the path towards budget balance. In our view, a great deal has changed in the last year. Importantly, we have seen concessions in the promissory notes restructuring. We are ahead of where we thought we would be on our budget deficit targets. For the first time since the start of the crisis, the Government has a choice. Until now, we have said the Government had no choice but to live with planned austerity.

The Government should choose to implement somewhat less austerity. We suggest an adjustment of €2.6 billion instead of €3.1 billion and there should be no further additional tax increases. We accept that €500 million in tax increases are already in the pipeline, but there is no need to announce additional taxation measures in budget 2014. If we deliver an adjustment of €2.6 billion, we will still reach comfortably the budget deficit target. The very clear message it would give to Irish households is that the worst of the austerity is behind us, evidenced by a tangible impact of the restructuring of the promissory notes and the strong performance on budget deficit targets. It would not affect us in the bond markets and we would bring growth back to the economy. The upside would not be new taxes through higher tax rates, it would be higher tax revenue through buoyancy. We must focus on growth.

If we can create buoyancy by saying to householders there will be no new taxes in budget 2014, it will have a big impact on the Exchequer finances and on employment and activity in the domestic economy. That is message No. 1.

Message No. 2 is also related to the domestic economy. It is about the initiatives IBEC introduced in the jobs initiative package when the Government first came into office. We think those initiatives, the reduced rate of VAT for the hospitality and related sectors and the lower rate of employers' PRSI for those on lower incomes, have really worked. We have seen a significant employment dividend, in particular, in the hospitality sector. It has protected many vulnerable jobs in the cost-sensitive sectors of the economy. Here we have a stimulus package that has really made a difference. It has more than paid for itself. It is being funded through a pensions levy with which we never agreed, but that pensions levy will exist in 2014 as well. Our view is that the initiatives to which I refer that are working should be retained for at least another year, and then see where we are in terms of the state of the economy.

Our third priority relates to employment costs. I mentioned in the overview that while we have regained competitiveness, there are still many competitiveness pressures in the economy, such as labour costs and energy cost, which are a concern for many of our members. On the employment cost front, we have spoken to the committee about statutory sick pay proposals which we always felt would simply result in job losses in the private sector and in enterprise. Specifically, the medical health insurance costs are becoming a significant item on the agenda for the chief financial officers and human resources directors in many companies. Those companies that are carrying the tab for health insurance costs are really noticing those cost increases. I appreciate households are noticing them as well but from an employment point of view, they now are really on the radar. They are a high-cost item. Where we are seeing increases in the region of 10%, 15% and 20%, and perhaps more with further policy changes, it is a real cost concern on the labour cost front for businesses.

The fourth priority item would be the competitiveness of Ireland's business tax offering. I suppose the business tax agenda has been very much in the media spotlight and the subject of debate over recent months, but one of the points that maybe has not been picked up as strongly as it should have been is that our nearest neighbour, the United Kingdom, is becoming increasingly aggressive and successful in competing for mobile investment. The United Kingdom is probably now our single biggest competitor on many mobile investment projects. Five or ten years ago, the United Kingdom would not really have been in that place. It would not have been seen as a serious competitor. With the United Kingdom's corporation tax rate heading down to 20% and with the type of supports it has brought in on intellectual property and what it is doing for research and development, it has really upped its game. The United Kingdom has the ability to attract much of inward investment. It remains to be seen whether the United Kingdom's decisions on Europe will be an advantage or a disadvantage on the competitiveness front. That has yet a long way to run.

From an Irish point of view, we need to continue to look at our business tax offering. Specifically, we refer in our pre-budget process to the research and development tax credit scheme, which has been in place for approximately ten years. The Department of Finance is conducting a major review of that scheme this year. We believe it is important that the scheme continues to be supported and that it can be enhanced, as we would see it, in a cost-minimal way. The scheme is really making a difference in terms of creating jobs in the economy, particularly high-tech, high end research and development jobs. When one looks at the numbers in terms of the volume of research and development now being conducted in the economy and the number engaged in research and development employment, we have performed strongly. Here we have a Government initiative that is working, making a difference and making Ireland much more attractive in terms of winning those mobile investment projects, but there is more that can be done and we would see it as a particular area of focus.

On the final point of our brief introduction, priority No. 5 relates very much to the domestic entrepreneurial investment climate. There are two specific issues. Overall, in terms of context, we think that the real growth in this economy, when we head into meaningful recovery, will come from the SME sector. We think there lies the real untapped potential of the economy. There are two things we see holding that back: the area of investment finance and investment capital remains a challenging one; and the fact that we are really missing out on the potential of the employment investment and incentive scheme. The scheme, the follow-on to the business expansion scheme, BES, really is not working. It is a great scheme in terms of what it could potentially do but what it is actually doing is quite disappointing. I would love to see us being able to put new energy into that, provide new branding and promotion, and get real strong ownership from Government of the potential for that scheme. When we look back over the past decade in the economy at how much money we all invested as households in unproductive assets, property, etc., if we could only get a fraction of that funding into businesses, SMEs and start-ups, it could really make a difference to the investment outlook. The scheme is in place. There is a couple of tweaks that it needs. What it really needs is a bit of re-energy, re-branding and promotion. It could make a big difference.

My final point on that overall domestic entrepreneurial investment climate is around capital gains tax. We now have a punitive rate of capital gains tax in Ireland, at 33%. It has increased sharply over recent budgets. We would like to see Government give consideration to providing an entrepreneur's relief to make a distinction between speculative investment in the economy and core entrepreneurial investment that supports employment and drives job creation. We need a distinction between what that cohort of businesses is doing and how it is treated in terms of capital gains versus the speculative sector of the economy. We would not deny that the low rate of capital gains tax played a role in the speculative bubble, but what we are seeing increasingly internationally is this distinction between the enterprise gains in the productive sector and those speculative gains. In the United Kingdom, for example, there is a special relief for entrepreneurs. In Ireland, at present, if a person who has been successful in setting up a company and, as many company founders are doing, sells it, there is no incentive to keep that investment in the economy. There is nothing in the tax system to encourage investment in a new start-up or in a couple of new growth companies. The Government is missing a trick there in terms of sending strong messages about the overall entrepreneurial climate, specifically a signal that if one sets up a business and takes the risks, one will be rewarded, and if one re-invests that money, the tax system recognises that.

We have not come in with a long shopping list. There are five issues. I am happy to hear comments, questions and reaction to them, as are my colleagues.