John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I welcome members of the National Competitiveness Council, including the chairman, Professor Peter Clinch. They will be dealing with competitiveness issues, including economic growth. Before we begin, I ask members and witnesses to turn off their mobile phones as they interfere with the transmission and recording of meetings.

I draw the attention of witnesses to the fact that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the committee. However, if they are directed by the committee to cease giving evidence on a particular matter and they continue to so do, they are entitled thereafter only to a qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable.

Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the House or an official either by name or in such a way as to make him or her identifiable.

I apologise to Professor Clinch for the delay and invite him to make his opening comments.

Professor Peter Clinch:

I thank the committee for inviting me here today. The National Competitiveness Council was established by the Government in 1997 and serves as an independent voice advising on Ireland’s competitive position and the means by which it may be enhanced. The council’s role is, therefore, an advisory one. We do not formulate policy but rather advise on areas of focus to improve competitiveness. Our membership includes people with relevant expertise in competitiveness, business people and representatives from employer and trade union organisations. The CEOs of Enterprise Ireland, IDA Ireland and the chair of the Competition and Consumer Protection Commission are also members.

Each year the council publishes three annual reports. The Costs of Doing Business in Ireland report is a requirement under the Action Plan for Jobs and benchmarks key business costs and highlights areas where Irish enterprise costs are out of line with key competitors. Ireland’s Competitiveness Scorecard provides a comprehensive statistical assessment of Ireland's competitiveness performance. Ireland’s Competitiveness Challenge uses this information along with the latest research to outline the main challenges to Ireland’s competitiveness and the policy areas to enhance our position. The council’s annual submission to the Action Plan for Jobs is also included as part of this year’scompetitiveness challenge report. We also publish a series of two to three page bulletins on various aspects of competitiveness.

Ireland’s ability to compete and sell goods and services abroad is the key determinant of economic growth, our ability to provide sustainable jobs, the wage rates that people are paid and, importantly, our ability to provide quality public services. Our recent competitiveness challenge report, a copy of which was provided to members, reports that the economy is in its strongest place since the onset of the recession. This is a significant achievement and the council wishes to acknowledge the role of Government and the Oireachtas.

Ireland’s improving competitiveness performance has been central to the recovery in employment and economic growth. Since 2011, Ireland’s relative international competitiveness, as measured by a range of international indices, has improved. Ireland moved from 16th to 7th in 2016 in the IMD’s World Competitiveness Yearbook, and from 24th to 23rd in the World Economic Forum Global Competitiveness Report. In addition, the World Bank’s most recent Doing Business 2017 report shows Ireland is now ranked 18th out of 190 countries, but down one place since last year’s report.

The concern of the council is that our significant improvement in competitiveness is largely the result of a cyclical cost competitiveness adjustment, that is, the economic crash putting downward pressure on prices, and external factors beyond our control such as the low value of the euro, low interest rates and low energy prices. The recovery was also helped by the record levels of investment in infrastructure in the run-up to the crisis. This allowed an expansion of output after the crisis without a consequent increase in prices or shortages. However, we are now seeing significant price pressures and hidden inflation in the economy.

At the same time, the economy now faces a significant threat from other external factors beyond our control, including Brexit, a potential shift in economic policy in the US, and the uncertain nature of the political economy of the EU. This makes it crucial that we address those factors within our control, these being maintaining cost competitiveness and investing in supporting infrastructure and talent. The decisions made today will determine the competitiveness of the economy in the future.

Importantly, these factors also determine the quality of people’s lives. Overall living standards, wages, housing, transport options to and from work, leisure time and access to social protection, education and health care are all dependent on how competitive we are in international trade. As such, a message of sustainable recovery is at the heart of the competitiveness challenge report we published in December. We must rigorously pursue cost competitiveness, address barriers to investment and growth, drive productivity performance and be responsive to the competitiveness challenges and opportunities that are emerging. The challenges posed by Brexit provide additional motivation to pursue cost competitiveness across a range of business inputs, including legal, property and insurance where costs continue to be a concern. It brings into sharp focus Infrastructure bottlenecks and skills mismatches, which have also become more acute, while issues such as increasing industrial unrest are emerging as threats.

The report covers a lot of ground but I will refer to five key areas.

In regard to public finances, efforts to bring fiscal stability and improved performance have been exceptional. It is important to ensure our fiscal position remains sustainable in the face of an uncertain international trading and investment environment. The council is of the view that we should avoid any narrowing of the tax base which might leave us exposed in the future and we must ensure the tax system supports and rewards employment and work. Second, housing affordability has a direct and significant effect on the competitiveness of the economy. The solution is clearly on the supply side. We welcome the Rebuilding Ireland plan but believe that it will take time to implement and to effect change.

Research suggests the single greatest factor that explains differences in prosperity between countries are the demographics and skills of the population. With increasing corporation tax competition, skilled labour must now be the key emphasis for retaining and winning foreign direct investment and the growth of a cohort of internationally trading indigenous companies. Failure to tackle the under-resourcing of higher education is placing Ireland at a considerable disadvantage internationally and will have a significant medium-term impact on competitiveness and productivity in the economy. We would urge follow-through on the recommendations of increased State funding alongside income contingent loans.

Delivering world class water and waste-water infrastructure is a long-term project, but it is a project that must commence today. The Council supports a funding model that delivers an adequate and reliable funding stream for public water services, is consistent with the user pays principle, protects vulnerable citizens and rewards conservation.

Finally, our medium-term competitiveness is being affected by the restrictions on capital investment. Our past investment in capital was a crucial ingredient to our rapid recovery, and we support any Government and Oireachtas efforts to have the restrictions on capital investment eased. We encourage that the fiscal space remaining goes towards investing in the future productive capacity of the economy.

This is just a brief summary of the council’s views.

In closing my statement, I would like to say that we appreciate policy-making and legislation are being carried out in very difficult and uncertain times. Following years of fiscal retrenchment, and a general reduction in living standards, it is understandable that people wish to see a degree of payback from all of the sacrifices made. We understand that this makes Government and Oireachtas decision making extremely challenging but crucial to Ireland’s future prospects. In the pursuit of equity within this generation we must also consider equity between the generations. We need to ensure that, in efforts to satisfy short-term demands, we must also work to secure the prospects of future generations.

I would like to express the gratitude of the council for affording us the opportunity to meet the committee today and I am happy to answer, as best as I can, any questions members might have.

John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I thank Professor Clinch. He is a master of understatement with his reference to the 'uncertain times' that we certainly live in. I call on Deputy Calleary first to be followed by Deputy Cullinane.

Dara Calleary (Mayo, Fianna Fail)
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I could say something about uncertain times but I will not. I would like to raise a couple of points on the report, starting with Brexit which is possibly the most immediate threat to competitiveness. Does Professor Clinch think that we are doing enough first as a country, by which I mean the Government, but second in terms of business and unions, in facing up to how big a challenge it is? Are we sleepwalking as a nation into it, hoping that it will be all right on the night?

Professor Peter Clinch:

Brexit is obviously one of the major challenges that we are facing but it is not the only challenge. It is important to say that there are developments at EU level and also in the US that are also critical, so perhaps those items may be considered together in how we respond to what are general broad international challenges. In recent years we have been performing very well relative to the UK in our international partners. One of the key issues are the short-term and long-term implications that it has across a range of areas, including trade and investment, the labour market, energy as well as a many of these sectoral competitiveness impacts. Clearly where the biggest threats arise are in the agrifood, financial and tourism sectors, which are very employment intensive sectors. That is a big concern as well as political concerns around the border. Bord Bia's report that €570 million was lost in the value of food exports last year is an immediate example of what uncertainty around Brexit does but also reflects the change in the exchange rates.

Probably what is best to look at is how do we compare with the UK in terms of competitiveness. The Competitiveness Council is undertaking an exercise to do that and I will give the committee some broad indicators. In comparison with the UK, we have a similar performance in the rankings with respect to the quality of our institutions, of government, the quality of higher education and training, the efficiency of product markets, but relative to Ireland the UK has a very large market size and much higher rankings in terms of its macroeconomic environment. Our infrastructure ranks poorly. The UK is stronger in financial market developments, in labour market efficiency, technological development, innovation and business sophistication.

One of the key things that we need to look at is labour market functioning. As an example of the sorts of threats that we could have from Brexit, the UK scores much more highly on labour market efficiency. What we would be concerned about is where the British Government moves in its policies that would increase the UK's competitiveness relative to Ireland. Having said that, there are also potential advantages from Brexit, particularly in terms of financial services and increased foreign direct investment. The other area of particular concern is taxation. The Competitiveness Council is essentially doing an exercise examining these comparators with the UK. To answer Deputy Calleary's question about how Ireland is responding to Brexit as a nation, it is quite obvious that a lot is going on in individual Departments. Where we need to place greater emphasis is if it was a company facing into this particular difficulty, we would be examining, for example, where to place our expenditure in response to what is a structural shift in the market. The medium review of our capital development plan is an opportunity to see whether we are placing our investments where they ought to be.

Dara Calleary (Mayo, Fianna Fail)
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Reference was made to the capital development plan and also the national planning framework, and its review. The council's report had a lot to say about capital investment and Professor Clinch also remarked that on the value of pre-crash capital investment towards assisting the recovery, our ability to repeat that particular investment is restrained because of fiscal rules. It is very restrained in a way that it was not previously. Apart from increasing taxation, what other ways would Professor Clinch see to address that? The council has also highlighted that we need to do more about climate change, reducing and meeting our carbon reduction targets. To link that in with the national planning framework, one of the points the council has highlighted is switching people to public transport in terms of higher density population locations, but that is not the way we do things. I suppose we must come back to Professor Clinch's last remarks about the practical reality of governance. We have a very disbursed regional structure. The national planning framework is a chance to take the burden out of Dublin, where the economic growth of 40% of our economy, high rent, high infrastructure costs and start developing opportunities around it. Should we link the capital plan review, the national planning framework and carbon reduction efforts together as well as making them all Brexit-proof?

Professor Peter Clinch:

On infrastructure, it is important to say that the key determinant of our economic growth rate in the future is our productivity growth rate and the key lever that Government has is the public capital programme to boost that. Investment is required in both hard infrastructure, but also soft infrastructure such as business supports, education and investing in our people. At the moment, it is rather startling that our gross fixed capital formation is about 2% of GDP equivalent; it is 2.7% in the United Kingdom, as a comparison, and our capital investment is half of what Finland is investing. Clearly, what we are investing is deficient relative to what our competitors are investing. Everything else being equal, one would expect that to have a negative impact on our competitiveness in the future. This is one of the challenges because for many of the indicators or determinants of competitiveness in five or ten years time it is about what we do today. We saw that in the recovery where our capital investment was an aid to our recovery. It is absolutely crucial, then, that we find ways to enhance our capital programme.

With regard to the fiscal rules, the key thing we will have to do, and which we urge Government to do, is articulate the case for a relaxation of the fiscal rules around capital spending at a European level. There is a very big difference between current spending and capital spending. Capital spending is an investment for a return. With that in mind, what we have asked for in the review of the capital programme is that the case is made clear on having a methodology underpinning that capital programme, that is a strong cost benefit methodology to show where the investments can create the greatest return. One of the issues around the capital review relates to the sorts of ex antecost benefits; those things tend to happen on the individual projects that take place rather than on the overall programme. In the review, there is an opportunity to revisit that and to revisit it in the light of the Deputy's first question on Brexit about whether there are areas where we need to create greater investment in order to head off some of the international challenges we are facing. It is worth saying that in our competitiveness rankings, we rank very poorly on capital spend in the perception of those who answer the surveys, including a lot of business people. In the WEF ranking, we rank fiftieth in terms of the perception of the quality of our capital, which is extremely poor. We have a perception problem as well as a reality problem.

To move on to the Deputy's second question, linking this to the national planning framework is essential. There is no point in having a national planning framework if the capital spend does not match up to that. That joined-up policy framework is crucial. When the national planning framework is produced, we would expect to see that it maps to the capital programme and vice versa.

I can make a number of points on the national planning framework. It is a critical piece of economic policy infrastructure and should be seen as such. I hope that when it appears, it is clearly grounded in economic realities and that there is an economic strategy document that would demonstrate through that its impact on the social fabric of the country as well. It will be important that, unlike the national spatial strategy, it is grounded in that reality and is something that can actually be delivered. It is not easy to change the spatial pattern of economic activity. The Deputy referred to Dublin versus the rest of the country. It would be unfortunate to go down that route and to see it as some sort of competition. We are in a global competition-----

Dara Calleary (Mayo, Fianna Fail)
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I want to be clear that I do not see it as a competition. It is important that we have a strong capital city but it is not good that we have such an imbalance. Other capital cities do not represent that much of their nation's economy. It is very important that we have a strong Dublin economically, as opposed to anywhere else.

Professor Peter Clinch:

The data are interesting on that. The extent of dominance varies by country. One of the challenges is we are quite a small region. I agree with the Deputy on the principle. The council itself has supported a national planning framework that can provide a robust infrastructure, employment opportunities and improvement in the social fabric across the country. The challenge there in terms of the population distribution is not something the council has a solution to. With regard to climate change, clearly transport is one of the key areas that is very hard to change given the pattern of our population.

Returning to Dublin, we must be careful to ensure that Dublin remains competitive because we are in this international competition. Dublin has infrastructural problems so we need to be careful about how we do our expenditure and that we do not neglect it. We should also retain and build the infrastructure within the Dublin region as well and we must use planning policies to ensure an improved urban policy as regards Dublin that can deal with issues relating to sprawl.

John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I call on Deputy Cullinane.

David Cullinane (Waterford, Sinn Fein)
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Is it five minutes that I have?

John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Yes.

David Cullinane (Waterford, Sinn Fein)
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I would prefer to converse over and back with Professor Clinch. It is the way I operate because I find it easier. I will first deal with some of the five key areas Professor Clinch has highlighted. He states in the first one that we need to ensure our fiscal position remains sustainable, which we would obviously all agree with. He then goes on to say we should avoid any narrowing of the tax base. The first thing we have to look at and acknowledge is that there is a carry-over from this year in terms of full-year effects of budget 2017. I understand it is about €500 million, which will narrow what is known as the fiscal space. To increase the fiscal space, our only options are to increase revenue or cut spending. When Professor Clinch says we should avoid any narrowing of the tax base, can he be more specific about what taxes he is referring to, given that in the last budget there was a cut to the universal social charge and a commitment to cut it even further over the next number of years? On the shrinking fiscal space and the demands Professor Clinch has identified in housing and capital investment and so on, how will we meet those demands? That is my first question.

Professor Peter Clinch:

On the issue of the narrowing of the tax base, we need to go back to why we needed to broaden it during the crisis. The narrowing of the tax base was identified at the time as being one of the contributory factors towards a lack of sustainability of the public finances and the reason why universal social charge was introduced. Our concern about the commitment to remove the universal social charge is having a sustainable tax base into the future. The difficulty with removing the universal social charge is establishing where the funding will come from. It is a challenge we are putting out. We are saying if the Government is going to narrow the tax base, there are some risks, and we are asking where the alternative funding will come from. It is the question we are asking rather than answering as a competitiveness council. Having a competitive tax system is a crucial aspect of the competitiveness offering of Ireland. At the moment, to give the committee a quick view on our tax base, we are still very competitive on corporate tax but we have increased competition in the corporate tax area, as we know without going into details, including the UK reducing its rate to 15%. On our VAT regime, we are relatively competitive but there is a threat from the UK which is also part of our Brexit response, which Deputy Calleary has asked about. We have very high rates of capital gains tax relative to others. In Ireland in 2014, we had the third highest capital gains tax rate.

David Cullinane (Waterford, Sinn Fein)
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I will just come back to the question I asked because we have a responsibility to scrutinise budgetary policy. We will have to do that as part of our work this year for next year's budget. We are faced with a shrinking fiscal space. We are faced with a carry-over of about €500 million from full-year costs that were not factored in for this year because they were just partially introduced. We are faced with a Government commitment to reduce the universal social charge again next year. If that is the policy that is pursued, is Professor Clinch saying it would become more difficult for us to spend in the areas where we need to spend, which are the other areas he has identified? Is that his position?

Professor Peter Clinch:

That is the position of the National Competitiveness Council. The challenge of how that gap will be filled is one that we have not seen a response to yet.

David Cullinane (Waterford, Sinn Fein)
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On the third point, where I agree with Professor Clinch-----

Professor Peter Clinch:

I will add one thing. It is also important to look at those taxes. It is important in the tax system also to ensure that it rewards employment and work. The sorts of taxes and charges that arise in other areas such as property and environmental taxes are in areas which are much less damaging to the overall economic performance of the economy. We need to look to those areas as well.

David Cullinane (Waterford, Sinn Fein)
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I have that. In the third key area, Professor Clinch talks about skills and a skilled labour market, which I support.

When we talk about skills and a skilled labour market, which I support, one of the difficulties is that we have had numerous reports at European Union level and at national level on low pay and precarious employment. With one in five workers in low paid jobs, does the council see that as a problem? It is often argued that we need to be a low wage economy, that we have to have these levels of low pay and precarious work to be competitive. How sustainable is that in terms of the people who are in those low-paid jobs? Does the council see precarious work as a problem and does it see the very high levels of low pay that we seem to have in comparison with other European countries as a challenge?

Professor Peter Clinch:

The council does not take a position on individual aspects related to pay. However, I should state clearly that a competitive economy does not mean, necessarily, a low wage economy. Some of the most competitive economies in the world are not low wage economies, it is about productivity.

David Cullinane (Waterford, Sinn Fein)
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Can Professor Clinch give us some examples of those economies?

Professor Peter Clinch:

Many of the most successful economies around Europe are reasonably high wage and productive economies. It is not an unusual thing in developed economies for wages to be high. What we are pointing out is that when it comes to wages, it is important to have a virtuous circle and in this virtuous circle must be an absolutely clear focus on cost of living and cost of doing business so the way to avoid understandable wage demands right across the economy is to focus upon costs. That is what we as a council do, we produce a cost report and we suggest ways in which those costs can be addressed. Housing is clearly a major driver of wage demands at the moment.

David Cullinane (Waterford, Sinn Fein)
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My last question relates to capital investment. I do not think it will come as a surprise to Professor Clinch that I fully agree with his view of decoupling capital investment from the fiscal rules as much as we can to get more flexibility. The problem is that we already have flexibility where we can smooth capital spend over a four year period. Does Professor Clinch believe it was a mistake, for example, not to take the opportunity in last year's budget to take better advantage of that? It would seem a bit foolish if we are going to ask Europe to give us more flexibility but do not use the flexibility that we have. Given that there are very low levels of capital investment in comparison with other European countries which is a problem in health and housing, but I would also imagine in roads, flood relief and those types of areas, if we do not get the flexibility that we need - and we can articulate those arguments but obviously we are at the mercy of those in Europe - should we make greater use of the flexibilities which we currently have? Finally, there was no mention of public sector pay. We do not have any provisions for the years 2019, 2020 and 2021. How much of a challenge is that going to be in terms of the overall fiscal space and the need to deal with and manage expectations in unravelling and unwinding financial emergency measures in the public interest cuts? I think the cost of that would be about €1.4 billion.

Professor Peter Clinch:

On the funding of capital expenditure and expenditure rules, the council's position has been that we are aware this is a very complex area. The committee will have greater expertise than we will in terms of how that works. The furthest we go is that we have to find funding for capital expenditure so if choices have to be made it is going to be a movement in the way we go about expenditure and how we view that within the rules, which is complex and, second, choices and those choices are difficult. Demands for wage increases are understandable, for example, but capital expenditure which will reduce the demands for those wage increases is also necessary. It is about creating this circle between saying that wage demands are driven by an increased cost of living and companies find it more difficult to pay high wages if the costs of business are high. That is why, as a council, we address all of those areas. It is not this committee's direct concern, but it is a concern for the Government and the Oireachtas generally to ask how we address the issues of costs and how do we deal with the housing crisis. How do we find ways within this complex area of the expenditure rules to make the case that returns will come from the investment in capital?

John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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The Deputy has had twice the legal limit. I call Deputy Broughan.

Tommy Broughan (Dublin Bay North, Independent)
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I will be brief as I have to go to the Dáil for a parliamentary question. I welcome the delegation and the benchmarking report and some of the other papers which the secretariat provided for us. It makes for very interesting reading. I wonder about the whole issue of measuring productivity and measuring competitiveness. Was the council concerned about the huge jump in GDP in 2015, resulting from, it seems, foreign direct investment, aircraft leasing and so on? I notice the council refers to GNI or national income specifically in a number of comparators that it has used. I know that the council is trying to measure multi-factor productivity and it has comparators, such as Denmark, but can we rely on the kind of information that we have at national level to measure competitiveness?

Professor Peter Clinch:

I will start with productivity. When I became chair two years ago, I was keen that we placed a much stronger emphasis on productivity. It was interesting that when we went looking for the data, it was actually quite hard to find the data at a sectoral level, for example, on productivity. We have just recently produced a report working with the CSO and others and finally we are shedding some light on productivity across different sectors. That is an advance. In terms of productivity the story looks superficially great. Many developed economies are in negative multi-factor productivity growth. It is the big concern for policy makers internationally and some believe that large leading companies are getting well ahead of the follower companies. It is something that we should be concerned about here because we see a big difference in productivity between the multinational sector and the rest of the economy. Our robust productivity rates rely on quite narrow sectors and a narrow range of companies. What is important is to grow productivity in those areas which have high employment intensity. We see lower levels of productivity in areas such as retail, hospitality and construction, and those are the areas on which we need to focus. We also tend to see that internationally traded companies are more productive and there is a learning effect of operating overseas. We have also seen that our productivity growth rates have been boosted by the loss of jobs in areas that are lower productivity such as construction, which is an obvious one, and retail during the crisis. We have to be careful when we look at the very nice figures that bring us to the top of the table of what is going on beneath that and also of the social consequences which are ignored.

In productivity, the story is good, on the face of it, but we have to find ways of boosting productivity right across all business and the public service as well. Public service productivity is also crucial to competitiveness. That comes from things like the discussion we had over investment in infrastructure, investment in talent and skills, supporting and rewarding entrepreneurs, by which we mean the large numbers of people who employ two or three people in all sorts of jobs, not just high-tech or those types of areas. We have also identified the need to improve what is called diffusion, which is getting all the know-how from leading companies over to companies right across the economy. It is really important that the message of higher productivity rates hits those in all jobs, this is not just something for people in white coats and so on. That allows us to answer this question which is that an economy does not have to be low wage to be competitive, it is about productivity growth rates.

If an economy can boost its productivity growth rate by even a small amount, it can skip a generation, in respect of the prosperity of its population. The importance of productivity was demonstrated in the latter years of the Celtic tiger when we saw growth rates in the economy getting ahead of productivity growth rates. This would suggest there is something wrong and there was something wrong. Essentially we turned the clock back to 2001 or 2002, which was where our model stopped being sustainable.

Tommy Broughan (Dublin Bay North, Independent)
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Following up on my colleague's questions earlier, would Professor Clinch say that in housing and in health care services, we have rationed them relentlessly? Professor Clinch spoke about the necessity for capital spending. It has been a refrain of this committee since it started that we are not covering depreciation in many elements of our capital infrastructure. On housing and health care services specifically, would Professor Clinch agree that the current situation, where there has not been enough current or capital spending on these areas, is a factor that greatly inhibits our current competitiveness?

Professor Peter Clinch:

The housing question is incredibly complex because it is influenced by a large range of issues. I think that the new housing strategy, Rebuilding Ireland, does address most of those areas. The problem is that it takes time. The reaction to the economic recovery ,which probably hit in early 2011 although people did not start to feel it for a long time, has not seen the investment levels on the supply side that we would have required to provide a mechanism to avoid the rapid house price increases we have seen. The knock-on effect of that is exceptional. For firms, property is very high among those areas that are most important for the costs and competitiveness of the business. Expensive commercial property affects the competitiveness of firms and that has a knock-on effect on what firms can pay their workers. Their workers, understandably, want wage increases because the cost of living, particularly driven by housing costs, is rising. While there has been an inadequate investment in housing, it is on the private side, not necessarily just on the public side.

Tommy Broughan (Dublin Bay North, Independent)
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Finally, Professor Clinch rightly refers and the council's reports refer repeatedly to the importance of innovation and the €4 billion spend that we might have on innovation. Given the role of third and fourth level education in the area of innovation and the connections that have been made by all of our third level institutions, universities and institutes of technology with local economies and enterprise, is Professor Clinch unhappy with the level of resources provided by the State for third and fourth level?

Professor Peter Clinch:

The supply and quality of labour is our key instrument in the face of the extraordinarily increased competition in international trade arising on foot of what is going on with Brexit, in the USA and in Europe. In our research, the single biggest factor which explains the differences in prosperity between countries is the talent and skills of its workforce, as well as its demographics. People are crucial. It is always important when thinking about innovation that one does not just think of a high-tech start-up, incubators or investment in research. That is very important but it is also in people. What we have argued for in this battle for talent is a sustainable funding model for the higher education sector. In spite of their inadequacies, the rankings demonstrate what is going on. To a large extent the fall in rankings is because of the fall in the ratio of staff to students in the institutions. We have looked for a model that encourages participation in order that people are able to access education without, perhaps, the financial assistance of their family. We do not favour the option of all the burden falling on the student. As we also recognise the multiple demands on State funding, we did not think that the required funding would be available as a State subvention. As there is evidence to suggest that those who have received higher education receive benefits beyond what the State accrues, we favour a balance of State funding and income-contingent loans that are available to people from all backgrounds. We do not get into any more detail other than that because there has been an expert group that has examined this and has made recommendations and we would rely upon its expertise. We have encouraged the Government to make decisions about what will be the funding model for the future.

John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Before Deputy Barrett comes in, I will ask a question related to that issue. The committee has had discussions with a number of witnesses on third level funding and education in general. There has been some agreement, albeit not unanimous agreement, among members about both attendance rates and the fact that so many Irish students go on to third level and the appropriateness of some of the courses they pursue at third level for their future economic prospects and careers. There has been great emphasis among parents, correctly and understandably, on their children receiving an education or an opportunity they may not have received themselves. However, that might not necessarily correspond with the best practice in other European countries that have high-wage economies, are successful from a competitiveness point of view but do not have as high a proportion of their school leavers going on to third level. Perhaps such countries have more young people doing apprenticeships. There is an attempt now to reinvigorate and launch apprenticeships in Ireland but they had largely disappeared as an option for many students for a long time in this economy. What is Professor Clinch's view on that particular subject?

Professor Peter Clinch:

In last year's competitiveness challenge 2015, the council focused quite heavily on the reform and evolution of further education and training and we put quite a big emphasis on apprenticeships in that year. This year, reflecting on two of the challenges in the competitiveness scorecard we produced, we focused on the higher education system. I suppose we would suggest our recommendations this year should not be read in isolation of the ones last year that dealt more with the issue of apprenticeships. In January 2017 we had the launch of the Government's plan to expand apprenticeships and traineeship in Ireland and consequently we have an aim to achieve 50,000 apprenticeships by 2020. There is a key commitment in the Action Plan for Education to implement that, which we would encourage. We agree with the Chair on the importance of providing suitable education for all people and all types of career opportunities and not to have a focus on one part of the education system over another. When it comes to funding, it always is a challenge that this sometimes is perceived to be the case, that is, that primary education is the most important or that secondary or higher education are so perceived. It really is a system and if competitiveness is to be delivered at the end of that system, it is crucial that all parts are properly funded and properly resourced. That whole education and training sector is our key lever now that there is increased tax competition. The things that will make sure that Ireland remains competitive are getting costs down and making sure we make the investments in infrastructure and in people. It also allows us to be an economy that delivers good wages to people and quality public services. The connection between those things is crucial.

Professor Peter Clinch:

The council's view is there is an obligation to demonstrate the impact that capital spending can have. It is an investment in the future, so there should be a return on it. I would then be in agreement with Deputy Barrett that we cannot persist with the level of capital spending that we have in the economy at the moment. It strikes me that the opportunity is there in the review of the capital programme to grasp that nettle, but it is a complex area. There is a logic around the fiscal rules on current spending and there is a logic around the fiscal rules for capital spending, but the logic around capital spending is that there will be a return on it, that it will not be wasted expenditure that has to be continually repeated. The evidence is there about what capital spending can do, the evidence is there that we do not measure up in terms of capital spending to those economies that we are trying to compete with. The evidence is also there that capital spending will hamper our productivity rate which in turn will hamper our economic growth rate which in turn will hamper our ability to pay for current spending for valued public services. I agree with the Deputy and I would urge this committee to grasp that nettle too, if it is within its remit. As a council we will continue to talk about that, as the Deputy has urged us to do.

We talked a little bit about the USC. The challenge for us is where the funding is going to come from if not from the USC. As a council, we have pointed out that we are dealing here with an extraordinarily complex tax system. Even an individual with some accountancy experience finds it difficult to wrestle with it. We are always of the view that a simplification of the tax system and a logical tax system is desirable. The challenge that we have just put down is for those who will be advocating for the abolition of USC to say where the funding is going to come to replace it, or what spending will we forego if the USC-----

Professor Peter Clinch:

I agree that the home renovation incentive scheme is a good example of where Revenue has tried to provide some reward to householders for uploading VAT receipts from their builders and tradesmen. It is an area that would be very beneficial to focus on.

It would also help us to monitor what is going on in the economy as well because the data, as the Deputy says, will be deficient.

The other point is that we tend to do piecemeal things with the tax system so that we add and add and that is why we have ended up with a highly complex tax system. We would really encourage that it be reviewed, simplified and also that there would be some coherence around it as well in order that people understand it. The Deputy raised a number of issues, and bringing them together, one thing that we have been very forthright on in everything we have said, and it is important we say it here, is that huge credit should go to this and previous Administrations, through Cabinet committees on the economy, economic management committees and the like, and to the Oireachtas as well, for a relentless focus on bringing our macroeconomic indicators back into line. By that I mean our budget deficits, sorting out our banks, bringing our debt-to-GDP ratio down and all of those macroeconomic things.

We know that these are the outputs of what goes on under the bonnet of the economy. We are in a fixed exchange rate system. We are about to have an economy next door which will be in a flexible exchange rate system and which can, as we have seen, drop the value of its currency quite dramatically and have the sort of impact we discussed on food exports, which have dropped by half a billion euro in value. We are competing with countries that have that flexibility. We do not have that flexibility in our currency. We do not have control of interest rates. We do not have control of exchange rates. We do not have control over energy prices and we are highly dependent upon energy. The only instruments we have are our competitiveness levers.

How do we get costs down? How do we use our valuable money in the capital programme and ensure we invest in the right things and have the right ex ante and ex post evaluation of those capital programmes to make sure we are spending on the right things and, in the changing global environment in which we are working, ensure we take advantage of any opportunities from Brexit? For example, do we have the infrastructure that can handle that kind of investment coming in? We are calling for the same relentless focus from Government and the Oireachtas on those issues as well as the macroeconomic indicators which we have brought back into line from the height of the crisis and which look really good. There are dangers and the decisions we make today will determine how competitive we are in five or ten years. That equity between different age groups will be as important as achieving equity within this particular generation.

Professor Peter Clinch:

It is beyond my remit as chair of the National Competitiveness Council to make a comment.

Professor Peter Clinch:

There is a political question there which is beyond our remit about how to articulate to people a coherent economic strategy that will benefit them now and in the future. As far as any threats that are emerging are concerned, there is very little we can do about them other than control those things that are in our control.

John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I thank the Deputy. Deputy Boyd Barrett sends his apologies as he had to go into the Chamber to ask questions of the Minister for Children and Youth Affairs. I would like to raise a number of matters relating to Professor Clinch's address. On energy, Professor Clinch spoke of developing contingency plans to guarantee security of energy supply. What is the shape of that? Does he mean direct interconnectors to the Continent? Does he have any more flesh to put on that? On our over-dependence on oil, primarily, are there particular measures that could or should be promoted by Government to remove that over-dependence?

Professor Peter Clinch:

Our principal starting point would be that we have to acknowledge our extraordinary dependence on imported fuels. We also have to note how heavily we rely upon oil and that 76% of those oil imports come from the UK. That shows one possible implication of Brexit. In electricity generation, 46% comes from gas and 96% of our gas is imported from the UK. These are rather dramatic figures when we think what implications Brexit might have for the single energy market. Fortunately, it appears that energy generally has been exempt from border taxes and tariffs in terms of trading, but it would be important that the Government has that close to the top of its list in terms of its advocacy around Brexit negotiations. It is important to ensure the UK and the European Commission also have it close to the top of their lists to ensure we retain the Single Market and it does not somehow get caught up in heated negotiations as something that is worthy of negotiation. The optimal functioning of the integrated all-island energy market is crucial, but if there were to be a threat to that, we would have to examine interconnectors into continental Europe, which is a very expensive challenge but is something that is an obvious implication if there were to be a problem.

In terms of matching the electricity supply and demand by locations, there is a link to infrastructure which is ensuring that, in our National Planning Framework, for example, we take advantage of where there are areas with an excess supply of electricity compared with other areas. In terms of improving supports for electricity generation, the potential for generating electricity at a micro level or in a person's own home, feeding that back into the grid and the relationship with electric cars, there is a challenge there in that we have not been meeting our targets for electric cars.

What is important from a competitiveness point of view is that we deliver that infrastructure at the least cost. The council is very pleased to see that competitiveness is highlighted alongside security of supply and other issues in the energy White Paper. A big job of the council is to make sure competitiveness gets considered in all these policy areas. A big challenge is how to deliver infrastructure at least cost and how to trade off any extra costs that might be put into the system in terms of energy prices and that are required to have the type of infrastructure that would ensure we have a sustainable and well-priced infrastructure thereafter. The energy White Paper sets out better than we can what those challenges are and what needs to be done. We will be looking for a timely implementation plan for that.

John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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A very direct impact after Brexit takes place arguably is that we in Ireland will become the most peripheral state in the EU. The island states in the Mediterranean are much closer to other member states. Our road infrastructure is very much focused on transporting products through the UK, whether it is from Rosslare or Dublin Port. Should we look at more regional interconnectivity, to use an awful modern type of word? I remember just before the crash, and maybe it was a pipe dream, that there was talk of ferries between Cork and the north of Spain. Given where I live, I often take the ferry between Rosslare and France. Do we need to state our case more strongly to our colleagues in the European Union that, in light of our peripheral nature once Brexit happens, there ought to be very specific exemptions for Ireland on things like the fiscal rules because we are going to be at such a disadvantage because of our location?

Does Professor Clinch have any views on those kinds of issues and their impacts on the economy? That is just another simple question.

Professor Peter Clinch:

The Chairman is absolutely right and has put his finger on a major problem that so much of our logistics and our trade, in terms of the transport routes, are carried through the UK. It is a bit like the energy question although in this case, it is more apparent that this will be a problem. Clearly we have to look at alternatives and this might go back to Deputy Calleary's first point about whether we are putting in place the appropriate Brexit plans. I do not get to see what are the machinations of the Government and its Departments until they are produced but it is something to which the council has drawn attention in its reports. Again, I agree it makes absolute sense to examine these things and to think through the implications of what we would have to do in a worst-case scenario. All of us hope that somehow we can come up with ways, between the European Union and the UK, to have a process by which we can phase our reaction to what would be an extraordinary structural shift in our trading relationships.

John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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The provision for structural reform of the economy exists under the existing fiscal rules but it has never really come into play. Perhaps this is an area where it can practically come into play. I have two brief questions. I read an IMF report recently in which it became clear that of the countries that had been studied, up to 90% of their capital funding was secured from private sources. In Ireland we do not come near even 10% but we have this traditional perception that capital funding must always come directly from the State to provide a road or whatever. Are there ways and means in which we can try to lever more money out of the private sector into capital investment projects? We have done it in bundles of schools and things like that, which has been successful to a degree and things have changed from a position a few years ago where there was virtually none from the private sector. Can we do more and is there an interim measure that could help to bridge the gap before the change in the fiscal rules? The change in the fiscal rules will require a treaty change and we are familiar that such things do not happen that easily.

John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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The East Link?

John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I was not even in primary school. The Deputy probably was the chairman of the county council.

Professor Peter Clinch:

We have had significant success in leveraging private funding and non-Irish state funding. Investment in the universities from the European Investment Bank, private investment in roads and tolling and such like, and in energy. Returning to Deputy Barrett's point about the current hurdle rates, the rates of return are incredibly low at the moment. It has been a fantastic environment in which to leverage private funding and it is very obvious anecdotally that there has been a lot of funding trying to find opportunities to be deployed within Ireland. The issue returns to the question of the fiscal rules and public capital, that generally these things have to be matched. If we do not have matching funding, we will not be able to leverage as much of the private funding. That has to be part of the picture of the case that is made on why we should be seeking a relaxation of those rules. Once again, we need to be careful. We need to demonstrate the return and we need to demonstrate that we can provide that return and we also need to demonstrate that we are spending it on the right things. It is very easy to come up with things we can buy but what have we seen in the past that really worked and what will work in the future?

John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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Many of the members, Deputy Calleary mostly, have spoken about the glaring lack of interconnectivity within Ireland. In my region, the south east, there is a road between the south east and Cork, which is a very busy road but in some parts it is a glorified cow path to be perfectly honest. The same case could be made up the west coast of Ireland. If we were serious about creating a counter-balance to the activity in Dublin - while not diminishing Dublin - there are obvious things about which we need to make a case. The final point I wish to make relates to the fourth key area in respect of water and wastewater. Professor Clinch made the point that infrastructural investment is a long-term project and must commence today and that the council supports a funding model that delivers an adequate funding stream for public water services and is consistent with the user-pays principle. The council is saying in the nicest possible way that water charges in some shape or form should -----

Dara Calleary (Mayo, Fianna Fail)
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He also points later in remarks to the difficulty of governance and of being Members of the Oireachtas.

John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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I am just pre-empting next month's crisis.

Professor Peter Clinch:

I wondered if we were going to finish without somebody noticing that. To state clearly what the council's view is, because it is a very sensitive area, an adequate and clean supply of water is essential. We do not rate well in respect of water infrastructure in the rankings for competitiveness so there is a perception that there is a problem there and there is a problem there. The current funding model is not sufficient to meet the needs of the service. We know that, and the committee knows that, it has been dealing with these issues. Competitive public services are essential for competitiveness. As a competitiveness council we must advocate those ways of providing infrastructure that are the most cost competitive. To do that we need to encourage conservation. The challenge is how does one encourage conservation if one is not following a user-pays principle. The water commission has reported and it is still suggested, as far as we can see, that encouraging conservation somehow is important and we look forward to certainty on the funding model that aids competitiveness and we look forward to hearing Oireachtas considerations of what the appropriate model will be that will encourage the efficient use of water.

John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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That is a very politically correct answer.

Professor Peter Clinch:

It is not an easy one and I am putting that to members.

John Paul Phelan (Carlow-Kilkenny, Fine Gael)
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No, that is fair enough. I thank Professor Clinch and his colleagues, Ms Marie Bourke and Mr. John Maher and Mr. Eoin Cuddihy, good Kilkenny names. I thank them for their input today and we might be in touch if the water thing gets out of hand as we might need the witnesses back here again.

Professor Peter Clinch:

I thank the committee for the opportunity.