Oireachtas Joint and Select Committees
Tuesday, 24 October 2017
Joint Oireachtas Committee on Jobs, Enterprise and Innovation
Cost of Doing Business in Ireland: Discussion (Resumed)
11:00 am
Mary Butler (Waterford, Fianna Fail)
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I remind members, visitors and the people in the Gallery to ensure their mobile phones are switched off or in flight mode for the duration of this meeting because they interfere with the broadcasting equipment, even when on silent mode.
Before we commence, in accordance with procedure I am required to state 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 this committee. If they are directed by the committee to cease giving evidence in relation to a particular matter and they continue to so do, they are entitled thereafter only to a qualified privilege in respect of their evidence. Witnesses are directed that only evidence connected with the subject matter of these proceedings is to be given. 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 Houses or an official either by name or in such a way as to make him or her identifiable.
I welcome to the meeting today to discuss the cost of doing business Mr. Ian Talbot, chief executive of Chambers Ireland; Mr. Thomas Mc Hugh, policy and external relations, Cork Chamber of Commerce; Ms Olivia Buckley, communications director, Irish Tax Institute; Ms Cora O'Brien, policy director, Irish Tax Institute; Mr. Neil McDonnell, chief executive of the Irish Small and Medium Enterprises Association, ISME; and Ms Siobhán O'Connor, vice chairman of ISME. I remind guests that each presentation should be of no more than two minutes duration. Members of the committee have received your submissions and presentations.
I invite Mr. Talbot to make his presentation.
Mr. Ian Talbot:
I will share time with Thomas Mc Hugh from Cork Chamber of Commerce. We thought it would be good to have some regional views as well.
Chambers Ireland is Ireland's largest business network, with 45 chambers of commerce across the country representing over 10,000 businesses ranging from small and medium enterprises, SMEs, to large corporations. We welcome the opportunity to work with the committee. As a general point, our network has called this year for priority to be given to infrastructure build over other potential budgetary measures such as reducing marginal rates of tax.
On the specific topics we raised in our submission, labour costs account for one of the largest outlays for businesses in the country and are therefore of huge interest and concern. Of most concern to businesses are the high cost of living and the rising cost and lack of supply of housing, both of which potentially will contribute significantly to demands for increased pay. We also refer to the minimum wage and the process adopted for increasing it this year. In future we would like to see the Low Pay Commission report being published and discussed in advance of any announcement by the Government on changes in rates. In addition, we continue to believe that this process should take place as part of the annual budget cycle so all impacts to incomes through tax, welfare, social insurance, minimum wage adjustments and so forth are dealt with in conjunction with each other, not separately.
Regarding property, while significant developments of commercial property are now under way and coming available there remains uncertainty about whether the amount under construction will meet demand. In the meantime, rent levels are escalating significantly and are a threat to competitiveness. However, investment in housing is critical. The national housing crisis is also a business-critical issue. Business is anxious that long-term solutions are adopted and applied, aside from addressing the short-term issues. We welcome initiatives such as home building finance Ireland, HBFI, and the introduction of a site value tax from 2019.
Our network also has concerns about the stagnation surrounding local property tax, LPT, while noting the Government’s plan for a comprehensive review of the tax. Failure to reset values and further exemptions from LPT carry the risk that businesses will be expected to make up the shortfall arising in funding through commercial rates. Concerns about significantly increasing values leading to a surge in the individual rate of tax can be addressed by adapting bands and rates appropriately.
Infrastructure development generally is a priority, none more so than in transport. We welcome the work being put into the national planning framework to create a template for strategic investment in the future.
Access to finance appears to be less significant as an issue now than during the recession. The main challenge facing businesses is the absolute cost of credit in Ireland and the need for alternative sources of finance, such as equity investment. Regulation is also a particular concern. Government Departments should undertake regular regulatory impact assessments. We are also concerned about the general data protection regulations, GDPR, and Brexit.
As regards insurance costs, we welcome the work of the cost of insurance working group and emphasise the importance of implementing its recommendations. In particular, claims costs and types appear to be a significant issue. We welcome the enactment of the Mediation Act as a means to assist in more cost and time effective resolution of disputes.
I will hand over to my colleague, Thomas Mc Hugh.
Mr. Thomas Mc Hugh:
In our most recent quarterly survey competitiveness was second to Brexit as a challenge for our businesses, so it is at the forefront. As Ian Talbot said, infrastructure is also at the top of our list and was so for our budgetary submission. Another big issue for us at present is the potential changes to the non-domestic water rates. There is a high level of concern that businesses would bear the cost of cross-subsidising that space. That is a serious area.
With regard to climate change and adaptation, storm Ophelia last week was a major event. There was a number of red weather warnings in Cork as a result of it. Nationally, there is potentially approximately €111 million in costs to insurance. It is a critical issue for competitiveness.
On the question of infrastructure more broadly it is obvious that there is potential for the population of Cork to increase to up to 850,000, with 120,000 jobs by 2050. Critical infrastructure, such as the M20 and M28, are essential to further enable employment on IDA Ireland sites.
Climate change mitigation and adaptation are relevant. I wish to reinforce the Storm Ophelia point that there is a need for construction of infrastructure to ameliorate these effects. That is absolutely essential. Flooding is a particular area that we are interested in.
Ms Olivia Buckley:
Thank you very much, Chairman. I intend to share my time with my colleague, Cora O'Brien, our policy director.
I thank the committee for the invitation and the opportunity to outline our views on the tax barriers and tax-related costs of doing business. The institute has recently undertaken a detailed analysis of the Ireland's tax policy and tax administration system as it relates to Irish business. The analysis highlighted some of the aspects that have a restrictive impact on the growth potential of our businesses. These restrictions act not only as blockers but also build additional costs into the system. These costs and the additional costs that are already emerging because of Brexit impact on the competitiveness of our businesses at a time when they need to be business-ready and fully supported not only for the challenges but the opportunities that arise in the global environment.
Tax-related costs to Irish businesses arise from two issues: tax policy and tax administration. Ms O'Brien will deal with the tax administration issues presently.
Many issues arise on the tax policy side. Some of these have already been mentioned by Chambers Ireland. The first is personal tax. Our high effective personal tax rates continue to be a challenge for employers trying to source the best possible staff in Ireland and abroad. Obviously, they represent a labour cost. We have had progress in the recent budget around the threshold for the higher income tax rate and the USC cuts. However, the fact remains that there is a marginal income tax rate of 52% for some earners in Ireland. This is among the highest personal tax rates in global terms.
Funding is also an issue for Irish businesses. Its relevance has been highlighted in the past week in particular given the ECB reports on Irish interest rates to business versus those of other EU countries. There are also issues with regard to interest rates in our tax administration system, which will be elaborated on further by Ms O'Brien.
Irish small and medium-sized businesses are more reliant on bank finance than those of other EU member states. They need to diversify into other sources of finance, including equity, a point that has been made by the European Commission and the National Competitiveness Council. This makes our capital gains tax environment critical. Yet, at 33%, we have the fourth highest capital gains tax rate in the OECD. This does not incentvise investment into businesses.
We also need angel investors. They are important part of the funding story. Yet, when it comes to Ireland's entrepreneurs relief system these important angel investors are locked out of our regime. They bring not only money but experience, contacts, expertise and enthusiasm. The rate of business angel investment in Ireland is low compared to other countries, including the UK, Spain, France, Germany and Sweden. We are also behind similar economies of a similar size, including Denmark and Finland. This is to the detriment of building and scaling Irish businesses. It was a subject on the business news on "Morning Ireland" this morning.
There are also costs associated with policies that do not work. For example, in our Brexit environment there is recognition across the board that we need more exports. Yet, measures such as our foreign earnings deduction regime are limited. The measure is aimed at encouraging businesses to send employees into emerging markets. However, only 144 claims were made in 2014. Across the policy regime we are not fully aligned with the needs of the indigenous sector. We need to look at the blockers and costs involved.
Ms Cora O'Brien:
Tax administration issues arise from burdens and uncertainties in the tax administration system that lead to higher costs for business. These range from the uncertainty about tax obligations and entitlement to reliefs, such as the research and development tax credit, to Revenue projects, such as PAYE modernisation, and on through to the uncertainty of tax appeals in dispute. We know there are over 4,300 such cases at this point totalling €1.5 billion.
We need to bring home the importance of the tax administration system in the growth of Irish businesses and their employees. I will use the research and development tax credit as real example. Only 1% of small firms and 16% of medium-sized firms consider themselves to be research and development active. These are low percentages in the context of our national ambitions. Innovation is key to driving growth. While Ireland has an attractive research and development tax credit regime administration barriers are weighing heavily on its success in terms of the low take-up among SMEs.
The institute’s research shows that 75% of Irish companies are aware of the research and development tax credit and 20% have availed of it. However, of those that availed of it, 47% said that the process was difficult to prepare for and administer. Only 35% of companies surveyed said that they intend to use it in the next 18 months, although this would rise to 62% if there was more clarity around the criteria for qualification.
In terms of efficiency and the service to Irish business, we need to ensure that Irish businesses are well served by our tax administration system. Businesses and their advisers deserve to be at the heart of a Revenue customer service model that aims to provide a standard of technical support which is best in class internationally. To achieve this, we believe that there needs to be an increased focus on the resourcing and delivery of Revenue’s technical tax supports, and in particular the current model for the Revenue technical service needs to be reformed. Businesses, through their advisers, need a timely, efficient and responsive technical service to provide certainty on their tax position when entering into commercial transactions. Over the budgets of 2015, 2016 and 2017, Revenue hired 226 additional staff with an emphasis on audit and compliance activity. It is just as important that new resources are targeted at supports and customer services to enable businesses to administer with certainty their tax affairs in a cost-efficient manner in these difficult times.
Tax is difficult and as well as calculating their own corporation tax businesses are also responsible for calculating and collecting VAT and payroll taxes. When they get things wrong the cost is very high in terms of both interest and penalties. Interest charged by the State on underpaid VAT and PAYE is 10% and it is charged at 8% on income tax and corporate tax. This compares with the 2.75% charged in the UK and with the 4% which the State pays taxpayers who have overpaid. Interest charged at this level is unfair and urgently needs to be addressed in the Finance Bill 2017.
To conclude, given the challenges and opportunities that lie ahead, the greatest cost of all lies in the opportunity lost to Irish businesses should we fail to have a tax policy and tax administration strategies that serve the needs of Irish business. The impact of this will be felt in terms of their competitiveness, attractiveness, resilience and ability to compete internationally in the export market.
Mr. Neil McDonnell:
I thank the Chair. ISME thanks the committee for the invitation to address it on the issue of business costs. We have identified five separate cost lines for business. I have asked our vice chairperson to voice the actual cost impacts of those areas on a small and medium enterprise, SMEs. These areas are commercial insurance, labour costs, public service costs, commercial property costs and energy costs. The one thing which all five of those cost areas have in common is that they are within the gift of members of the committee, as legislators, to control.
Insurance costs are a direct function of how members legislate for the insurance industry, the Courts Service, legal services, and the status of the book of quantum. I can confirm that ISME will present a draft law on perjury to the Houses of the Oireachtas for their consideration next month.
Ireland is a high-cost economy where citizens and businesses struggle to meet basic costs of living and trading. That does not mean, however, that we can meet those costs simply by increasing the cost of labour. As has been said by our colleagues from the Irish Tax Institute, our average hourly rate of pay is just over €30 per hour, placing us in tenth position among our OECD comparators, but we receive much lower levels of social services than those who are paid more than us. Our income tax is extremely low below an income level of €20,000 a year and extremely progressive above €34,000 per year. This leads to an unwillingness to get promoted, to work overtime, or to take a job which would breach the income threshold for social housing, which is €35,000 in the cities.
Regarding our public services, they would be tolerable if they gave us, as citizens and businesses, satisfactory outcomes. The Secretary General of the Department of Public Expenditure and Reform, Robert Watt, last week criticised the "nonsense, waste and inefficiency" in our public services. We also have an extremely high gap between public and private sector remuneration, and yet all the pressure for pay increases come from the latter. This pay gap is no longer sustainable economically, politically or morally.
Commercial and private property prices are rising to unsustainable levels and constitute a direct threat to employment in small and medium enterprises and inward investment. All of these costs are heavily influenced by legislation and Government policy. Upward only rents and commercial rates are within the gift and control of legislators.
Energy costs are also a function of Government policy. While the public service obligation, PSO, levy was introduced with the best of intentions, namely, to support green energy generation, the fact that it is linked to wholesale energy prices defeats the very objective it was designed to support because the levy increases as wholesale prices decrease. As the cost of renewable energy fall for everyone, the PSO levy absorbs savings that are being made by SME users. This is counterproductive and legislators need to change it. I ask Ms O'Connor to give some examples of the real world effects of these factors.
Ms Siobhán O'Connor:
I conducted a quick survey in our business yesterday to identify what costs we facing as we move into 2018. I was startled to find that gas charges increased by 15% this year, while our bank charges increased by €500 and the price at the pump to fuel our vans was 4% higher than it was last December. If we implement a 2.5% wage increase, our wage bill will increase by €100,000. The current discussion on public sector pay is influencing expectations in the private sector. Many of our staff do not want to accept a wage increase because the taxation rate is so high and instead want time in lieu. This a problem because introducing a policy of allowing people to take time off the work would immediately create pressure for the company in terms of trying to operate.
I also found that our building rates increased by 2.6% this year, while the cost of our main liability insurance and motor fleet insurance increased by 7% and 4%, respectively. This year, as a result of the general data protection regulation, which many small companies in ISME are struggling to grasp, we had to take out a cyber-insurance policy costing €3,670. I have cited these figures because it is important to get back to basics and recognise the costs of doing business, which is the subject of our discussion. To support Mr. McDonnell's point, we must be a position to see these costs because they are real.
Mary Butler (Waterford, Fianna Fail)
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I will open the discussion to the floor. Will Ms Buckley elaborate on the issue of angel investment, a concept with which I am not familiar?
Ms Olivia Buckley:
The Irish Tax Institute did some research earlier this year and looked at a new tax strategy for indigenous business because there is a recognition that we need to grow and scale our business, particularly in light of other global threats. This will involve a number of pillars. We need innovate companies and we need to expand into new markets. We also need to have talent and the best people to allow us to do this.
Companies also need to have funding. It was interesting to note the comment by the chairman of the European Union's open innovation and strategy policy group in an interview on "Morning Ireland" this morning that one of the big issues to be addressed across Europe was the scaling of companies. This requires funding. One of the important sources of equity, apart from bank funding, that companies need is angel investors. The relief for entrepreneurs is capped at €1 million and is only available to owner managers. We have many enthusiastic, highly capable and successful entrepreneurs. It is part of their DNA and their natural inclination when they make a success of their business to reinvest in other start-ups and bring enthusiasm and experience to these companies. However, the entrepreneur's relief, which gives people a lower rate of capital gains tax of 10%, locks out angel investors on the basis that they may not be involved full-time in the company.
We did another interesting piece of research which looked at EY entrepreneurs across the world. It found that a large number of them reinvest in other companies and that other countries, notably the United Kingdom, have a much better system in place. Perhaps Ms O'Brien will elaborate on that issue because we have a competitiveness issue in terms of Ireland's regime versus the UK regime.
Ms Cora O'Brien:
We have many more conditions. Our entrepreneur's relief is targeted to capital gains tax rates. If one does not want to have lower capital gains tax on everything, one needs to target a lower rate on business. That is what the entrepreneur relief is intended to do. It sounds like a lot at €1 million, but when compares it to other jurisdictions it is not. Many conditions are attached to it, including ownership, the level of shares and the fact one has to work full-time in the business. That means we are missing an opportunity to bring in external investors using entrepreneur's pronounce relief. It is only available to the owner-manager of the business. We have to ask ourselves why we are restricting the types of investors we could have.
Niall Collins (Limerick County, Fianna Fail)
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To pick up that point, do we know how many entrepreneurial start-ups we are losing to the UK because of the differential in our rate of capital gains tax? It is an issue I raised occasionally with the Department and Minister. There does not seem to be any willingness to have a wider discussion on the issue. I know we do not discuss policy here. Could we have some numbers on that?
Ms Buckley or Ms O'Brien stated there are about 4,000 tax appeals in the system. What is the average waiting time for a person to have his or her appeal heard? The quantum of money cited is quite significant, given that it is in excess of €1 billion.
The under-resourcing of the technical service part of the customer service remit within revenue was mentioned. How long are revenue clients waiting for a determination if they submit a query on the tax treatment or tax status of a potential transaction or contract? It is obvious that if it is too long it will dampen competitiveness and stall decision-making. Could the witnesses revisit the numbers they quoted on the insurance rates applied for late payment in Ireland compared to other jurisdictions within the UK?
Ms Olivia Buckley:
I will take the comments on the entrepreneurs relief. Ms O'Brien will deal with tax administration.
It is very difficult to get numbers in terms of businesses lost the UK, although we hear constant feedback because capital and talent are mobile. It is very easy for both to move out of the country. The Institute for Fiscal Studies, IFS, did a report and, I understand, made a submission to the Department of Finance in the lead-up to the budget. It examined the entrepreneurs relief rating in the UK and Ireland. I understand the report received some coverage in the media. It warned that Ireland risked being at a competitive disadvantage given the attractiveness of the UK regime. In terms of a London think tank saying Ireland is at a disadvantage, its observations are indicative.
We have examined other countries' patterns of progress. Sweden is jumping up the rankings in the latest OECD report in terms of its performance. Funding, venture capital and investment are very successful areas for it. Stockholm is a very successful city and is the same size as Dublin, yet it finds itself in the upper ranking of entrepreneurship, unicorn companies and high growth and high performance. We need to examine countries like that.
Mr. Martin Curley, the head of the EU open innovation and strategy policy group, was on "Morning Ireland" today. He talked about how Israel is the most innovative country and its success in scale-ups. We have examined it in terms of its introduction of funding, concentration on venture capital and entrepreneurship.
We have learned that a deliberate policy intention and implementation that is pro entrepreneurial has been effective in the likes of Israel, London and Stockholm. Perhaps that is a lesson we can consider in Ireland.
Ms Cora O'Brien:
I will answer a few of the queries and will commence by answering the last query on interest. We look at the UK regime where interest is pegged. I refer to instances where somebody has underpaid his or her tax. He or she might be in tax arrears, made a mistake or are involved in a settlement with Revenue but he or she has not paid his or her tax on time. The penalties are parked. In the UK penalties are charged for careless mistakes or deliberate error. The penalties imposed are for a fixed amount and are almost like a fine. The interest is really a charge for the fact that one has not paid the money on time. In the UK the interest rate is pegged to the base interest rate of the Bank of England. I think the rate is half a per cent above what pertains in the UK and I can confirm that aspect later. The end effect for the UK taxpayer is that he or she pays 2.75% as the cost of not having paid his or her tax on time. It does not matter whether it is VAT, payroll taxes or income tax because all of them are treated the same.
In Ireland, an interest rate of 10% is charged for the fiduciary taxes of VAT and payroll and 8% is charged for other direct taxes. Every year for the past seven or eight years the Irish Tax Institute has asked for this matter to be considered because we do not think it is fair on taxpayers. Yes, they should have to pay interest if they have underpaid their tax but not at such a high rate. We think the interest rates applied are penal rates and taxpayers must pay penalties on top of that.
Niall Collins (Limerick County, Fianna Fail)
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I asked about the technical service.
Ms Cora O'Brien:
The electronic side of the Revenue service is very good. In fact, Revenue is a world leader and best in class when it comes to e-services. The Revenue Online Service, ROS, is excellent, as is online filing. We also have electronic Revenue Contracts Tax, RCT, and electronic registration. All of the systems work very well and are great for businesses generally because they cut down on the time one has to file.
The problem is that we have gone so far down the electronic route that simply technical queries cannot be answered. Let us say one wants to change one's tax credit. Now, if one telephones the 1890 number one will basically be put into an email service called MyEnquiries and advised to send an email. One will probably have waited 20 minutes for someone to answer one's phone call but then one will be told that the query cannot be answered over the phone and it must be put in writing and emailed to us. Unfortunately, it could take three to five weeks for Revenue to reply to the email. Our members have told us that often times Revenue, when it does reply, wants more information. That situation does not just apply to the Revenue service in Ireland. There has been a move to electronic services generally for tax administrations in the UK and US. We have reached a situation where people cannot speak to a human being by phone to discuss in order to resolve an issue.
We feel that with all of the challenges such as Brexit, which Ms Buckley mentioned, and all of the costs that businesses have to cope with, we need to assess the present service. Revenue is a great enforcer and collector of taxes, which is important. However, money and resources must be set aside to help businesses at the critical stages of starting in business and starting to export. The UK has dedicated people to work in certain areas. When UK businesses start exporting they get a person for six months purely to help them with their tax obligations and ensure filing is done right. Ireland needs to do human things like that to help businesses with their technical services. Tax uncertainly only ends up costing businesses and the State because it leads to audits and settlements.
Niall Collins (Limerick County, Fianna Fail)
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What is the response time for technical queries? I know it is hard to know.
Ms Cora O'Brien:
We have surveyed our members about the matter.
It depends what one means by response and response time and that is part of the problem. A response could be a letter saying, "We hear what you say, give us more information", or it could be someone answering the phone but not giving one the information that one needs. In the UK, Her Majesty's Revenue and Customs, HMRC, has looked at this issue. In its annual report, it said that it wanted to be a leading customer service provider and that it was not good enough to just measure how long it takes people to answer the phone or how long it takes to send a letter; what matters is measuring how long it takes the customer to get the answer that he or she needs. We need less quantitative statistics because they often do not give one the full picture and more real and valuable information about whether taxpayers are getting the service to which they are entitled.
Niall Collins (Limerick County, Fianna Fail)
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What is the wait time on an appeal?
Ms Cora O'Brien:
There are 4,400 outstanding appeals at this stage. We reckon that it will take approximately ten years, with current resources, to clear what is on hand at the minute. A detailed consultation was published a few weeks ago to which we made a submission. There are 2,000 small businesses and taxpayers with appeals on tax amounts of less than €10,000. In other words, half of all appeals are for less than €10,000. Those people are in the system. Our members have examples of appeals going back ten years that have not yet been heard. There are delays in getting the appeals heard, in getting one's day in front of the appeal commissioner but now we are also finding, with so many appeals in the system, that once the appeal has been heard there are delays of up to 18 months in getting a determination or a decision on that appeal. It is a very expensive process and people in this system who may end up losing their cases are having to pay really high rates of interest, of between 8% and 10%, through no fault of their own because of the appeals process over which they have no control. All of these issues are tied together - long waits on appeals, high interest rates and people struggling to deal with the electronic part of Revenue's service. It all ties in together and needs to be looked at again.
Niall Collins (Limerick County, Fianna Fail)
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Does the clock on the interest not stop when a customer lodges an appeal?
Mary Butler (Waterford, Fianna Fail)
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I wish to clarify something. Is Ms O'Brien saying that regardless of whether one's appeal is for less than €10,000 or is for €10 million, the process is the same?
Ms Cora O'Brien:
Yes. We have suggested that there should be a separate process for smaller amounts. We have asked that consideration be given to a small claims court type system for small cases. That would take half of the appeals out of the system. Alternatively, we have suggested the introduction of mediation processes which operate successfully in other countries. Such processes would mean that cases would not have to go into the appeal system but could be dealt with through mediation. Something needs to be done to unlock the system. Potentially, the State will not win all of the cases in the appeal system but there is €1.5 billion worth of tax is in dispute, waiting to be heard.
Mary Butler (Waterford, Fianna Fail)
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Is Deputy Collins finished?
Niall Collins (Limerick County, Fianna Fail)
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I have a few questions on the minimum wage. I wish to pick up on comments from Chambers Ireland and ISME on the minimum wage. Following the budget, I did not hear any commentary on or criticism of the fact that the Minister increased the training levy element of employers' wage costs. Maybe something was said and I missed it. However, given the witnesses' comments and concerns about the low-pay commission's recent awards on the minimum wage, the response seems very different. Have the witnesses any hard numbers or data on knock-on pay claims being experienced by their members or member industries following the recent increases in the minimum wage? As I understand it, there are approximately 80,000 people on the minimum wage. While that is a big number, it is a small percentage of the overall labour force.
I find it difficult to accept how the paltry increase in the minimum wage was such a big issue for the witnesses. Can the witnesses explain that to me?
Mr. Neil McDonnell:
I will start on the national training fund and the PRSI levy. We are the first to say that our sector needs a lot of resources to be diverted into training because that is what all the economists are telling us about our sector. The SME sector in general, and this is not a criticism but an observation, is not a productive sector in comparison to foreign multinationals. The only way we are going to get there is through training and investment in people. However, and we pointed this out in our pre-budget submission, while we acknowledge that money needs to be spent on training, if one looks in the break-out in the budget about where the training moneys have gone, they have gone substantially towards the tertiary, the university sector and not towards on-the-job or employment training. That is not what people like those in ESRI are telling us. In fact, ESRI is telling us that there is a substantial degree of overtraining and overeducation in a lot of employment sectors.
A second concern about this is the cost one. Again, these are not out figures. The National Competitiveness Council says that up to 86% of the cost for a small business, especially in service businesses like Codex, can be manpower. Therefore, a small change in employers' PRSI in a business that has a large labour cost is disproportionately penal on that small business than it would be on Google or Intel. Lastly on the levy, and we would drew the committee's attention to it in our pre-budget submission, in 1979 employers were asked for an extra 0.5%in employers' PRSI to cover an insurance fund for redundancies. That levy has been in place ever since, and in 2012 we abolished the statutory redundancy rebate. That fund was in so much surplus from its inception in 1979 that the then Minister in 2002, Mary Coughlan, wrote a cheque from the Department of Social Protection to the Exchequer for €635 million. That is how much that insurance fund against redundancies was in credit at that point. Then, of course, we hit a massive wave of unemployment in the crash and then we took away that rebate from employers. The net effect of that is to make employers far more reluctant, even when the economy is in on the turn, to recruit people. Therefore, one needs to think of the unintended consequences of what one does when one takes away something the employer was paying for all along.
The message on the national training fund is, by all means take money out of PRSI for training, but by God we better see it in training. If we do not, then we want it back in PRSI.
I refer to the national minimum wage. The trade union sector has already queried why some employments are reducing their hours of labour as a result of the increase in the national minimum wage. We said all along that, if in those strained sectors or those sectors paying at or close to the national minimum wage, the payroll cost cannot be recovered from the customer, it will be recovered from the employee. It does not matter what the Houses of the Oireachtas say is the national hourly rate of pay. If the employer cannot pay that in what we would call P60, then the P60 will fall. We told the committee it would happen and it is obviously is happening in some areas now.
Mr. Ian Talbot:
On the training levy, when the initial consultation came out from the Department of Education and Skills with the proposal of increasing it by 0.3%, in our submission on that we certainly raised our concerns about that increase. However, we said at the time that it was really important that we had transparency on where the training moneys are being spent and that we need to rebalance the money Mr. McDonnell referred to, that is, the money that the then Minister, Mary Coughlan, took from funding that was going into training people in employment and put it into the very necessary training for people in unemployment.
With unemployment down to 6.1% or whatever, and expected to continue to decline, we need to rebalance the amount that is being spent on the unemployed and to spend more money on training for people in employment in small business and, going back to the point Ms Buckley made, giving businesses the opportunity to obtain the skills to scale up. If we do not train people better, they are not going to be able to scale up. When it was announced in the budget that the levy was going to be increased by 0.1% over three years, we made the point that if we need money to be spent on infrastructure, for example, it has to come from somewhere. However, we reiterated the point that we need to know how that money is being spent and the transparency around it. Our focus is on rebalancing the money we are spending on training and making sure that we give businesses the opportunity to scale up.
On the minimum wage, the point I made in my report was more about the process followed this year than a comment on the increase itself. This year, somewhat out of the blue, the Minister made an announcement that the Low Pay Commission had reported and that he was increasing the minimum wage. Even when the press release came out, the link to the report itself did not go active for a couple of hours. The increase was announced even before the report was produced. What we suggested was that we would rather see a process whereby the report could come out and that there would be some opportunity for debate or setting expectations around it. The reason we are here, and I think we all have the same objective, is that we really want to see a situation where the fruits of economic recovery and employment growth need to be seen in improved standards of living and not being just soaked up by escalating costs, whether they are within Government control or otherwise. We need to see people seeing increases that they can spend as disposal income rather than just, of necessity, paying bills, whether rent or whatever it might be.
Mary Butler (Waterford, Fianna Fail)
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I thank the witness. I call Deputy Neville.
Tom Neville (Limerick County, Fine Gael)
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I have one question following on from what Deputy Collins said. This might be a broader in regard to salaries. The witnesses mentioned salary inflation, social partnership and demand in the public sector. These are probably hard figures the witnesses may not have but is there an air that salary inflation is outgrowing productivity or is productivity still ahead of salary inflation?
Tom Neville (Limerick County, Fine Gael)
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Does the witness have figures on that?
Tom Neville (Limerick County, Fine Gael)
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That is no problem. I understand that.
Mr. Ian Talbot:
I am pretty sure that they are in our detailed submission. What we are now starting to hear is the concern from business coming through, particularly going into 2018. We are at the point now where businesses are making their budgets for 2018. Their concern is that they are going to sit down with their members of staff who are going to say that they expect a big increase in 2018. It has not actually come through but businesses are very concerned it is coming through. It is being fed by several things. It is being fed by the housing crisis, the increase in rents and so on and by the perception of increases being passed through in public sector jobs. People are looking at the percentages and are saying they should get that and that we have all had five, six or seven tough years, so it is their turn. It is back to the point about trying to make sure that the fruits of our recovery go into improvements in disposable income rather than being soaked up in costs, or people even falling back even though they are getting salary increases.
Tom Neville (Limerick County, Fine Gael)
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I am not knocking what the witness is saying, which makes sense. Does inflation ever come into the equation in the debate because ten years ago it was all about inflation? I know our economy could not compete in 2007 and 2008 and that was one of the reasons we took such a hard bang. I understand that. However, I know when I was working in recruitment and people were going for salary increases, it was always because of inflation. Is inflation off the table because it is so low or is that ever referred to?
Tom Neville (Limerick County, Fine Gael)
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Nobody talks about it anymore.
Mr. Ian Talbot:
However, people are still concerned about the costs that matter to them, buying a house, child care, education and so on. The things people are concerned about, the things people aspire to, are just getting out of reach. It is inflation in another way. The published inflation figures have remained very low or stagnant.
However, people are seeing that the costs of their aspirations are getting away from them.
Tom Neville (Limerick County, Fine Gael)
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If the witnesses were to prioritise the costs of doing business, what would be the top three they would like to see alleviated and why? The witnesses listed a number of things. What would the witnesses prioritise? If they were to come to me with a shopping list, what would the top three be?
Tom Neville (Limerick County, Fine Gael)
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I understand that. We saw from 2008, 2009 and 2010 that the cost of business dropped and there was a correction in the economy.
Mr. Neil McDonnell:
The one where there would be an agreed commonality would be obviously be labour costs. If headcount increases, manpower becomes a greater proportion of cost of business. Labour costs is No. 1 in most businesses, insurance costs is No. 2 in most businesses, although not necessarily in professional services, and then sundry forms of tax, whether corporation tax, commercial rates or whatever, and energy. Thereafter, it really is going to be very sector specific.
Tom Neville (Limerick County, Fine Gael)
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I understand.
Mr. Ian Talbot:
We would say the impact of the housing crisis is the big thing that we see coming through. That is coming through primarily in labour costs, but also in people's commute time. We are back to where we were ten or 12 years ago where in order to get accommodation that is affordable, people are having to live further away from their job. The crisis in the infrastructure, public transport availability and reliability and so on all become issues to people's quality of life. It has an impact. If people are arriving at work and they are tired and weary from their journey and are stressed out because of their finances, they are not going to be as productive when they get to their job.
Tom Neville (Limerick County, Fine Gael)
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I thank the Chairman.
Mary Butler (Waterford, Fianna Fail)
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I call Senator Gavan.
Paul Gavan (Sinn Fein)
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I thank the witnesses for their presentations. I have a couple of quick questions. I notice, unless I am mistaken, none of the witnesses has anything to say about the levels of executive pay in Ireland. Am I right in saying that in terms of the witnesses' presentations?
Paul Gavan (Sinn Fein)
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I am, to be fair. It does not directly relate to the witnesses.
Paul Gavan (Sinn Fein)
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That is fine. How about the other witnesses?
Paul Gavan (Sinn Fein)
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We know there have been some astounding increases in pay for CEOs. A survey last year showed between 11% and 236% in wage growth. I would have thought that somewhere in the cost of doing business there would be some commentary on it but if there is not-----
Mr. Neil McDonnell:
To be honest, when I am asked a question like that in here, it makes me depressed. I do not know how many CEOs we have in plcs who are in receipt of seven figure remuneration but I think it is fewer than 50. If people become fascinated with peaking through the lace curtain at what this tiny number of people are getting paid, we just become lost. We are talking about the 2 million.
Paul Gavan (Sinn Fein)
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Let me broaden it out. The point I am making relates to inequality. I have a concern because there seems to be this general theme, particularly with ISME, that the real challenge is to stop workers from getting pay increases. The witnesses have been very clear on the minimum wage and yet we know from the CSO figures that one in three workers in this country in this country is on less than €400 a week. We know that in terms of inequality we have a huge gap between low paid workers and CEOs. We know that the living wage is currently €11.70 and yet the witnesses are objecting to the minimum wage going up to €9.55. That means workers do not have enough to live but the witnesses are saying it is still too much. How do the witnesses justify that?
Paul Gavan (Sinn Fein)
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Let me be clear. The witness does not object to a minimum wage rise.
Mr. Neil McDonnell:
Let me finish because there is no point in shouting over me. The Senator must show me the courtesy of allowing me to answer the question. What we have said is that one can set a minimum rate of pay at whatever level one wishes.
However, the members, as legislators, must then accept the effect that will have on the levels of employment in the economy. That is the first message.
The second message, and the point we constantly make, is if one gives someone €1 in income that does not translate directly into €1 of earned wealth whereas if one reduces a person's cost of living by €1, that translates directly into €1 increase in wealth. To go back to the point that Mr. Talbot has made, and this is why it is so important, we are listening to a narrative that says we can close this unaffordable gap. The housing part of the consumer price index is 7%, 8% or 9% of the total CPI. However, that does not matter to a person who is working in a warehouse in Blanchardstown and who is being asked to pay €1,500 or €2,000 a month in rent for a small apartment. It is irrelevant what the metric is. The point we are making is that unless the cost of living is materially and meaningfully tackled, and we can increase the national minimum wage to higher than that in Luxembourg - we are already second highest to Luxembourg - it does not matter. Unless people can afford to live on what small businesses can afford to pay, it does not matter what the national minimum wage is set at.
Mary Butler (Waterford, Fianna Fail)
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Can I call Ms Buckley for a comment?
Ms Olivia Buckley:
I thank the Chairman and the Senator. We have touched on increasing living standards, which Mr. Talbot mentioned earlier, and the quality and the calibre of jobs. It is something Senator Gavan is touching on in terms of people's pay. We need to see how we expand and create jobs in this country that have a higher level of salary for people. That is where everybody wants to get to. The Irish Tax Institute is doing a lot of research in this area in terms of looking at Irish business and where the opportunities are for Ireland because that is the best starting point. The services area globally is the greatest area of growth. It is outpacing manufacturing and industry. In fact, the growth rate globally in services is 10% per annum, which is huge. One of the greatest areas of opportunity for this country, as we are becoming more of a service economy than a manufacturing one, is in information and computer services, or anything in ICT and communications. A recent OECD report, looking at the gazelle companies which are high growth, high speed, high revenue companies across the OECD, tells us that computer programming, information services and the whole area of ICT is where success is and where we should be focussed.
The Boston Consulting Group did a report a year ago looking at the digital economy. It listed Ireland as one of the top nine front-runner countries in terms of digitised capability and where the greatest opportunity for us as a country is. We know, however, that we have a digital skills shortage in terms of younger and older people. We know we have a digital skills shortage in terms of talent in the country. Across Europe, 40% of companies are looking for the same people and yet they cannot get them qualified in ICT.
I refer to where we, as policy-makers, can make a real difference in terms of our legislation. In our area, we are looking at tax policy, in particular, personal tax rates, and at the burden on business. What is the strategy for us as a country so that we can create the kind of jobs, we grab the opportunity that is there globally and we can give our people higher paid jobs? That is where one can make a real difference, that is, when it is possible to say to somebody that the growth is in services and that there are global opportunities.
Our SMEs are not as e-commerce focused as they should be. Some of them are not online. There are perhaps broadband issues, but there are a multitude of issues. Where is the opportunity for Ireland? How can we, as policy-makers, get our strategy right so that we can give our people and companies the best chance and that an employer can increase a person's salary from €27,000 to €35,000 and upwards? We need to be able to grab the opportunities. We need to be searching in the right space if we are going to make a difference to people.
I thank the members very much for their comments.
Mary Butler (Waterford, Fianna Fail)
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I call Senator Gavan.
Paul Gavan (Sinn Fein)
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I just wanted to let Mr. Talbot back in and I have one other question.
Mr. Ian Talbot:
Sometimes I despair at our culture towards entrepreneurship in this country. Entrepreneurs are risk takers and job creators. In the worst of the recession, most entrepreneurs were struggling to pay themselves any sort of living wage. That was in the worst of times. They had to get on with meeting other obligations: taxation, interest, paying their staff the best they could, dealing with redundancies and everything else. They are stressed out, they are anxious, but they are risk takers and they are doing their thing. If they are successful, we charge them an extra 3% taxation. If they are not as successful, if their latest operation does not work out, a safety net is not there in the same way as it is in other jobs. We restrict their allowances. Entrepreneurs are out there doing their thing for the economy and they get better recognition in other countries than they do in this country. Most of the businesses we talk to are struggling to survive. We started this conversation, as Mr. McDonnell pointed out, talking about a handful of people on high salaries but we are here to talk about the cost of doing business for the almost 2.1 million people employed in this country, not a handful of people at the top. That is where our submissions and our synopsis come from.
Paul Gavan (Sinn Fein)
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I see two of the witnesses are in despair. I am sorry to hear that.
I despair that any time someone raises the issue of inequality to employer representative bodies, or points out the gap between the minimum wage and a living wage, the issue is never addressed. I will take up one issue Mr. Talbot mentioned regarding the cost of living. I agree with him that the cost of living is a massive issue. The issue of housing was mentioned. The only way that we can fix that is by a greater investment by the Government. Yet at the same time, the witnesses are saying we need to decrease taxes for business. Well, we cannot have it both ways. If we are going to address the housing crisis properly and have the long-term investment that has not been happening in housing, then that will cost taxpayers' money. To be honest, the witnesses are saying on the one hand things are really hard and we need to reduce taxes and they are also saying the Government must do more to address the cost of living. How does one marry those?
Ms Cora O'Brien:
I will make a few points on that. High taxes do not equal high yield from tax. That is an important point. Things like high capital gains tax do not give the country more tax. A tax rate that is too high discourages activity. It means entrepreneurs are not doing the types of things they should be doing because they are facing these high taxes. As a result, our capital gains tax yield has actually halved from what it was in 2008, even though the rates have increased from 20% to 33%. There is a difference between high tax yields for the State in order to pay for services and setting rates of tax too high so that they do not match economic policy. Tax policy should follow what economic policy is trying to achieve. It is a double-edged thing. We have social needs and money we need for housing and infrastructure. However, we are a certain type of economy. In order to raise the amount of tax that we need to pay for all of these services, we have to work within the bounds of being a small open economy. We need a tax policy that will generate the most euro for those spending needs, given the constraints that we have as a small open economy. One should follow the other.
Mr. Ian Talbot:
We did not object to the 0.1% increase in employers' pay related social insurance, PRSI, for example, or to the budget. We just want to see it spent better. It is not about training management, but about training resources through the entire network of companies and bringing the next wave of entrepreneurs through. It is about transparency.
Paul Gavan (Sinn Fein)
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That is a fair comment.
Mr. Neil McDonnell:
We said as a starting point that we appreciate all the issues that exist on the current side. However, our pre-budget submission called for a figure of 4% of gross national income, GNI. We were not rashly saying 4% of gross domestic product, GDP. We said 4% of GNI needs to go on infrastructure and then legislators have to decide how to redistribute the rest of the pie, and this is the difficulty and why I am sorry to have to say to the Senator "right back at you". We have over-prioritised current spending at the expense of capital spending and all that is doing is beggaring our children with increased national debt. Our national debt still went up after the budget.
Mary Butler (Waterford, Fianna Fail)
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I thank the witness and call Deputy Maurice Quinlivan.
Maurice Quinlivan (Limerick City, Sinn Fein)
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I thank the witnesses very much for their presentations. I missed the start unfortunately, but I read their briefs before coming in. I would like to go back to the minimum wage for a minute if the committee does not mind. We discussed it at length in previous sessions in the context of banded hours contracts, and we spoke to the witnesses about that. I was concerned about the comment made by Mr. McDonnell that it does not matter what wage people are paid. It really does matter to people because many people - Deputy Collins referred to 80,000 - are on the minimum wage. That is a problem we have. We are talking about taxes and tax cuts, and Mr. McDonnell said it does not matter what one pays. The costs of housing and transport need to be addressed, and I agree with him 100% on that. The State, for example, pays almost €500 million a year on the family income supplement. Some 57,000 people are accessing the family income supplement and that is because of the low minimum wage we have. Mr. McDonnell disagrees with that, saying it is the second highest in, but obviously costs here are higher and they need to be addressed. If that €500 million was put into infrastructure, it would improve transport, allowing people to get to work more cheaply. It could provide houses and the rents would go down. As Senator Gavan said, we need a massive housing investment to deliver these houses. Then the pressure might come off wages, but we are where we are, and I believe the minimum wage needs to be increased more quickly. We need to get to the living wage, but we also need to address housing and transport.
Mr. Neil McDonnell:
Funnily enough, I do not think there is a huge difference between us. There is a philosophical difference on how one bridges the gap. Let me explain it this way. Funnily enough, when unemployment hit its highest level in 2011 or 2012, the Gini index of inequality was at its best for Ireland. In other words, what it was saying was that in terms of social supports in Ireland, the safety net was good enough that, although 300,000 people lost their jobs, the safety net picked everyone up, and as a result inequality decreased. I was not in this organisation when I made the comment, but I said that it follows that when unemployment starts to fall off again and we come out of recession, the Gini index is unfortunately going to go the wrong way. As more people go above the safety net, by definition perceived inequality decreases.
I have met with the Vincentians and debated with them about what constitutes a living wage. One serious issue I have with the calculation of it is that it is done on the basis of a 39-hour week. I would be much more comfortable with the expression of the living wage as a gross weekly wage rather than as an hourly rate, because one could capture the increase in the hourly living wage this year by working two hours more. That means working 41 hours instead of working 39. That is just a fact.
In the long-term, however, the only way we are going to bridge some of these gaps without being perpetually in disagreement is by breaking down some of the walls between the social support systems and the revenue system. I can the Deputy that people in Dublin are refusing jobs as distribution drivers because they do not want to earn more than €35,000 a year. If they do, they will come off the social housing list. That is a fact. There are people who are insisting on remaining on jobseeker's allowance in order to do that. Again, it is over to the members.
Maurice Quinlivan (Limerick City, Sinn Fein)
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I agree with Mr. McDonnell and I know people who do not want to go over that limit because they cannot get social support. However, they are not on the minimum wage or close to it.
Mary Butler (Waterford, Fianna Fail)
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I call Deputy Tom Neville.
Tom Neville (Limerick County, Fine Gael)
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I just want to put on record that we have come from 15% unemployment in 2012 to a figure of 6.1% today, so I do not want all negatives going out from here. That is the backdrop to what we are talking about. If anything, we are talking about growing pains here. These are growing economy pains, as opposed to what we were used to in previous years. I understand we are trying not to repeat the mistakes of the past in relation to competitiveness, and we want to try and spread it as equally as we can. Nobody predicted that it would be this fast, and because it has been we are now seeing parts of the economy outgrow the infrastructure and the infrastructure is trying to catch up. That is the backdrop to this.
Mary Butler (Waterford, Fianna Fail)
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I thank the Deputy. I thank all of our guests. The main reason I decided to invite the Irish Tax Institute here was because we do not always hear from that point of view. I wanted to see, while we are discussing the cost of doing business, if there are any tax savings out there for small and medium enterprises and entrepreneurs which might not be obvious. Very significantly, the witnesses have addressed people who are in tax arrears and pay a huge interest rate. I think that is certainly something the committee could address. Is there anything further the witnesses would like to add?
Ms Cora O'Brien:
If you are looking at the tax system then there are two things to say. Our tax base is extremely broad, which means that there are very few reliefs for businesses. There used to be more. The biggest one is probably the research and development tax credit for businesses trying to innovate, which is so important. Then there are reliefs for investment, like the employment investment incentive. To be honest, the most helpful thing that we could get concerning those reliefs, and the tax system in general, is better certainty for business through tax administration. That is what we hear continually. On a related point about tax certainty, it is not just about administration, but also certainty of legislation. We have asked a number of times and have had really good improvements in consultation on tax policy over the past five to ten years. However, we need consultation on tax legislation. We have a new share options regime, a really welcome development which has come out in the Finance Bill 2017. When big changes like that are announced, we would like to see that legislation put out for businesses and tax advisers to look at in draft, to see if it is going to work for them and if there are issues with it. We are in a process now, between the publication of the Finance Bill 2017 and Committee Stage, where we have a raft of small issues with the legislation. We need certainty for taxpayers through getting to see legislation in draft, and through more supports from Revenue for businesses, because that is really where it is hitting the road at the minute.
Mary Butler (Waterford, Fianna Fail)
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I thank all our guests for coming and engaging with the committee. I propose we suspend this meeting for a moment to allow our next guests to take their seats.
Mary Butler (Waterford, Fianna Fail)
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I would like to welcome Dr. Peter Rigney of the Irish Congress of Trade Unions, ICTU, and Dr. Tom McDonnell of the Nevin Economic Research Institute, NERI, to the meeting today to discuss the cost of doing business. Before we commence and in accordance with procedure, I am required to read the following. 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.
I have read the members' reminder already. I remind our guests that the presentations should be no more than five minutes in duration. We will have a question and answer session following the presentations. I ask Dr. Peter Rigney to make his presentation to the committee.
Dr. Peter Rigney:
Go raibh maith agat, a Chathaoirligh. I have given members a submission and I intend to go through its highlights. The Irish Congress of Trade Unions is an advocacy group for workers with 800,000 members on both sides of the Border, so some of the things I say will not surprise members in being diametrically opposed to what they heard before. In some areas, however, I will identify areas of agreement between us and the previous speakers.
When examining the cost of doing business, the cost of labour is defined by EURSTAT as the total expenditure borne by employers for the purpose of employing staff. It includes employee compensation, wages, salaries in cash and in kind, employers' social security and other expenditure such as recruitment costs, minus any subsidies received. While some will argue that workers in Ireland enjoy relatively high hourly earnings, in reality the cost associated with employing staff in Ireland is about average by EU standards, and relatively low compared to small open-economy competitors such as Belgium and Austria. This is because employer social contributions, as a component of total labour costs, are significantly lower in Ireland. A recent research paper by the Nevin Economic Research Institute, NERI, identifies the total average hourly labours costs in Ireland in 2015 as €28.70 in the business economy. This compares with a cost of €29 in the UK and €29.50 in the eurozone. International comparisons of statutory minimum wage levels that do not take into account differences in employer social insurance are misleading.
A further consideration in any analysis of labour costs is productivity. Productivity is what the employer gets for his or her €28.70 an hour. The National Competitiveness Council's scorecard for 2017 notes that Irish labour productivity performance is strong in an international context. Irish labour productivity growth has been above that in competitor countries since 2013, and was 2.3% in 2016. The productivity of Irish workers allows Irish companies to be competitive. In the short term, the cost of employing labour is more than offset by the productivity of the labour involved.
Previous speakers raised the issue of executive pay. We raised this issue last year in a report called Because We're Worth It.We pointed out what we know in terms of executive pay for chief executives of public limited companies, plcs. We also made the point in the report that this is only the tip of the iceberg because there is a large number of private companies whose executive remuneration is a secret. The disquiet about the inequality levels of executive pay is developing quite significantly in the UK at the moment, and will trickle through to Ireland through the application of most of the UK Code of Corporate Governance. The Financial Timeshas a city panel and in yesterday's newspaper, one of the contributors, who was described as a city grandee, made a point that was reflected by previous speakers in another way. He said that the premium that is attached to entrepreneurship risks is being paid to managers, who are mere employees. That is the point that is being made in our work on executive pay.
Another issue is the cost of housing people. Escalating rents must feed through into wage demands. Both the Irish Congress of Trade Unions and NERI have produced comprehensive proposals aimed at tackling the cost and supply of housing and the cost of rent. The Irish Congress of Trade Unions will continue to make the case for greater state investment in public housing. A couple of weeks ago, Members of this House and the other House paid tribute to the late Taoiseach, Liam Cosgrave. One of the leitmotifsthat came up was that he was a conservative and cautious man. This was quite correct. What is often forgotten is that in his term as Taoiseach 100,000 local authority houses were built. That is under a Taoiseach who is described as conservative, and under a Minister for Finance, Richie Ryan, who was a fiscal hawk. There are learning points from that.
The exceptionally high cost, by international standards, of renting office accommodation Dublin, noted by the NCC, does not reflect higher than average costs of labour and materials in the construction industry, but rather the acute shortage of suitable sites and the escalating cost of development land.
It is vital that such costs are controlled. In order to control these costs, more investment is required to provide for balanced regional development, along with improved transport and communication links. Last week I attended a public meeting addressed by the European Commissioner for Transport - her name eludes me. She is a very impressive lady and she said that the Commission has a problem at the moment, that it is not getting sufficient quality projects from Ireland. In other words, for public transport projects such as a heavy rail link to the airport which is required by 2030 under an EU Directive, or the DART underground in its slimmed-down format, there is very cheap European Investment Bank, EIB, money available. Evidently, however, for whatever reason we are not putting forward the proposals.
I noted that Mr. Ian Talbot mentioned child care. We produced a report last year called, Who Cares: Report on Childcare Costs & Practices. This does two things. It takes money out of people's pockets after they count their earnings at the end of the month, and it also pushes second earners, mainly women, out of the labour market. There is a body of research done by EUROMOD, a European institute on tax and benefits, where graph number one shows support to second earners across member states. Ireland comes first, top of the pack, in terms of supports. Graph number two is support for second earners, taking account of child care costs, and Ireland moves from number one to number 28. We could hear that echoed in Chambers Ireland's statement, the need to tackle child care costs.
There is a number of other aspects to doing business. Energy costs were mentioned. We are into a great era of uncertainty there for a number of reasons. In the context of Brexit, about 82% of our natural gas comes down a pipe from western Scotland, so that is a huge area of uncertainty. Second, we are going to have to decrease our reliance on fossil fuels or face enormous fines, so investment in alternative energy will be needed.
There is also the cost of getting credit for SMEs. The re-establishment of the Industrial Credit Corporation is basically what we would be suggesting.
Business representative groups frequently complain about the variation in commercial rates among various local authorities. We believe that commercial rates are an important and essential source of funding for local public services, however we would welcome a more predictable and more transparent system.
Another area where costs are outlined is legal costs. We strongly endorse a more comprehensive and transparent information database on legal service prices. The provisions of the Legal Services Regulation Act 2015 should be speedily implemented and the resources of the Legal Services Regulatory Authority increased as recommended by the National Competitiveness Council, NCC. It seems strange to us, who represent people who got the full brunt of the troika in many areas, that the legal services profession seems to have gotten off very lightly from implementation of troika representations, for whatever reasons, on which we will not speculate.
We are strongly of the view that public capital investment levels should be substantially increased. Infrastructure improvements, for example improved public transport systems and road networks, will reduce the cost of doing business and the cost of commuting. It is not often that I quote an employer, but Mr. Ian Talbot rightly makes the case about what use to an employer are workers coming in wrecked after a commute of an hour and a half. That is a very valid point and that is within the resolution of the Government. In most international competitiveness indices, Ireland tends to perform poorly in infrastructure, notably in broadband. If we are to get some sort of regional balance and correct the regional imbalances, which would in turn make life more tolerable for those of us who live in Dublin, we need to up our game in terms of broadband.
Finally, enterprise policy should focus not just on labour costs per se, but on unit labour costs. To this end we must consider how productivity and quality of work can be raised in private or public enterprises. The Nordic model, which originates in Norway, Denmark and Sweden, has succeeded in generating high levels of employment, high wages and high levels of life satisfaction. These countries also measure extremely well in international competitiveness outcomes. How do they achieve these outcomes?
The Nordic model is based on a high-quality social wage in the form of health, education, lifelong training and upskilling, social housing and child care, all of which are hugely important to national competitiveness and sustainable job creation. It is the view of congress that the Nordic model is one that Irish economic and social policy should be seeking to emulate. Go raibh maith agaibh.
Mary Butler (Waterford, Fianna Fail)
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I thank Dr. Rigney and call Senator Gavan.
Paul Gavan (Sinn Fein)
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I thank both of the witnesses for their presentations and apologise in advance. I have to go to another meeting, so I thank my colleagues for letting me speak first. It has been an excellent presentation in terms of its breadth, the issues it covers and as a counterbalance to some of the other information that we have had. I mean no disrespect to that information.
We seem to have emphasised the issue of labour costs. The witnesses' figures on labour costs suggest a different picture. I see here the figures suggest a total average hourly labour cost of €28.70, as opposed to a figure of €29.00 in the UK, and some €29.50 in the eurozone. Could the witnesses talk about the social insurance employer costs? It was mentioned that there is a differential operating herevis-à-vismost of Europe.
Dr. Tom McDonnell:
I would be happy to do so. The first thing to note is that we now have 2016 data as well with which I am happy to update the committee. According to EUROSTAT, total average hourly labour costs, for industry, construction and services, that is, traded sectors, which excludes public administration, defence and so on, is €30.40 in 2016. The euro area average is a figure of €29.80, so we are broadly on a par. It is interesting to note that the most expensive countries by labour cost are Norway, at more than €50.00; Denmark, at €42.00; Belgium, at €39.00; Sweden, at €36.60 and so on down. It turns out that there is a correlation between the countries with the highest employment rates and the countries with the highest labour costs. Let me read out a few numbers, and then I will talk about the employer pay related social insurance, PRSI.
The country with the highest employment rate in Europe is Iceland. For people aged 20 to 64 it is 87.8%, an astonishingly high number. This is followed by Switzerland at 82% employment, but then we start getting to the Nordic countries. Sweden is at 81.2% employment and Norway is at 78.6%. Germany is also at 78.6%. Denmark is at 77.4%, and so on. Ireland is at 70.3%, and this is in the context of people talking about overheating. We still have a way to go, but to get from our 70% to a figure of 80% implies adding an extra job for every seven jobs we have at the moment. That is in the region of a quarter of a million jobs.
Ireland is failing in terms of its labour market policy. It is not failing because of high labour costs, because we can see that the most successful countries, in terms of employment rates, are actually the high-cost ones. Labour costs differentiate from wages because of employer PRSI and other employee compensation.
Tax was discussed earlier. Labour taxation in Ireland in a strict sense is about average in European terms. However, on a ranking by labour taxation which includes social security contributions Ireland is very low. In particular, 60% of the difference between Ireland and the average high-income Western European country, of which there are ten with a GDP per capita over €30,000, is explained by employer PRSI alone. In Ireland, we have low levels of employer PRSI, and indeed PRSI across the board, and that means that Irish labour costs are that much lower than they would be in Nordic countries, for example. It also means that the social wage is that much lower. The benefits that workers receive are not the same. People will talk about labour costs and employer PRSI, but the question then is whether it is desirable to move towards the Nordic-type model. We find that across the board, in terms of inequality, poverty and deprivation, employment, gender wage gaps and female labour force participation, those countries tend to do much better than Ireland.
Everyone talks about child care. It is true, child care is a huge barrier in Ireland to second earners and lone parents, who are primarily women.
However, it is also the case that there is a large safety net in the Nordic countries that enables people to move in and out of the labour force, to go back to education and so on. It is a different model. It would be expensive to do, and it is certainly not something that one could do overnight, but it strikes me as something that would be attractive over the medium term. We know that in the future, because of automation and an economy that is increasingly speeding up, with more and more jobs becoming obsolete, it becomes more important for people to be able to step out of the workforce, to go back to education and to retrain in new things. That strikes me as a better model in the long term. I do not know if that answers the question.
Paul Gavan (Sinn Fein)
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It does. I have two other follow-up questions, and I will be brief. It is important we hear about a social wage. We have only ever had conservative government in this country, so the social democratic concept of a social wage perhaps might not be as familiar as it should be. Could Dr. McDonnell tell us about what it means, and why it is so beneficial to a modern economy?
Dr. Tom McDonnell:
It is important for a number of reasons. Ireland has developed in a very different way. Education spending was originally through the church and the same applied to health. In the northern European countries, however, a pact was reached between what might be called social democratic or even socialist parties and Christian democratic parties on the other side. To offset revolution, as had been seen in the Soviet Union, for example, a welfare state was built up. They had built up a welfare state decades before we did. Part of that was an insurance model like the National Health Service in the UK, for example, but it also included pension benefits and so on.
There are drawbacks with the social insurance model, of course. For example, the original social insurance model was very much based upon the male breadwinner, and often the benefits did not necessarily go to the spouse, or to women or whoever it might have been. Broadly speaking, the way it works is that all the money is collected, it is put into a pot, and then workers gain benefits in terms of health care, pensions, unemployment benefits and so on, which insulate them. It is effectively an insurance mechanism for when things go wrong.
Paul Gavan (Sinn Fein)
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On that point, is the fact that so many workers in Ireland do not have any pension coverage, for example, a direct result of not having that social wage model in place?
Dr. Tom McDonnell:
It is partially related to that. If we had a strong social insurance system whereby all workers and their employers were paying in, it would allow us to have a more robust system of pension payments for former workers. Part of the problem in the Irish case, of course, is that many women have a very spotty employment history, often because women are the ones who engage in child care. They often leave the workplace for a number of periods of time, and that means that their contributions are not sufficient.
Mary Butler (Waterford, Fianna Fail)
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I am worried that are we going off the subject of the cost of doing business because-----
Paul Gavan (Sinn Fein)
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Sorry, I have one last question-----
Mary Butler (Waterford, Fianna Fail)
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It is more about ideological tendencies-----
Paul Gavan (Sinn Fein)
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That is okay; I am proud of them. I want to ask one last question directly on the cost of business.
Mary Butler (Waterford, Fianna Fail)
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Please do.
Paul Gavan (Sinn Fein)
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I thank the Chair for her indulgence. Could Dr. McDonnell speak about productivity levels? It is important to clarify how well Irish workers and Irish companies are doing in comparison to our EU competitors.
Dr. Tom McDonnell:
I can answer that directly. Broadly speaking, productivity growth in the West has been between 1% and 1.5% since World War II. It has deteriorated in the last ten to 20 years, however, because of the changing composition of the economy. Ireland's productivity growth was higher than other countries in the West up to about 2007 and 2008. There was a major catch-up effect associated with that. As the Organisation for Economic Co-operation and Development, OECD, says, there is now marginal scope for productivity catch-up, although it says there is some scope for higher labour resource utilisation, which I discussed earlier. What we have seen in the last couple of years is that, allegedly, Irish productivity has exploded. However, it has exploded in regard to the onshoring of intellectual capital.
That means that when one looks at unit labour costs in Ireland, they have come down dramatically across the economy vis-à-visother European states. However, it is a chimera, essentially, and unfortunately the headline unit labour cost statistics are now broken in Ireland. What I can say, however, is that the labour cost index has only increased by 3.1% in Ireland since 2012, and has increased by about 20% in Germany and the Netherlands. Ireland is now in the top one third of Organisation of Economic Co-operation and Development, OECD, countries for productivity. That means we are a high-productivity economy. That means there is limited scope for catch-up with the United States in management best practice and so on. What it means, however, is that if one wants productivity gains in the future, and that is not to say that we should not continue to pursue those, it will have to be based upon having a robust innovation system whereby we are generating new ideas ourselves, and putting them into practice in new businesses, whether they are high-potential startups rolling out of the universities, or something different. Unfortunately, we know that the technology diffusion mechanism in Ireland, as in other western European countries, has now broken down. We are seeing productivity growth in the multi-nationals, but they are locking that up through a system of patents. We are not seeing productivity gains in small and medium enterprises, whether in Ireland, other European countries or, indeed, America. It is not specifically an Irish problem. It is now an international problem. There are things that one can do, but broadly, we have not been doing well on productivity from small and medium enterprises in the West in the last ten years.
Mary Butler (Waterford, Fianna Fail)
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I call Deputy Neville.
Tom Neville (Limerick County, Fine Gael)
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I have a quick query on the Nordic countries. On what basis is their economy built? Dr. McDonnell has given us some of the history of the church looking after education, health, etc. in Ireland. However, Norway has oil. We do not.
Tom Neville (Limerick County, Fine Gael)
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That is a huge factor in how it does its business. Some of the Benelux countries are more financially oriented. Are their economies built more on financial services?
Tom Neville (Limerick County, Fine Gael)
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The witness has made the very broad statement about the Nordic countries versus Ireland. I would like to know more about the environmental background, because looking at it from the macro perspective, we would all go in that direction. However, the background we have does not include the raw materials they would have. In the public interest, I would like something about the environment of these economies to be articulated.
Mary Butler (Waterford, Fianna Fail)
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Dr. McDonnell, I agree with Deputy Neville. I would be interested to hear your reply.
Dr. Tom McDonnell:
Their institutional architecture is very different to ours, and obviously path dependence is a huge element here. Nobody is saying that Ireland can turn itself into Sweden or Denmark overnight. It would be impossible. It would be politically and economically impossible to do it overnight.
Tom Neville (Limerick County, Fine Gael)
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It would be a huge step.
Dr. Tom McDonnell:
We are talking about a generational shift that would involve extremely difficult choices. We are talking about countries which have much higher tax rates than we do, and much larger social safety nets. They have built this up from the first half of the 20th century. It is something that is built up over time, essentially as a three-way partnership between the state, employers and the broader labour movement. Essentially, the agreement was to focus on labour peace in return for reinvestment in the economy by business and large contributions by business towards employee education, child care and so on. That then provided what became known as the social democratic welfare state, which allowed a high level of human capital to be generated. By human capital I mean low levels of poverty and high levels of education, so that there is a very highly qualified workforce, which of course takes decades to build. There are also high value-added industries. They are paying their workers a lot of money, but they are high value-added. Deputy Neville is dead right about Norway. Norway has oil. I would not count Luxembourg as a Nordic country, but there is also Denmark-----
Tom Neville (Limerick County, Fine Gael)
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Did Dr. McDonnell mention the top ten?
Dr. Tom McDonnell:
There is Denmark, Sweden and Finland as well. None of those countries would be particularly resource-rich. A point was made earlier about the knowledge economy.
In the future productivity gains will really be about knowledge. Having an educated workforce in which nobody falls behind because of poverty will be key. In terms of the enterprise environment, achieving productivity gains to allow everyone to benefit in the way previous delegates discussed will mean sustained long-term investment in education and research and development. The level of investment in research and development on a per capitabasis is two thirds of that in the United States which is considered to be a low-tax and low-spending economy but it spends much more than Ireland on research and development. The Netherlands spends twice as much per person on research and development, while Denmark spends three times as much. These countries are investing in new ideas and innovations and will generate new high value businesses. Many will fail - many in Ireland will also fail - but in these countries more businesses will be generated. There are more ideas coming through because of which they have a more educated and qualified workforce. Unfortunately, all of this costs money, but that is the deal between employers and employees. The employers are saying they will invest more in their workers. The countries mentioned also have great infrastructure, of course, which helps to reduce costs. In Ireland one can travel from Maynooth to Dublin and essentially be a sardine. That model required a long period of trust building. It also required buy-in from all parties in order that there would be something in it for everyone. Employers gained a high quality workforce; employees achieved a high standard of living and a high wage, while for the state there were low levels of poverty and high levels of GDP. Ireland could not do the same overnight, of course. Its model was based on attracting US multinationals and it was very successful in doing so, but it has not been successful in developing indigenous enterprise. The Deputy asked about Denmark. A much higher proportion of its exports come from small and medium enterprises in its indigenous sector. It has very successful small and medium businesses. It also tends to do well in areas such as wind energy where we have not really pushed out the envelope.
Tom Neville (Limerick County, Fine Gael)
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I asked about the differences between the Irish and Danish economies in the context of Ireland's dependency on foreign direct investment, the size of the two countries, legacy issues related to raw materials and the platform from which Denmark's success had sprung. The partnership has been in place for some time. What was its economic base, compared to that in Ireland? Perhaps we are moving off the point a little, but-----
Mary Butler (Waterford, Fianna Fail)
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We are. I am going to allow a little latitude, but we are moving off the point. The purpose is to look at the cost of doing business in Ireland.
Tom Neville (Limerick County, Fine Gael)
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We will talk about the debate on the cost of increasing salaries and productivity. To what extent are the Nordic countries depending on foreign direct investment, as opposed to Ireland?
Tom Neville (Limerick County, Fine Gael)
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What is the biggest market for the Nordic countries?
Tom Neville (Limerick County, Fine Gael)
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There is also an embargo with Russia, but would it have previously been a market for Nordic goods?
Tom Neville (Limerick County, Fine Gael)
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I apologise for moving off the point, but it was the way the debate was going.
Niall Collins (Limerick County, Fianna Fail)
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Will Dr. Rigney recap on the key findings of his report on executive pay levels, including the key findings and recommendations he made? I have no objection to or issue with transparency. It is important to look at the environment in which we are operating.
We are subject to a high degree of scrutiny and transparency. I despair some mornings when listening to the radio. A few months ago there was a piece on "RTE Investigates" which claimed to reveal the costs of salaries for the Oireachtas. If the researchers had looked at the Oireachtas website, they would have found that information at the click of a button and taxpayers would not have to fund an investigations unit to look into Deputies. Can the witness tell us what his key findings were and what he is recommending, and how those recommendations will impact on the cost of business?
Niall Collins (Limerick County, Fianna Fail)
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Does that mean listed on the Stock Exchange?
Dr. Peter Rigney:
Yes, listed on the ISEC index on the Dublin Stock Exchange. Otherwise there is a veil of corporate secrecy. There are other people, who I will not name, who have to be taken into account. The report found significant levels of increase in pay, made up by a decrease in basic pay and an increase in what are known as long-term investment plans. It is almost impossible to compare one of these to another, because they are weighted in different ways. The report named good practice when we saw it and commended companies for reporting in a particular way. It made the point that companies listed in Dublin have to concur with the London Stock Exchange code of practice. There is much dissatisfaction on the London exchange in terms of executive pay in Britain. The issue came up in Teresa May's first speech as Prime Minister, although she subsequently drew back from it. That issue is still causing anger in the London system, and it will appear in the Dublin exchange. ICTU intends to update that report annually, and will be producing a new report around the turn of the year. That pressure will, if anything, become more intense. This year we have added Irish companies which are listed in London but not in Dublin.
In terms of the cost of doing business we are talking about a small number of people, but it causes a demonstration effect within the economy as a whole. SMEs and owner-managers do not figure in that. However, a man who described himself as a grandee of the London Stock Exchange said that people who are essentially managerial employees are reaping the rewards of corporate entrepreneurs who have put their house or their wealth on the line. That is the disconnect.
One of the things that I have always been impressed with is the quality of the Oireachtas research service. If I am a business owner and my truck driving contractor allows three crates of food to rot through lack of due diligence and I want to sue it, what is the cost of settling that claim in a selected number of countries? If I have an insurance claim for a given injury, what is the cost of settling that in a number of countries? These are the "unknown unknowns", to quote Donald Rumsfeld, but they present very significant costs to businesses. How much does public liability cost in Britain and Denmark and what does it have to be insured against? From speaking to SME owners, insurance is a key issue. Much of the responsibility for this is in the hands of the insurance industry. It can organise its work more collaboratively - having regard to the rights of data protection - to monitor claims, etc. Perhaps it is not for me to say, and I hope that I will not be cited for contempt or anything, but the Oireachtas research service is very good, and perhaps there is a job of work for it in this area. There are other costs besides the usual suspects of labour costs and tax.
We are a republic. The first republic in modern times was conceived in America in 1776, with the slogan, "No representation without taxation".
There is an implicit link between paying tax and being a citizen. They are two sides to the same coin. If there is one concept that needs to be driven out of public life, it is that of a burden of taxation. Taxation is a part of citizenship. If one does not like how one pays one's taxes or what they are spent on, there are representatives, such as members of the committee, with whom one can have that debate. It is not a burden but an aspect of citizenship. The phrase "burden of taxation" needs to be driven out of the public discourse.
Mary Butler (Waterford, Fianna Fail)
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I thank the witnesses for engaging with the committee today. This is the second in a series of meetings the committee will hold on this topic. We will take on board the comments about the library service, which is excellent.