Mr. Neil McDonnell:

I thank the Cathaoirleach and ISME thanks the joint committee for this opportunity to address it on these challenges. The first challenge for domestic SMEs that ISME identifies is the fact that Irish industrial policy is structured around large businesses, and more specifically foreign-owned large businesses. While this has been a great success in terms of GDP growth and the amount of corporation tax the State earns, it has come at the expense of a far less productive domestic sector. This results in our industrial and taxation policies, our research and development policy and our policies on remuneration, motivation and retention of staff being optimised for big business. We have excellent agencies in the form of the Industrial Development Authority, IDA, and Enterprise Ireland overseeing industrial development, but the former is focused on foreign direct investment, FDI, and the latter on exporters and high-performance start-ups, despite the fact that both represented a mere 1% of Ireland’s 279,000 active enterprises in 2020. While the Department of Enterprise, Trade and Employment’s White Paper has allocated responsibility for the small enterprise, the ten to 50 employees sector, to the local enterprise office, LEO, network, we have reservations as to whether the LEOs have the capacity and capability to adequately look after this sector.

The second challenge flows from the first and is the fact that the success of the FDI sector means it is expanding at a far faster rate than the domestic sector. The Central Statistics Office, CSO’s, 2021 national accounts show a GDP of €426 billion compared with a gross national income, GNI, of €231 billion, a divergence of 46%. In simple terms, this means the output of the FDI sector is almost approaching that of the remainder of the Irish economy. In one respect this is good, generating high employment, high wages and high corporation tax returns. On the other hand, it risks regulatory capture and pricing or crowding domestic enterprise out of our own economy. We have seen recent examples of this with the energy network rebalancing mechanism for large energy users, which meant they paid less for electricity than consumers did, and the special assignee relief program, SARP, which works well for big business, while the key employee engagement program, KEEP, for small businesses does not work at all. However, this fixation on FDI means we undervalue our domestic enterprise sector. The FDI sector makes a huge contribution to Ireland but in net national product terms, the domestic sector contributes three and three quarter times more to the Irish economy. This is principally down to employee remuneration. While employees of FDI operations typically earn a substantial income premium over those in domestic businesses, there are fewer of them and they are geographically concentrated in the urban conurbations. SME employers on the other hand are everywhere. The State also excludes SME employers from the Labour Employer Economic Forum, LEEF, despite the fact that they make up the vast majority of employers in the State and account for the majority of employees.

The third challenge and arguably the most important one is that of our domestic costs and competitiveness. In 2022, Ireland had the dubious privilege of overtaking Denmark as the most expensive EU country for consumer prices. Denmark has a land border with the largest economy in Europe, a luxury Ireland lacks. Our VAT rates are also high by EU standards, even at the currently reduced rate of 9% for services. We believe not only in the retention of the 9% VAT rate but in its extension to the whole services sector. The 23% rate should revert to its historical 21% level. Some service businesses such as early years childcare represented here today must pay these exorbitant rates of VAT, while being incapable of recovery of VAT paid. Despite a significant amount of legislative activity over the past four years, insurance costs remain high. Reforms to date have made a minimal impact on motor insurance and there are signs that motor premiums are beginning to rise again. Employer and public liability insurance costs have not declined and excessive premium cost remains an issue, as does non-availability of cover or a single, take-it-or-leave-it quotation from one underwriter in certain sectors. We need to see action by the Judiciary on perjury and we need rapid progress on Defamation Act reform, we need Personal Injuries Assessment Board, PIAB, reform, duty of care reform, and reform of legal costs.

Regarding the Review of Administration of Civil Justice report completed by Mr. Justice Peter Kelly, we endorse the minority report by Mr. John Shaw, Mr. Liam Gleeson, Ms Oonagh Buckley, and Mr. Kevin Fidgeon, which recommended the setting of fixed maximum costs charges and rates. We look forward to the publication of the Indecon study into legal costs later this year. We will be happy to answer any questions members may have.