Ireland Losing Competitiveness, Academic Claims

by Jason Gorringe, Tax-News.com, London

07 June 2010

Improving Ireland’s investment environment is critical to staving off a prolonged recession, leading economist, Constantin Gurdgiev of Trinity College, Dublin, told a recent forum.

Amid talks of an imminent recovery, in line with improving economic conditions globally, Gurdgiev said that Ireland continues to face several crises, and will continue to do so unless the government enhances the country’s tax regime to attract "investment in human capital."

“Ireland is ten quarters into twin crises of credit contraction and house price declines which will last for 33 quarters unless radical policy changes are made,” Gurdgiev said, speaking at the annual national conference of the Institute of Certified Public Accountants (CPA).

Noting that Ireland’s deficit is greater than in any other indebted European country, Gurdgiev told the conference that “the structure of our fiscal spending is working against us. Fiscally we have excessive structural deficits of 50-60% of the total deficit and, courtesy of the banks we are now accumulating off-balance sheet structural deficits. Our deficits are the worst in the Euro Zone.”

According to Gurdgiev, compounding these crises is the fact that Ireland has the least competitive economy among these indebted Euro Zone countries in terms of relative unit labour costs. “We haven’t been competitive since at least the mid-1990s”, he contended. “While the latest data from the Irish Central Bank provides some grounds for optimism on the competitiveness front, regaining our overall competitiveness compared to other small open economies around the world will require more hard choices on public sector reforms and restructuring of our public utilities and semi-state service providers.”

On the other hand, Ireland does have a healthy exporting sector dominated by multinational companies, he said, adding: “But it is struggling against uncompetitive capital, public services and utilities markets, has no credit support and is suffering from capital flight and assets downgrades. Our exporting sector alone cannot carry this economy out of the hole. We are in for a structural recession; unemployment will remain high and employment will continue to fall.”

Looking at the international picture he claimed there will be a decreased pool of foreign direct investment and portfolio investment for Ireland to compete for and there will also be a decreased appetite among investors globally for an ‘Irish story.’ “Firm fundamentals will matter in future. In addition, competition for foreign direct investment and portfolio investment amongst the smaller EU states will heat up and as investment diversification becomes more important the flight of capital from Ireland will be significant,” Gurdgiev claimed.

Gurdgiev told the CPA Annual Conference that he did see some opportunities for Ireland’s exporters in the near term, however, particularly among those countries experiencing a relatively high speed recovery - primarily in rapidly developing emerging markets in parts of Asia and to a lesser extent Latin America.

“There is a substantial continued demand for investment in major public infrastructure in these countries,” he said. “These regions are likely candidates for products and services from Ireland, but Irish firms need a differentiator in entering these markets. They have to attract and deploy top talent and deliver meaningful gains to local and foreign clients investing in these regions, while offering the legal and counterparty security of being domiciled in Ireland. The most likely pathway to these markets is by partnering in broader joint ventures with local providers in the countries themselves.”

Growing the knowledge economy in Ireland is the long-term solution to Ireland’s economic problems, Gurdgiev argued, stating: “We have no choice but to develop our higher value-added, traded services sectors. This is the real ‘knowledge’ economy. But our prospects are not guaranteed here. The knowledge economy is human capital intensive and our taxation system creates no incentives to invest in human capital. We need to become more human capital focused.”

“This requires a maximum flat rate income tax of 20%; a shift of the tax base to property; closing the welfare trap; and reducing the fiscal burden”.

“We used to have a more productive and balanced economy,” Dr Gurdgiev observed, concluding that: “We need a productive knowledge based services economy next.”

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