The Cost of Doing Business 2019 Report has just been released by the National Competitiveness Council.
The Council defines national competitiveness as the ability of enterprises to compete successfully in international markets. This is a significant factor influencing economic growth, jobs, wage rates and the quality of public services. The report looks at the labour, property, transport, utility, credit and other costs affecting individuals and business alike. Here is a summary of the 59 page report published in April 2019.

Labour costs in Ireland are broadly in line with the euro area average. The total hourly labour cost in Ireland was €30.90 in 2018, which was lower than the corresponding figures for Denmark, Sweden, France and Germany. However, it was higher than the total hourly labour cost in the UK (€25.70). The last data shows that Irish labour costs increased by 2.9% in 2018 – which is concerning as it is four times higher than the inflation rate. Labour costs vary considerably between sectors. In Ireland, labour costs are highest in the utilities sector (€55/hour) and are lowest in the accommodation and food sector (€16/ hour). In most sectors, labour costs were greater than, or equal to, the UK. The tax burden, as a percentage of labour costs for a single individual earning the average wage stood at 27%, which is below the OECD average (36%) and the UK (31%). The tax burden, as a percentage of labour costs, for Irish married couples (with two children) earning the average income was 11% of labour costs, while the corresponding figure in the UK was 26%. While the Irish average tax rate for those earning the average income is very competitive, the marginal tax rate these earners face tells a different story. In Ireland, a person earning the average wage pays the second highest marginal tax rate (49%) of the countries examined. High earners (those earning 167% of the average wage) face the same rate in Ireland as those earning the average income (49%), which means Ireland becomes more competitive relative to the Scandinavian countries where marginal rate increase dramatically for people in this bracket.

Property Costs

Over the last year, there has been a steady increase in commercial property prices and the cost of constructing office space. In the office rental market, in the last five years, prices are up 15.9% in Dublin (Suburbs) and up 16.5% in Galway. The Jones Lang La Salle Property Index suggests that prices in the Irish commercial property market continued to grow at a relatively steady pace, with capital values increasing by 3.1% in the year to Q4 2018. The capital values of office (1.5%), retail (5%), and industrial (5.3%) property all increased over the same period, and vacancy rates in Dublin stood at 7.4% in Q4 2018 (a fall of 1.7% from Q3). The rental price of prime office space varies greatly across Europe. In Q4 2018, office rental in Dublin cost €646/m2. This was lower than Paris (€810/m2) and London City (€804/m2), but considerably higher than Amsterdam (€450/m2), Berlin (€396/m2) and Brussels (€275/m2). According to Turner and Townsend, Dublin is one of the most expensive cities in the world in which to construct prime office buildings. In 2018, the construction cost per square meter of a prime office building in Dublin was $3,065/m2, lower only than London ($3,919/m2) among the major cities measured. Similarly, construction costs for a high-tech factory in Dublin ($2,679/m2) is comparable to London ($2,812/m2), and costs in Dublin have risen by 27% from 2013 to 2018.

Transport Costs

In recent years, aggregate transport sector prices in Ireland have increased moderately. Prices in all transport sectors (except sea and coastal transport) have steadily increased, with postal and courier services recording the highest price increase, followed by warehousing, storage and cargo services. In 2018, the average price per litre of petrol and diesel were €1.43 and €1.34 respectively. Prices of both petrol and diesel have fallen off since their peak. Petrol prices in December 2018 (€1.43/litre) were 4.6% lower than the peak in November 2018 (€1.50/litre). Similarly, diesel prices were down by 2.8 % December (€1.36/litre) compared to the peak in October (€1.40/litre). Over the course of 2018, petrol prices increased by 2.8% and the price of diesel increased by 4.6%. After increases at the start of the year, bus and taxi fares remained stable, but fares on other purchased transport services have increased significantly (3.9%), since the start of 2017. It is not only transport costs that have been on the increase. Traffic has increased across the road network by 3%. In the Border and Mid-West regions, traffic increased by almost 4% in 2017. Heavy goods vehicle traffic in the South East and Dublin increased by 4.6% in the same period. The increased congestion is supported by the fact that 11% of all commuters spend an hour or more commuting to work in 2017.

Utility Costs

Certain utility costs (including electricity and gas) tend to be higher in Ireland than other jurisdictions, while Ireland is more competitive regarding other utility costs (telecoms). The EU is among the most expensive locations for electricity and gas globally – and within the EU – Ireland is one of the most expensive countries for electricity for both large and small users. In S1 2018, electricity in Ireland (for those in the low consumption band) cost €0.14/ kilowatt-hour, which is higher than both the UK (€0.12/ kilowatt-hour) and euro area average (€0.10/ kilowatt-hour) price. In the higher consumption band, Irish consumers are still paying more (€0.09) compared to the euro area average (€0.08) but lower than UK (€0.11). Gas prices in Ireland are in line with the euro area average but higher than the UK prices. Ireland is relatively cost competitive for telecoms. In Q4 2018, the Business Fixed Broadband 60GB Basket (>25Mbps) cost in Ireland (€42.56) was lower than the UK (€44.4) and slightly above the Netherlands (€41.9). However, the high post-paid mobile broadband costs in Ireland (€30) compared less favourably to the UK (€13.71).

Credit and Financial Costs

Businesses in Ireland face higher interest rates than the average business in the EU, or the euro area. This is a consistent feature of the data regardless of intrinsic features of the loan, whether it is large or small, or whether it is for a short or long duration. However, this was not always the case. In 2014, Irish companies faced a similar interest rate (around 3%) to their counterparts in Germany and France, but while the average rate businesses face has dropped in these economies (to around 2%), overall Irish companies face higher rates now (3.3%) than they did in 2014 (3%). For Irish SMEs, the average interest rate is 3.4%, but there is considerable sectoral variation. SMEs in the transport and storage (4.2%), construction (4%), and ICT (4.2%) sectors are all higher than average interest rates, and the rates on gross new lending for Irish transport and storage SMEs stood at 5.1% as of September 2018.

Business Services and Input Costs

In Ireland, the overall price of services is rising much faster than the price of goods. In total, the price of services has increased by 7% since 2015, but this masks widely different changes in the price of certain services. For example, the price of warehouse, storage and cargo handling services increased by 6.2%, while sea and costal transport prices declined by 0.2%. When compared to other EU countries, services prices are rising relatively quickly in Ireland, with Luxembourg being the only economy measured where services prices increased faster than Ireland. In Denmark, services producer prices declined since 2015, and are now around 4.5% lower than they were in 2015. Insurance costs, which increased rapidly in Ireland from 2013 to 2016, have decreased since the end of 2016. The price of car (and other transport) insurance is now roughly what it was in 2015 (like the EU and euro area average).

Residential Property and Childcare Costs

Real wages are the key measure of how well-off a person feels –real wages account for what a person can buy with the wages they receive – and so consider price changes. If prices are increasing faster than nominal wages, then real wages are declining, and people are becoming less well off. The Competitiveness Council have decided to include a chapter that looks specifically at residential property costs and childcare costs given the importance of these items and because of their impact on wage pressures, and the competitiveness of firms and of Ireland as a place in which to do business. Residential property prices have been growing consistently across the country since a low point in early 2013. Property prices are now roughly where they were at the start of 2005. Irish rents have also been growing since 2013 and have been increasing by over 5% per annum for the last four years. According to the Residential Tenancies Board, the average rent in Dublin was €1,527 in Q1 2018. Childcare costs are higher relative to other EU Member States. According to the OECD, net childcare fees (i.e. when childcare benefits and any tax reliefs are considered) in Ireland make up 28% of the average wage of a couple. This is much higher than the EU average, where net childcare costs account for only 12% of the average wage of a couple. As housing and childcare are necessities for working people, these increases in price put pressure on wages. This is something we are starting to see in the nominal labour cost data (which have increased by 2.9% in 2018),which is higher than the inflation rate. Higher real wages are certainly a positive development, but real wage increases need to be matched with increases in productivity to prevent either domestic prices from increasing faster, or an erosion of the Irish competitiveness position.

Why Costs Matter

Generating broad-based, sustainable economic growth is fundamental for Ireland’s economic prosperity. As a small open economy, it is crucial that Ireland’s international competitiveness position is maintained relative to our key competitors. Competitiveness is a complex concept, which results from many different factors. Two of the most important factors determining competitiveness performance are productivity (i.e. the efficiency with which factors of production – such as labour and capital – are used to produce output) and cost competitiveness (i.e. the relative price of employing any given factor of production). An improvement in either of these elements – productivity growth, or relative price improvements – allows Irish businesses to compete more effectively internationally and as a result makes Ireland a more favourable place in which to locate international businesses. This exposure to international competition, and international best practice, can result in further productivity gains.

A high cost environment weakens competitiveness in several ways:

▪ High costs make Ireland less attractive in terms of mobile investment and business expansion, if unchecked this could see companies relocating to other jurisdictions;

▪ Higher costs can make firms less competitive when they are selling into foreign markets – this is a concern for indigenous goods and services exporters;

▪ High costs in areas such as childcare and transport, and a high marginal tax rate, can affect incentives to work and suppress labour force participation; and,

▪ A high cost environment can impact on firms which may not export, but which rely on the domestic market – their customers (consumers and other firms) may source cheaper inputs from abroad due to currency fluctuations, rather than from within Ireland, leading to a loss of market share for Irish-based enterprises.

More broadly, all sectors of the economy are interlinked and interdependent – high and increasing business costs have implications for the costs of living. These in turn have knock on implications for wage demands, and so the cycle continues. It remains vital, therefore, that Ireland protects the gains made to date, and that we continue to act to address in appropriately high costs (i.e. where price increases are not matched by corresponding increases in productivity) wherever they arise. In this regard, there is a role for both the public and private sectors alike to proactively manage their cost base and drive efficiency, thus creating a virtuous circle between the costs of living, wage expectations and cost competitiveness.

You can read a full report here.