Costs of Doing Business in Ireland 2018 June 2018
Introduction to the National Competitiveness Council The National Competitiveness Council (NCC) reports to the Taoiseach and the Government, through the Minister for Business, Enterprise and Innovation on key competitiveness issues facing the Irish economy, and offers recommendations on policy actions required to enhance Ireland’s competitive position. In March 2018, the Government mandated the NCC as Ireland’s National Productivity Board responsible for analysing developments and policies in the field of productivity and competitiveness. Each year the NCC publishes two annual reports: ▪ Ireland’s Competitiveness Scorecard provides a comprehensive statistical assessment of Ireland's competitiveness performance; and ▪ Ireland’s Competitiveness Challenge uses this information along with the latest research to outline the main challenges to Ireland’s competitiveness and the policy responses required to meet them.
As part of its work, the NCC also: ▪ Publishes the Costs of Doing Business where key business costs in Ireland are benchmarked against costs in competitor countries; and ▪ Provides an annual Submission to the Action Plan for Jobs and other papers on specific competitiveness issues.
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National Competitiveness Council Members Professor Peter Clinch Chair, National Competitiveness Council Pat Beirne Chief Executive Officer, Mergon Group Kevin Callinan Deputy General Secretary, IMPACT Trade Union Micheál Collins Assistant Professor of Social Policy, University College Dublin Isolde Goggin Chair, Competition and Consumer Protection Commission Cathríona Hallahan CEO/Managing Director (Ireland), Microsoft David Hegarty Assistant Secretary, Department of Business, Enterprise and Innovation Jane Magnier Joint Managing Director, Abbey Tours Fergal O’Brien Director of Policy and Chief Economist, Ibec Seán O'Driscoll President, Glen Dimplex Group Margot Slattery Country President, Sodexo Ireland Martin Shanahan Chief Executive, IDA Ireland Julie Sinnamon Chief Executive, Enterprise Ireland Ian Talbot Chief Executive, Chambers Ireland Patrick Walsh Managing Director, Dogpatch Labs Jim Woulfe Chief Executive, Dairygold Co-Operative Society Limited
Council Advisers John Conlon Department of Employment and Social Affairs Patricia Cronin Department of Communications, Climate Action and Environment Kathleen Gavin Department of Education and Skills John McCarthy Department of Finance Conan McKenna Department of Justice and Equality David Moloney Department of Public Expenditure and Reform Ray O’Leary Department of Transport, Tourism, and Sport John Shaw Department of the Taoiseach Kevin Smyth Department of Agriculture, Food and the Marine David Walsh Department of Housing, Planning, Community and Local Government
Research, Analysis and Secretariat Marie Bourke Department of Business, Enterprise and Innovation Teodora Corcoran 23 Kildare Street, Dublin 2, D02 TD30 John Maher Tel: +353-1-631-2121 Email: [email protected]
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Table of Contents Introduction to the National Competitiveness Council 2 Table of Contents 4 Executive Summary 5 Recent Trends in Cost Competitiveness 7 Chapter 1 – Introduction and Methodology 16 Chapter 2 – How Do Costs Impact on Enterprise? 18 Chapter 3 – Exchange Rates and Harmonised Competitiveness 28 Chapter 4 – Labour Costs, Earnings and Tax 30 Chapter 5 – Property Costs 43 Chapter 6 – Transport Costs 477 Chapter 7 – Utility Costs 52 Chapter 8 – Credit and Financial Costs 57 Chapter 9 – Business Services and Other Input Costs 60 Chapter 10 – Broader Costs Environment 66 Chapter 11 – Focus on Residential Property and Childcare Costs 70 Appendix 1 – NCC Policy Recommendations on Costs 2017 78
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Costs of Doing Business 2018
Executive Summary
The Cost of Doing Business is a key element of Ireland’s relative international competitiveness. While Ireland experiences strong economic growth, the openness of the economy means the enterprise sector is particularly vulnerable to negative price and cost shocks that are outside the influence of domestic policymakers. These include unfavourable exchange rate movements, higher international energy prices, imported inflation from our major trading partners, or an interest rate shock. Ireland is a relatively competitive location in which to do business. However, several downside risks have already emerged that could undermine national competitiveness, growth and living standards. Brexit underlines the importance of keeping costs down to mitigate the effects of continuing uncertainty and unfavourable exchange rate movements. This is a key element to facilitating firms to stay competitive in international trade. Increasing business costs reduce the competitiveness of enterprises based in Ireland and our attractiveness as a location for mobile investment. It is imperative that Government continues to place competitiveness at the heard of our Brexit response and prioritises policies and actions that are within Ireland’s control to enhance cost competitiveness. As the pressure on costs increases, it is critical that domestic policies do not contribute to overheating. While consumer price inflation is subdued, this is largely due to currency effects and is likely to increase in 2018 and beyond. Ireland remains an expensive location in which to do business with a price profile which could be described as “high cost and rising”. Largely driven by services price rises, Irish consumer prices in 2017 are 23.7 per cent above the EU average. Persistently high rates of consumer prices lead to expectations of further price increases, and can create a vicious circle of increasing prices, reducing real incomes, increasing wage demands and reduced international cost competitiveness. Considering the main cost categories, labour cost growth has remained modest in recent years and below the growth experienced in both the UK and the EU28. However, this masks considerable divergence at sector level. As the economy nears full employment, skills shortages and gaps are likely to emerge and it is likely that wages will rise at a faster pace in 2018 and into 2019. Competitiveness will be negatively affected if growth outpaces productivity levels and growth rates in competitor countries. As the labour market tightens further, upward pressures on labour costs can be expected in several sectors as skills shortages have emerged and these, in turn, have some knock-on implications for wage demands. Retaining employees, particularly in SMEs, poses difficulties. Certain skills needs are becoming more pronounced as indicated by increased job vacancy rates in professional, scientific and technical services, financial, insurance and real estate services and ICT. Skill shortages have the potential to create wage inflation and could impact on enterprise competitiveness. Measures to encourage labour force participation levels remain important for alleviating labour cost pressure and increasing the availability of talent. With the labour market approaching full employment, improving the quality of life and the creation of an attractive environment to live and work is particularly important in increasing labour market participation rates, mobility of workers and ensuring Ireland is an attractive location for talent. The delivery of a suite of competitively priced world-class infrastructure (e.g. energy; telecoms; transport – road, public transport, airport, seaports; waste and water) and related housing is critical to support competitiveness in the medium term. In this regard, well planned infrastructure, including sustainable housing, high quality public transport and adequate water infrastructure provides people with the opportunity to live near their work and enjoy quality of life, reduces traffic congestion and increases productivity. The return to economic growth and Ireland’s high dependence on car usage has increased pressure on the transport infrastructure capacity, which manifests itself in increased journey times, traffic congestion and increased emissions. These are pinch points for business and workers that not only affect existing firms, but also impact the State’s attractiveness as an investment location and as a location providing wellbeing of its citizens.
5 A well-functioning property market also enhances the competitive performance of our cities and towns, improves quality of life, and attracts overseas talent. The availability of competitively priced property solutions is also a key requirement for enterprise. Commercial prices in Ireland compare favourably to comparable cities in the UK and Europe. However, strong rental growth can be observed, particularly in office accommodation. Increasingly, the shortfall and affordability of residential housing affects Ireland’s ability to attract and retain talent, and can indirectly impact on enterprise costs and influence the competitiveness of Irish goods and services. High rents affect decisions around labour mobility, entering employment and expansion of operations by enterprises, therefore they are a significant infrastructure impediment, particularly in urban areas. Prices in Ireland remain relatively high and rents push the cost of living out of line with other developed European economies. Despite an increase in construction activity, strong demand means property price inflation is likely to continue. It is well understood that a significant increase in supply is urgently required. Insufficient access to affordable, full-time childcare in Ireland is a factor in deterring female labour market participation. The availability of financially accessible, high quality childcare would help to address skills shortages and would improve Ireland’s overall attractiveness as a location to work and live. The supply and demand for credit has improved significantly since the crisis. However, the cost of credit remains relatively high, particularly for SMEs. The determinants of cost are complex, but the concentrated lending market coupled with higher credit risk premiums in Ireland has led to higher interest rates. The impact of an interest rate shock on borrowing costs and the wider economy could be significant. It is important that debt levels continue to be reduced. Increasing competition in the lending market and further diversifying the funding models remain key medium-term challenges. The absence of data means it is not possible to ascertain Ireland’s relative performance across aspects of the enterprise cost base. Items such as local authority commercial rates, water, refuse, banking and legal charges can significantly affect enterprise competitiveness, particularly for small and micro enterprises. A range of hidden costs, including costs associated with planning and payment delays, labour law compliance, transaction costs, cost to export and insurance costs, particularly in relation to cost attributable to employers, remain a cost pressure point for business. In the case of water rates and the costs of congestion and inadequate infrastructure, costs can be difficult to measure at a micro level. There are limits to the extent to which policymakers or regulators can, or indeed should, intervene to influence prices in competitive markets. However, it is important that price developments in these areas are kept under review by appropriate bodies. Well targeted State intervention to address deficiencies in infrastructure provision and address market failures remains important. However, it is vital that policy interventions are not pursued in a piecemeal or short-term way. Measures that ensure price transparency are essential. Reforms that enable markets to work more efficiently are the key policy mechanism to realise improvements in cost competitiveness. The Council emphasises the continued importance of both the public and private sectors proactively managing their cost base and driving efficiency. Improving firm level productivity must assume a more prominent role in driving competitiveness. Despite intense global competition, the trajectory of Ireland’s competitiveness performance has in recent years been positive. Growth is robust and has resulted in employment growth across a range of sectors and a more favourable fiscal balance. The exporting sectors of the economy continue to perform strongly and many of Ireland’s traditional strengths (such as our openness to trade, highly skilled and adaptable workforce, and stable pro-enterprise administrative and regulatory frameworks) remain. It is important that the conditions for future competitiveness are put in place. As a small open economy, any deterioration in our cost competitiveness will have a major negative impact upon economic growth, employment, and our standard of living. Addressing the treatable causes of erosion in cost competitiveness must continue to be an urgent economic priority for both enterprise and Government.
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Recent Trends in Cost Competitiveness
In terms of business costs, as a small open economy dependent on exports and foreign investment as major drivers of growth, our relative cost competitiveness is a significant determinant of our overall competitiveness, and ultimately of our economic prosperity, employment, and our standard of living. High business costs make Ireland less attractive for mobile inward investment and reduce the competitiveness of Irish enterprises’ goods and services trading in both domestic and international markets. More broadly, a more competitive cost base can help to create a virtuous circle between price inflation, wage expectations and cost competitiveness.
Labour Costs Based on the summary cost profiles considered in Chapter 2, the cost of labour may be considered as the most significant driver of business costs for most firms – particularly for services firms. Since labour costs are generally the most significant cost component for most firms, the relationship between labour costs and consumer prices is a major determinant of Ireland’s overall cost competitiveness. Overall, despite robust growth in employment, labour cost growth has remained modest in recent years and below the growth experienced in both the UK and the EU. However, this masks considerable divergence at sectoral level, and most likely firm level. Data for 2017 shows labour cost growth in Ireland was 1.9 per cent compared to 1.9 per cent in the Euro area and 2.6 per cent in the UK. In Q4 2017, the Professional, scientific and technical sector recorded the largest annual percentage increase in average hourly total labour costs, rising by 4.9 per cent from €30.17 to €31.65 per hour. The Construction sector recorded the largest annual percentage decrease in average hourly total labour costs, decreasing by 1.3 per cent from €22.99 to €22.68. In terms of the size of business, in the year to Q1 2018 the average hourly total labour costs for firms with less than 50 employees increased by 2.4 per cent (from €21.19 to €21.70), for firms with 50 to 250 employees by 4 per cent (from €24.02 to €24.99) and for firms employing more than 250 employees by 2 per cent (€30.43 to €31.04). Over the five years to Q1 2018, average hourly total labour costs increased by 4.7 per cent, from 25.70 per hour to €26.92. The percentage changes across the sectors ranged from +12.8% in the Financial, insurance and real estate activities sector (from €38.53 to €43.45) to -4.1% in the Arts, entertainment, recreation and other service activities sector (from €20.87 to €20.01). Figure 19 shows considerable divergence in sectoral labour costs across the EU. Within the business economy (exl agriculture, public admin), labour costs per hour in Ireland were highest in industry €32.9 compared to €33.4 in the euro area. Labour costs in Irish services were €28.9 compared to €29.3 and €25.2 in the Euro area and UK. Costs per hour were €27.3 construction (Euro area €26.7 and UK €25.4). Between 2016 and 2017, hourly labour costs in the total Irish economy expressed in € currency rose by 1.9% both in Ireland and the Euro area. When comparing labour cost estimates over time, levels expressed in national currency should be used to eliminate the influence of exchange rate movements. Within the Euro area, the largest increases were recorded in the Baltic Member States. The only decrease was observed in Finland (-1.5%). Expressed in national currency, hourly labour costs increased in the UK (+2.6%) (-4.1% in Euro). Expressing labour cost growth in an index form, Figure 16 shows that Irish labour costs have been increasing since 2014 but at a rate less than UK and Euro area labour costs.
Taxes From an enterprise perspective, it is important that the taxation system is internationally competitive, stable, supports and rewards employment, entrepreneurship and investment, and stimulates labour market participation. The Irish income tax system is the most progressive in the EU. Figures 34 and 36 show that for a married couple with 2 children earning the average wage and above in 2016, both the average income tax and the marginal rate of income tax remain competitive, below the OECD average and the UK rate. Married
7 couples in Ireland also fare better than single people in terms of marginal rate of income tax. OECD data shows that for a single person earning 100 per cent of the average wage in 2016, total average income tax in Ireland was 9 per cent lower than the OECD average and 3 per cent below the UK average (Figure 31). However, this cohort faced a 12 per cent higher marginal income tax in Ireland (54.4%) than in the UK and almost 10 per cent higher rate than the OECD average (Figure 32). Marginal rates were competitive at lower wage levels but high for employees earning the average wage and above. Ireland is currently very reliant on taxes on income as a source of revenue and significantly less revenue is generated through social security contributions in Ireland as compared with other OECD members. Figure 13 indicates that when expressed as a percentage of total labour costs, Irish employers' social contributions and other labour costs paid by the employer represented 13.8 per cent, significantly lower than the 25.8 per cent in the Euro area and below the UK figure of 16.5 per cent in 2016. As the country is moving towards full employment, it is also important that Ireland’s income tax regime contributes to attracting and retaining talent, including those coming from abroad. CSO data indicates that entry to the higher rate of income tax in Ireland occurs at a relatively low level - the standard rate band threshold for a single individual without qualifying children of €33,800 (€34,550 for 2018) was below the national average wage of €36,916 in 2016. As the economy continues to grow, it can be expected that upward pressure on labour costs will intensify as the labour market tightens. To maintain cost competitiveness, it is important that our labour cost base is in line with productivity developments at sectoral level and not significantly out of line with our competitors across the OECD and the UK. In this challenging environment, long term certainty, transparency and stability regarding our 12.5 per cent corporate tax regime also remains critical in informing enterprise investment plans.
Earnings Average hourly earnings increased by 3.5 per cent between Q1 2013 and Q1 2018 while irregular earnings increased by 14 per cent (Figure 26). From a sectoral perspective, the highest increases occurred in the Real Estate (25.8%), Construction (9.7%) and Administrative sectors (8.9%). The highest earnings (€35.22 per hour) were recorded in Education; the lowest earnings were in the accommodation &food sector (€12.76 per hour). In absolute terms Ireland has the second highest national minimum wage in the EU at €1,563.25 per month, Luxembourg records the highest rate (€1,998.59) while the UK has the seventh highest (€1,396.90). The strength of the Irish minimum wage is reduced somewhat when expressed in purchasing power standards (Ireland ranks 6th), though it remains relatively high (Figure 29). As a percentage of the average wage the minimum wage in Ireland is 42 per cent compared to 44 per cent in the UK and 46 per cent in Luxembourg. The gap in the national minimum wage between the UK and Ireland is an important consideration in the context of Brexit. The wholesale and retail, hotels and restaurants, other services, and traditional manufacturing sectors are likely to be the sectors most impacted by increases in the national minimum wage. Increases in the past number of years do not appear to have had an adverse effect on competitiveness or employment. As the labour market is approaching full capacity job vacancy levels are increasing and certain skills needs are becoming more pronounced. CSO data shows that job vacancy rates have increased with vacancy rates in Q1 2018 highest in professional, scientific and technical services, financial, insurance and real estate and ICT. Skills shortages have the potential to create wage inflation and could impact on business competitiveness. Productivity performance will assume an even more prominent role in driving Irish international competitiveness. Indeed, in the longer term, productivity growth is the preferred mechanism to improve competitiveness as it can support cost competitiveness in tandem with high and increasing income levels.
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Costs of Doing Business 2018
Relative to most OECD countries, Ireland’s productivity performance is strong in terms of growth and levels of GDP per hour worked. However, Ireland’s overall productivity performance measured relative to GDP is positively skewed by certain sectors and high performing firms. A narrow base of sectors (ICT and Manufacturing account for most productivity growth) is leaving Ireland vulnerable to shocks. Increasing productivity particularly in the indigenous economy remains a significant issue.
Property Costs After labour costs, facility or property costs represent the next significant cost factor in the profile of business costs. For services sub-sectors, office lease costs represent 4 to 15 per cent of total location-sensitive costs. For manufacturing, sub-sectors, industrial lease costs range from 2 to 5 per cent of location-sensitive costs. The availability and affordability of commercial property solutions is a key requirement for the operation and expansion of enterprises based in Ireland and winning and maintaining mobile investment. During the downturn in the commercial property market, there was limited office construction activity in the Dublin market between 2011 and 2013. The last number of years has witnessed a sustained recovery in the Irish commercial property market. Commercial rents growth has been driven by an increase in demand, particularly in major cities, reflecting the improving economy. Recent quarterly increases in capital values for a range of commercial property classes suggest continued growth and stabilisation in the Irish commercial property market. In Figure 38 the Jones Lang LaSalle Property Index shows sustained growth in commercial capital and rental values. In terms of capital values, overall capital value growth was recorded at 5.2 per cent in Q4 2017, this comprised of annual increases of 8.4 per cent, 1.3 per cent and 3.2 per cent in Office, Retail and Industrial values respectively. Jones Lang LaSalle report that while the capital value index has increased it remains 38 per cent below 2007 peak value. The CBRE Irish Market Outlook 2018 reports continued growth in Dublin Office Take-Up and falling vacancy rates. In the industrial sector CBRE reports rental values increased by more than 6 per cent year-on-year in 2017 and this has led to an increase in planning applications for new industrial and logistics buildings. The take-up of office space remained strong in 2017, reflecting the growth of existing businesses. Office rental prices in Ireland in 2017 compare favourably to cities in the UK. Figure 41 shows that in 2017, Cushman and Wakefield report the cost per square meter per year in Dublin City (€619) and Suburbs (€324), Limerick and Cork (€325) and Galway at €295. UK costs range from €1333 in the West End, €406 in Manchester, and €303 in Cardiff. Year-on-year increases in Irish locations ranged from 67 per cent in Limerick to 9 per cent in Dublin Suburbs. Any Brexit-related firm relocations would add to demand in the Dublin market. A large supply of new office space in Dublin is due to be in place by 2020. The Central Bank/CBRE report the equivalent of a further five years of average Dublin office take-up is due to be completed by 2020. The addition of this new stock should help reduce rapid upward pressure on rents. In Q4 2017 prime high street retail rents had increased on an annual basis across Ireland. The most expensive location was Dublin (€3,794, +4% year on year). Costs in Galway (1,349, +9%), Cork (€1,265, 0%) and Limerick (€562, +5%) compare relatively favourably to the UK. The World Bank estimates it takes 149.5 days to build a warehouse in Dublin compared with 86 days in London. Cost is recorded as a percentage of warehouse value (the value is €2 million in Dublin and £1.4 million in London) and is reported as 4.6 per cent in Ireland compared to 1 per cent in the UK (Figure 44). The availability of information and data is a powerful tool in encouraging efficient markets. In this regard, the Council welcomes the announcement that NAMA and the Central Bank are to co-fund the development of a commercial property statistical system to provide a comprehensive database of commercial sales and lease transactions. It will incorporate the existing commercial lease register, currently produced by the Property Services Regulatory Authority. Improving the accessibility of the Valuation Office’s comprehensive data on
9 commercial properties would also assist in establishing market size, vacancy rates and to compare costs across locations.
Transport Costs Brexit also underscores the importance of Ireland’s logistics and transport sectors’ cost competitiveness. The international price of oil increased by 25 per cent between 2016 and 2017. The decision of the world’s major oil producers to extend production curbs until the end of 2018 along with the geopolitical uncertainty, were major factors in the three-year high rise of the oil prices recorded at the end of 2017 (almost $70 a barrel). Improving global growth, particularly in emerging economies and the Eurozone, is also expected to continue pushing up oil prices by increasing demand for energy, but the increase is expected to be limited as non-OPEC producers have started increasing output. Prices for Brent oil are projected to increase by an average of 24.6 per cent to 68.3 USD per barrel in 2018 compared to 2017. Figure 47 shows that Irish petrol and diesel prices increased by 6.3 per cent and 7.8 per cent respectively in 2017 compared to 2016. In January 2018, the cost of 1 litre of diesel in Ireland (€1.29) was 4 per cent above the EU average (€1.24) in the corresponding month. The CSO’s experimental Services Producer Price Index (Figure 49) indicates that transport service prices have been relatively flat in recent years, excluding prices in Air transport1, which have been more volatile, and prices in Sea and coastal transport, which have been on a downward trajectory since 2016. The UK is the destination for 55 per cent of all maritime goods exports and 86.1 per cent of roll on/roll-off freight traffic. The liquid bulk received from the UK accounts for 39.5 per cent of the total tonnage of goods received in 2016. Of the total amount of goods received at Irish ports in 2016, a third arrived from the UK. The implications of extra administrative costs and tariffs, standards and regulations and customs on the transport of goods between Ireland and the UK may negatively impact on indigenous exporters’ supply chains, and their capacity to competitively price products, not only in the UK but domestically and in other international markets. Transport usage is strongly related to economic activity. Economic growth increases employment, disposable income and consumer spend, all of which lead to more travel. Economic decline produces the opposite effect. This was clearly demonstrated over the past decade. Ireland’s high dependence on car usage has clear impacts on infrastructure capacity and competitiveness in terms of the negative effects of increased journey times and congestion which affect productivity and costs and diminishes the attractiveness of a location to set up business, live and work. In the State, overall, 61.4 per cent of working commuters drove to work in 2016. Just under half of Dublin city and suburbs workers commute by car, which is the lowest across the State. The highest car use was in rural areas, where 76 per cent of commuters used the car to get to work. The average commute for those at work rose in 2016 to 28.2 minutes, having fallen between 2006 (27.5mins) and 2011 (26.6mins). Commuting times rose in every county, but there was still significant variation in times travelled depending on where people lived. Nearly 200,000 commuters (199,922), representing almost 11 per cent of all commuters, spent an hour or more commuting to work in 2016, with an average travel time of 74 minutes. This has increased by almost 50,000 persons (31%) on the 2011 figure of 152,000. Men account for 61 per cent of those commuting for over an hour. Figure 53 indicates that nearly 53,000 workers commuted 90 minutes or more. Census data shows Dublin city and suburbs recorded a 10.9 per cent increase in the number of workers commuting from outside the urban area, rising to 130,447 from 117,764 in 2011. Twenty-five per cent of Dublin workers commute from outside the city and suburbs. The number of workers commuting in to Cork city and suburbs increased by 13.5 per cent between 2011 and 2016 and Limerick city and suburbs saw a rise of 13.1 per cent. Over 40 per cent of
1 The Air Transport index is constructed using data collected by the Consumer Price Section. 10
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workers in Cork commuted from outside the urban area. In Limerick and Galway city and suburbs half the workforce commute from outside the urban area. The most recent data shows that the greatest year- on-year traffic growth was recorded on motorways in 2016, when traffic increased by 5.7 per cent for all vehicles and 7.3 per cent for HGVs. International congestion statistics based on TomTom's database (Figure 54) show on average, journey times in busy periods take 43 per cent, 34 per cent and 27 per cent more time in Dublin, Cork and Limerick respectively. Dublin is one of the most traffic congested cities in Europe with morning and evening congestion times 80% and 86% higher compared to a free flow. Analysis of congestion in the Greater Dublin area undertaken by the Department of Transport2 estimates the cost of time lost due to aggravated congestion is €358 million in the base year (2012). Most of the costs of aggravated congestion are incurred between the M50 and the canals, on key arterial routes. The cost of congestion is forecasted to rise to €2.08 billion per year in 2033. The annual cost is forecasted to grow moderately up until at least 2025, but will begin to increase sharply after that.
Utility Costs A reliable and competitively priced supply of energy is vital for business and its ability to compete successfully in international markets. Utility and energy costs are an essential input to the entire enterprise base across the State, both the internationally trading and domestic sectors of the economy. Utility costs can represent 1 to 7 per cent of location-sensitive costs3. Despite increasing investment in renewable energy, Ireland remains heavily dependent on imported energy products, which represent 82 per cent of the gross inland consumption in Ireland. The share of crude oil and petroleum products represent 75 per cent of the total import of energy products. The high dependence on imported fossil fuels makes Ireland’s energy prices vulnerable to substantial oil price fluctuations, therefore it is essential that efforts continue to focus on cost determinants within our control such as regulatory costs. The UK accounts for 76 per cent of our oil import and 40 per cent of the gas import. Given Ireland’s dependence on energy imports from the UK, Brexit could potentially have a significant impact on Ireland’s energy market. Figure 56 indicates that the average electricity prices (in purchasing power standard) for non- household consumers in Ireland have declined over 2015-2017; in the first half of 2017 they were marginally lower than the Euro area but higher than the UK prices. The proportion of non-recoverable taxes and levies in the overall electricity price for the same period is lower in Ireland (10.2%) compared to the Euro area (28.2%) and the UK (22.2 %). The average prices of natural gas expressed in purchasing power standard for business consumers are slightly lower than the Euro area average but higher than the UK prices (Figure 59). The proportion of non-recoverable taxes and levies in the overall gas price is also lower than the Euro area average but higher than the UK. Generally, water and waste water costs for enterprise in Ireland compare favourably to those in competitor markets despite there being a significant variation between water and waste water tariffs across Local Authorities. Lack of comprehensive data on waste management costs makes it difficult to benchmark Ireland's performance versus competitor countries. The Confederation of European Waste-to-Energy Plants (CEWEP)4 Country Reports indicate that in 2014 the average net fee for landfilling in Ireland was €94 per tonne, marginally higher that Sweden's fee of €93.4 per tonne. To divert waste from landfills, most EU States apply a form of landfill tax and/or a landfill ban. According to CEWEP in 2017 the tax varied from €3 per tonne
2 Department of Transport, Tourism and Sport/IGESS, The Costs of Congestion, An Analysis of the Greater Dublin Area, 2017 3 The CSO’s Census of Industrial Production shows that energy costs for Irish enterprise, including SME’s, represents 1.57% of total costs. 4 http://www.cewep.eu/2016/07/23/country-reports-2016/
11 (Lithuania) to more than €100 per tonne (Belgium). Ireland's landfill tax was €75 per tonne, below the UK standard landfill tax of £86.1 per tonne (€97.8 per tonne). Ireland is relatively cost competitive for telecoms, especially for business mobile broadband. However, it is more expensive in cost for fixed and mobile broadband than the UK. Concerns persist around the issues of quality (speed) and the regional availability of high speed services (Figures 63-66).
Affordability of Credit Access to competitively priced sources of finance is essential to facilitate enterprises establish, survive, improve productivity, and ultimately scale. Limited or costly credit damages the environment for entrepreneurship, scaling and investment, and amounts to a competitive disadvantage for Irish enterprises. Irish SMEs are still heavily reliant on bank loans with limited uptake of non-bank finance sources. The concentrated lending market and higher credit risk premiums are important factors when determining the cost of credit in Ireland. The Central Bank reports5 that the market share of the three main lenders in new lending flows in the first half of 2017 was 82 per cent. In the second half of 2017, the SME lending market became more concentrated both in terms of outstanding credit and new lending flows, with fewer banks holding an ever-larger market share. Increasing competition and choice in the lending market would contribute towards reducing the cost of credit, therefore further diversifying the lending market in Ireland and in turn increasing levels of private equity, crowdfunding and venture capital funding remains important. The ECB Survey on Access to Finance of Enterprises (SAFE) indicates that credit demand was low with the share of SMEs applying for bank loans at 21 per cent in September 2017. Working capital was the primary purpose of internal and external financing. The annual European Investment Bank survey6 conducted in 2017 suggests that while bank loans remain the main source of external finance for investment activities (41%), their share fell compared to 2016 (57%); the share of bank loans is also below the EU average of 56 per cent. Leasing has become more prominent as a form of external finance and in 2017 it accounted for 36 percent of the overall external finance. All other types of finance, including equity, bonds and grants represent less than 10 per cent of the external finance used. The cost of credit remains high compared to the Euro area average. Figure 67 shows that Interest rates on new business loans in Ireland have been consistently higher and more volatile than equivalent Euro area rates which puts Irish businesses at a competitive disadvantage. The divergence is particularly noticeable for loans of up to €0.25 million, where the interest rate on new business loans in Ireland was more than double the Euro area average rate throughout 2017. As per Figure 70, the interest rates on gross new lending for SMEs declined between Q1 2015 and Q3 2017 in most economic sectors with the exception of ICT. The interest rates to SMEs engaging in Construction and Transport & Storage were consistently higher than the rates for the remaining sectors in the same period. Figure 68 indicates that as of late 2016, interest rates on outstanding amounts were significantly higher in Ireland compared to the Euro area, and the interest rate gap between the two jurisdictions is widening. The interest rates on outstanding amounts to SMEs were consistently lower than the interest rates on gross new lending in the period Q1 2015-Q3 2017, and the difference is particularly prominent in the Construction Sector. The interest rates on outstanding amounts to SMEs engaging in Transport & Storage were higher than the rates for the remaining sectors in the same period (Figure 69). Figure 66 shows that Irish businesses also face the second highest interest rate charges on revolving loans and overdrafts (4.9%) in the Euro area in 2017; the Euro area average interest rate is 2.5 per cent. The SAFE survey
5 Central Bank of Ireland, SME Market Report, H2 2017 6 EIB Investment Survey, Ireland Overview, 2017 12
Costs of Doing Business 2018
indicates that although interest rates on credit lines for SMEs in Ireland have declined over the four-year period to H1 2017, at 4.7 per cent, they remain above the Euro area weighted average of 3.2 per cent.
Services Costs In Q4 2017, the CSO’s Experimental Services Producer Price Index stood at 113.6. Following a period of decline during the recession, an upward trend has been evident since 2011. Services prices in Quarter 4 2017, as measured by the SPPI, were on average 4.2% higher in the year when compared with the same period last year. The most notable changes in the year were: Postal and Courier (+9.1%), Air Transport (+7.2%), Computer Programming and Consultancy (+6%) and Sea and Coastal Transport (-8.5%). Over the five years to 2017 Ireland has maintained its competitive position in terms of the cost to register a business as a percentage of gross national income (Figure 76). In 2017, Ireland ranked first in the Euro area and joint-second in the EU. Regarding legal costs, World Bank analysis suggests that enforcing a commercial contract in Ireland is estimated to cost more and take relatively more time than the OECD average. In the World Bank's Ease of Doing Business Report 2018, Ireland is ranked 98 out of 190 countries and rates poorly relative to the UK (31st). The World Bank estimates that the total cost of contract enforcement in Ireland was 26.9 per cent of a claim, compared with 21.5 per cent in OECD high income countries. It also takes longer to enforce a contract in Ireland (650 days) than in the OECD (551 days). This category is based on the ease or difficulty of enforcing a case study commercial contract. This is determined by following the evolution of a payment dispute and tracking the time, cost, and number of procedures involved from the moment a plaintiff files the lawsuit until actual payment. The World Bank reports the time taken for filing, service, trial, judgement and enforcement (including time for appeal) is 650 days in Ireland compared to 437 in the UK. Pricing in the motor insurance sector for private and commercial vehicles has been subject to a lot of volatility in recent years, from a point where some premiums appeared to be priced at an unsustainably low level. Insurance is a significant element within the Consumer Price Index basket, with a weighting in 2017 of 6 per cent. While the rate of headline consumer price inflation has been relatively stable in recent years, there has been a notable increase in insurance price inflation, in the period from mid-2015 to mid-2017. Motor insurance has moderated in recent months; in the period 2014-2016, prices as measured by the CPI increased by approximately 40 per cent (Figure 77). It has not been possible to provide statistics on commercial insurance prices in the Irish and broader European markets due to the lack of publicly available information in this area. Commercial insurance prices tend to be agreed on a company-by-company basis with insurers, reflect differences in the types of companies insured and the coverage purchased (i.e. the range of commercial insurance products is wide, and the nature and type of coverage provided in commercial insurance policies is non-homogeneous), and the final price charged is generally not publicised. International comparisons can also prove problematic because of differences in law, in fiscal regime, in policyholder behaviour, and in the expectations of policyholders from their insurance provider. Consumer prices for insurance as measured by the Consumer Price Index are now between 20-30 per cent higher than levels in 2014. CSO data for December 2017 indicates that private motor insurance premiums have reduced by 16 per cent from the peak in July 2016. On a monthly basis, the price of motor insurance has been falling since April 2017. While the CSO statistics indicate more stability on an overall basis, these figures represent a broad average and therefore there are many people who may still be seeing increases. However, it is anticipated that this greater stability in pricing will be maintained and that premiums should continue to fall from the very high level of last year. Revenue collected by the local authorities through commercial rates in 2017 stood at €1,475m. In most counties, the commercial rates levied as a proportion of the total receipts increased in the five-year period to 2017.
13 Service and Broader Environment Price Competitiveness The UK’s decision to leave the EU has imminent and far reaching consequences for Ireland’s economy and brings into sharp focus the need for Ireland to maintain and improve our cost competitiveness. The openness of the Irish economy means the competitiveness of the enterprise sector is particularly vulnerable to negative price and cost shocks which are outside the influence of domestic policymakers. The sustained appreciation of the euro-sterling exchange rate in 2016/2017 poses significant challenges for Irish export competitiveness to the UK. The appreciation of the euro vis-à-vis Sterling provides a timely warning about just how vulnerable Irish firms are to external shocks and further volatility, and depreciation of Sterling represents a major threat to Irish export competitiveness. Figure 8 shows that the €/£ exchange rate average was 0.88 in 2017 compared with 0.82 in 2016 and 0.73 in 2015. Sterling was 0.91 in August 2017. The €/$ spot rate averaged 1.13 in 2017, up from 1.11 in 2015 and 2016. Further volatility in exchange rates could affect the Irish economy through several channels. It may generate expenditure switching effects between foreign and domestic goods and services both at home and in trade partners, thus affecting net exports, to the degree that nominal exchange rate changes are absorbed by importers/exporters rather than passed on through increased prices. Exchange rate movements may also affect firms’ profit margins, with possible second-round effects on investment. Harmonised Competitiveness Index data for December 2017 show that the nominal HCI increased by 5 per cent on an annual basis. In real terms, the HCI increased by 3.5 per cent when deflated with consumer prices (Figure 10). The movement indicates a decline in this measure of competitiveness linked to the exchange rate movements. Features of the Irish economy can be affected by movements in HCIs and care should be taken in interpreting movements in the indices as a measure of relative international competitiveness. The nominal HCI is affected by exchange rate developments and relative to other Euro area countries a high share of Irish exports is destined for non-Euro area countries (UK and US). Real HCIs consider price movements relative to trading partners. Using consumer prices as a deflator means the impact of intermediate goods and capital goods are not directly considered and the influence of indirect taxes and non-traded goods and services on the CPI limits its usefulness as a good indicator of international competitiveness. Consumer price inflation, Ireland remains an expensive location in which to live and do business with a price profile which can be described as “high cost, and rising”. As per Figure 85, Irish consumer prices in 2017 were over 23 per cent above the European Union average and increasing at an annual rate of 0.2 per cent. The Consumer Price Index annual average rate of inflation in 2017 was 0.4 per cent. Figure 84 indicates that the price of Goods decreased on average by 2.1 per cent compared to a fall of 3 per cent in 2016. The price of Services (which includes mortgage interest) rose by 2.1 per cent. Prices on average, as measured by the HICP, rose by 0.2 per cent in 2017 compared to a fall of 0.2 per cent in 2016. Over the period 2013 to 2017, the largest increases were recorded for Education (+15%), Miscellaneous Goods & Services (+9.6%) and Restaurants & Hotels (+8.4%). The largest decreases were for Clothing & Footwear (-13.1%), Furnishings, Household Equipment & Routine Household Maintenance (-12.1%) and Food & Non-Alcoholic Beverages (-7.6%). During 2017, mortgage interest repayments fell on average by 1.6 per cent and by 6.4 per cent in 2016. In terms of prices directly affected by the State, mainly administered prices cover the prices of goods and services on which the government including any national regulator has a significant influence. There has been a downward trend in HICP and administered price inflation over the period 2011-2016. In 2016, mainly administered prices in Ireland decreased by 1.9 per cent, a rate lower than the UK and Euro area rates. The UK’s new relationship with the EU post-Brexit will have a significant bearing on consumer price inflation over the next few years through several channels. UK inflation recently soared to its highest level in two and a half years and in 2017 stood at 2.7 per cent. Much of the rise to date reflects the elimination of past drags from food, energy and import prices, together with renewed rises in oil prices. The current overshoot of inflation
14
Costs of Doing Business 2018
above the 2% target is almost entirely due to the effects of higher import prices following sterling’s depreciation, the contribution from which is expected to dissipate in coming years. The UK inflation rate is forecast at 2.3% cent in Q1 2019. Irish inflation rates are forecast to gradually pick-up to 0.7% in 2018 and 0.9% in 2019. The services sector is likely to remain the main source of upward price pressure in Ireland. The services sector is likely to remain the main source of upward price pressure in Ireland, with the price pass through impact of exchange rates and an expected increase in energy prices in 2018.
Focus on residential property In addition to the considerable social policy implications associated with the availability and affordability of housing, the shortage and cost of residential property is damaging competitiveness. It impacts upon our attractiveness for mobile investment and talent. High rents affect decisions around labour mobility and entering employment. In addition to being an important element of Ireland’s cost base, housing impacts on productivity. Despite an increase in construction activity and planning permissions residential property supply remains constrained. Continued strong demand means property price inflation is likely to continue in the short term without additional supply becoming available. The link between residential prices, rents, and wage expectations means that developments in the residential property sector also have a direct impact on Ireland’s international competitiveness. Continued strong demand means property price inflation is likely to continue in the short to medium term. Residential Tenancies Board data for 2017 indicates that private sector rents continued to trend upwards and are above pre-crisis levels. Rental growth has been strong since 2012 and accelerated between 2014 and 2017. On a year-on-year basis, rents for houses increased by 6.5% in 2017 Q4. Apartment rents increased by 5.3% on a similar basis. House price growth in Ireland remains high. Year-on-year house price growth reached 12.8 per cent in September 2017, up from 8 per cent a year earlier. In terms of residential sales, overall, the national index is 23.7 per cent lower than its highest level in 2007. Dublin residential property prices are 24.7 per cent lower than their February 2007 peak, while residential property prices in the Rest of Ireland are 29.6 per cent lower than their May 2007 peak. ‘Rebuilding Ireland’ Plan presents a wide-ranging set of commitments to address housing supply. While many of these will take time, the Government is implementing and driving change. The CSO reports that in 2017, planning permissions were granted for 20,776 dwelling units, compared with 16,375 units in the year 2016, an increase of 27 per cent. The problems in the Irish housing market, while not unique to Ireland are severe and will take time to resolve. A continued acceleration of supply by the private and social sectors is required.
Focus on childcare The Council has previously noted childcare-related costs and benefits (as a percentage of average wage - this data takes account of childcare fees, child benefit and relevant tax reductions). For couples, earning 167 per cent of the average wage, Ireland is the second most expensive in the OECD. For lone parents (67% of the average wage) Ireland is the most expensive OECD location. New CSO QHNS Childcare statistics which relate to Q3 2016 show a fall in the number of children using parental childcare between the years 2007 and 2016. The decrease is larger among primary school children (from 81% to 74%) than among pre-school children (from 64% to 62%). The average household weekly expenditure on paid non-parental childcare is €155.60. This is an increase from 2007, when the corresponding figure was €123.20. The average weekly cost per child is highest in Dublin, at €150.00 per child per week. It is lowest in the South-East at €83.00 per child per week (Figure 103).
15 Chapter 1 – Introduction and Methodology
Introduction Competitiveness is a multidimensional concept, encompassing many different drivers. Competitiveness is not an end, but a means of achieving sustainable improvements in living standards and quality of life. The Cost of Doing Business is just one of the elements which determine a country’s ability to compete in international markets.
The NCC’s Competitiveness Framework The Council uses a ‘competitiveness pyramid’ to illustrate the various factors (essential conditions, policy inputs and outputs), which combine to determine overall competitiveness and sustainable growth.
▪ At the top of the pyramid is sustainable growth in living standards – the fruits of competitiveness success. ▪ Below this are the key policy outputs for achieving competitiveness, including business performance (such as trade and investment), costs, productivity, and employment. These can be seen as the metrics of current competitiveness. ▪ Below this in the third tier are the policy inputs covering three pillars of future competitiveness, namely the business environment (taxation, regulation, and finance), physical infrastructure, clusters and firm sophistication, and knowledge and talent. ▪ Finally, at the base of the pyramid are the essential conditions for competitiveness, these foundations are based on institutions, macroeconomic sustainability, and endowments.
This report attempts to focus on the costs that are largely domestically determined such as labour, property, transport, utility, credit and financial, and business services and which can be benchmarked internationally. It
16
Costs of Doing Business 2018
considers both price levels, and changes in those levels (i.e. price inflation) on an annual basis and over a longer time, for example, 5-10 years. It is structured as follows: ▪ Chapter 2 provided an overview of why costs matter for enterprise, sets out cost profiles for a range of firm types which identify the most important cost categories, and explains the high level economic factors that determine costs; ▪ Chapter 3 summarises the key cost trends for enterprise in Ireland; ▪ Chapters 4 to 8 examine the main cost categories in greater detail. The primary costs analysed in these chapters relate to labour, property, transport, utilities, and credit and financial costs; ▪ Chapter 9 examines data on business services and other input costs – a cost category not captured in the profiles referred to above but still an important input for the vast majority of enterprises; and ▪ Chapter 10 considers the broader consumer cost environment. ▪ Finally, acknowledging the interlinked nature of all sectors and participants of the economy, chapter 10 focuses on childcare and residential property
Methodology In each chapter, a range of internationally comparable, enterprise-focussed cost indicators are examined for Ireland and key trading partners, particularly the UK. We have endeavoured to collect data from high-quality, internationally respected sources, and where necessary, caveats on data are set out. Costs are typically compared over a five year or annual basis. In some instances, a longer time frame is used, particularly considering changes in the economic cycle pre- and post-recession. Nonetheless, there are limitations to comparative analysis: ▪ While every effort is made to ensure the timeliness of the data, there is a natural lag in collating comparable official statistics across countries. As much of this data is collected on an annual basis, there may be a time lag in capturing recent changes in cost levels. ▪ The Council is also constrained in terms of the availability of metrics and their impact on enterprises of different sizes and sectors, and across several important areas such as water, transport and international freight, waste, commercial insurance and Local Authority rates. ▪ Given the different historical contexts and economic, political and social goals of various countries, and their differing physical geographies and resource endowments, it is not realistic or even desirable for any country to seek to outperform other countries on all cost measures. ▪ There are no generic strategies to achieve an optimum level of cost competitiveness; as countries face trade-offs and may be at different points in the economic cycle. ▪ Where possible, Irish cost levels are compared to a relevant peer group average (e.g. the OECD and Euro area average) Given the importance of the UK as a trading partner and the potential implications of Brexit on the economy, the UK’s performance is also benchmarked. It is also worth noting that individual cost metrics have strengths and weaknesses (i.e. in terms of definitions used, in how the data is collected etc.). When analysing the individual metrics, it is important, therefore, to consider all the data as the analysis of the individual metrics combine to tell a coherent story about Ireland’s current cost competitiveness performance.
17 Chapter 2 – How Do Costs Impact on Enterprise?
Why Costs Matter Generating sustainable, broad-based, export-led growth is essential to sustaining economic growth in these challenging times. To achieve such growth, Ireland’s international competitiveness must be maintained and enhanced relative to our key competitors. Competitiveness is a complex concept, encompassing many different drivers. Notwithstanding the evolution of the Irish economy and the growing complexity of the goods and services produced in the country over the past decade, cost competitiveness remains a critical determinant of success. Indeed, in the absence of a currency devaluation policy lever to manage short term competitiveness pressures, a combination of cost competitiveness in key business inputs and enhancements in productivity must provide the foundations for sustaining growth. In the longer term, productivity growth is the preferred mechanism to improve competitiveness as it can support cost competitiveness in tandem with high and increasing income levels. A high cost environment weakens competitiveness in several ways. ▪ High costs make Ireland less attractive in terms of mobile investment and business expansion and in the context of Brexit, if unchecked could see companies relocating to other jurisdictions; ▪ High costs make firms that rely on domestically sourced inputs less competitive when they are selling into foreign markets – this is a concern for large indigenous exporting sectors such as the food and drink sector, construction products and services, timber and engineering; 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 unnecessarily high costs (i.e. cost levels not justified by 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 While cost competitiveness matters to all firms Figure 1 shows that in 2017 the most pressing problem reported by Irish SMEs was finding customers (29%). The next most pressing problem was the availability of skills and competition (both 15%). The proportion of SMEs identifying costs as the most pressing problem was 11 per cent. Figure 2 shows the proportion of SMEs who consider costs the most important problem ranges from 6 per cent in Slovakia to 18 per cent in Italy. The proportion of firms in Ireland in 2017 was 11 per cent compared to 10 per cent in 2016. This is marginally below the EU 28 and UK rate (12%). Irish SMEs identify finding customers (29%) and the availability of skills (15%) as the most pressing problem. The survey shows that across Europe enterprises report rising costs amid improvements in their debt situation and higher investment. The net percentage of EU SMEs indicating an increase in labour costs remained relatively constant (56%). The comparable figure for Ireland and the UK was 55 per cent and 62 per cent respectively.
18
Costs of Doing Business 2018
Figure 1: Most Pressing Problem faced by Irish SMEs, SAFE Survey, 2009-2017
other regulation In 2017 the most availability of skilled staff or experienced managers costs of production or labour access to finance competition pressing problem for finding customers 100 Irish SMEs was finding customers (29%). The 80 next most pressing was the availability of skills 60 and competition (both 15%). The proportion of 40 SMEs identifying costs
20 as the most pressing
problem was 11%. Over Most pressing problem faced (% of SMEs) (% facedof problem Most pressing
0 the period 2009-2017
2010H1 2009H1 2009H2 H2 2010 1 2011H 2011H2 20121 H 2012H2 H1 2013 H2 2013 1 2014H 2014H2 2015H1 2015H2 1 H 2016 H2 2016 2017H1 the median value of firms identifying costs as the most pressing problem was 10%. Source: ECB
Figure 2: Costs as the Most Pressing Problem faced by European SMEs, SAFE Survey, 2017
2017 2016 The proportion of SMEs 20 who consider costs the 18 most important problem 16 ranges from 6% in 14 Slovakia to 18% in Italy. 12 The proportion of firms 10 in Ireland in 2017 was
8 11% compared to 10% in
6 2016. This is marginally Percentage of Firms Surveyed of FirmsPercentage
4 below the EU 28 and UK rate (12%). 2
0
UK
Italy
EU28
Spain
Latvia
France
Ireland
Poland
Finland
Sweden
Belgium
Germany Denmark
Netherlands Source: ECB
19 Which Costs Matter Most? From a competitiveness perspective, it is essential that policymakers focus on maintaining cost competitiveness, particularly in relation to those goods and services that comprise a significant percentage of business costs and that are out of line with those in competitor countries. Figure 3 and Table 1 provide an enterprise cost profile based on KPMG data for a range of sectors and locations7. The data illustrate the relative importance of location sensitive and location insensitive costs (i.e. goods and services produced on international markets where the price is determined by global supply and demand conditions: e.g. commodity raw materials, industrial equipment, etc.).
Figure 3: Summary of Enterprise Cost Profiles, 2016 (to be updated March 2017)
Labour Property Transportation The column on the right Utilities Interest & depreciation Income taxes strips out cost elements Other taxes Location insensitive costs determined 100% internationally and 90% 10.1% focuses instead on costs 80% 13.4% which are primarily 45.7% 70% 7.9% determined 60% domestically. The 50% 5.5% significance of the 7.3% 40% location-sensitive cost 30% 60.6%
Percentage Percentage of costs factors differs by sector, 20% 32.9% with considerable 10% variations occurring 0% between services and Including location insenstive costs Excluding location insensitive costs manufacturing firms. Source: KPMG Competitive Alternatives 2016,
These differences are elaborated upon in Table 1, which provides a range of magnitude for each cost category.
7 KPMG’s 2016 Competitive Alternatives report explores the most significant business cost factors in more than 100 cities and 10 countries around the world. This study measures 26 key cost components, across 7 business to business service segments and 12 significant manufacturing sectors. The 10 countries included in the KPMG report are Australia, Canada, France, Germany, Italy, Japan, Mexico, Netherlands, UK and US. While Ireland is not included in the project, Figure 1 provides data based on the average contribution of each cost factor for the 10 countries included in the study. This provides an indication of the importance of each cost factor to the average firm. All figures in this report are expressed in US dollars and so results are sensitive to exchange rate movements – while exchange rate changes do not affect local business costs expressed in local currency, they do impact international comparisons when local costs are converted to US dollars. 20
Costs of Doing Business 2018
Table 1: Relative Significance of Location Sensitive Costs (% of total location sensitive costs), 2016
Services Manufacturing Labour & Benefits 72-86% 40-57% Of which: Salaries & Wages 52-61% 28-40% Statutory Plans 8-10% 5-7% Other Benefits 12-14% 7-10% Facility Costs 4-15% 2-5%
Transportation Costs - 6-21% Utility Costs 0-1% 2-7% Capital Costs 0-8% 11-25% Taxes 3-16% 10-18% Of which: Income Taxes8 1-15% 9-15% Property Taxes 1-2% 1-2% Other Taxes 0-1% 0-1% Source: KPMG Competitive Alternatives 2016
Taking these in turn: ▪ Labour costs include wages and salaries, employer-paid statutory plans, and other employee benefits. KMPG research indicates that labour costs represent the largest category of location-sensitive cost factors for all industries examined. For the services sub-sectors examined, labour costs typically range from 72 to 86 per cent of location-sensitive costs, while for manufacturing operations the typical range is from 40 to 57 per cent of total location-sensitive costs. ▪ Facility or property costs represent the next significant cost factor. For services sub-sectors, office lease costs represent 4 to 15 per cent of total location-sensitive costs. For manufacturing sub-sectors, industrial lease costs range from 2 to 5 per cent of location-sensitive costs. ▪ Transportation costs are only assessed for manufacturing operations – reflecting the cost of moving finished goods to markets. For the manufacturing sub-sectors examined, transportation costs represent 6 to 21 per cent of total location-sensitive costs. ▪ Utility costs represent 1 to 7 per cent of location-sensitive costs9. Electricity and natural gas costs are more significant for manufacturers than for non-manufacturers. ▪ Costs of capital include both depreciation and interest. These are major cost items for manufacturers, ranging from 11 to 25 per cent of location-sensitive costs across sub-sectors. Capital-related costs are much less significant for services sub-sectors, at 0 to 8 per cent of location-sensitive costs. ▪ Taxes typically represent 3 to 16 per cent of total location-sensitive costs for the services sub-sectors examined, and 10 to 18 per cent for manufacturing sub-sectors.
8 Effective income tax rates are calculated to reflect combined corporate tax rates (national, regional and local), net of generally applicable tax credits, grants and other common government incentives. 9 As noted above, the CSO’s Census of Industrial Production shoes that energy costs for Irish enterprises, including SMEs, represent 1.57% of total costs.
21 HICP – Administered prices (HICP-AP) Persistently high rates of consumer price inflation lead to expectations of further price increases, and can create a vicious circle of increasing prices, reducing real incomes, increasing wage demands and reduced international cost competitiveness. Rapid consumer price inflation can also adversely impact on Ireland’s attractiveness as a location for talent. Although Irish consumer price inflation is currently low, it is prudent to consider administrative factors affecting consumer price inflation and contributing to the Irish consumer price level. The HICP-AP is a Eurostat measure of state-influenced prices. It is important to stress the HICP-AP basket differs from country to country depending on the scope government has to influence prices. Several conventions guide the definition of administered prices. The CSO consider that HICP-AP indices do not provide an exact measure of the development of administered and non-administered prices. In effect, the basic information from which these aggregate measures are derived does not fully distinguish administered and non-administered prices. HICP items which cover more than 50% administered prices are classified as administered. Administered prices refers to prices of goods and services which are fully (“directly”) set or mainly (“to a significant extent”) influenced by the government (central, regional and local government including national regulators). From a policy perspective, the portion of any increase in administered prices that can be attributed to the government directly is unclear for at least two reasons. Firstly, in the case of Ireland, the categories are ‘mainly-administered’, meaning the government does not completely determine prices in these categories. Secondly, some categories, such as electricity and gas, may be more influenced by international prices that are outside of the control of governments. In addition, certain pricing aspects of administered prices are determined by independent regulators (in accordance with their prescribed mandates). The classification of administered prices is updated on an annual basis. There are no prices which are directly set by government in Ireland but some prices are influenced by government generally through the regulator for that market. The goods and services classified as “administered” by the CSO and Eurostat represent a small subset of the overall Irish CPI basket. Table 2 outlines the range of goods and services categories defined as mainly administered prices in Ireland, and the year in which they were classified and included in the ‘mainly administered’ basket.
Table 2: Mainly-administered prices in Ireland COICOP10 Sub indices Mainly administered prices, in Ireland and date of inclusion 04.41 Water Supply (from 2015) 04.43 Sewage (from 2015) 04.51 Electricity (up to 2011) 04.52 Gas (up to 2015) 06.3 Hospital services 07.31 Passenger transport by railway (from 2011) 07.32 Passenger transport by road 07.35 Combined passenger transport (from 2011) 08.1 Postal services (up to 2008) 12.53 Insurance connected with health (up to 2008) Source Eurostat
10 COICOP is an acronym for the Classification of Individual Consumption by Purpose.
22
Costs of Doing Business 2018
Figure 4: HICP and Mainly-administered prices in Ireland, 2012-201711
HICP Administered Prices HICP (excluding Administered Prices) Figure 4 shows a 12 downward trend in HICP 10 and administered price
8 inflation over the period
6 2012-2017. Inflation in administered prices was 4 particularly high in 2012 2 (7.3%) and 2015 (10.5%). 0 Since November 2016, -2 mainly administered
-4 price inflation has been Moving 12 months Moving months 12 average rate change of (%)
-6 negative and was -1.9%
2012M01 2013M04 2013M07 2013M10 2014M01 2014M04 2014M07 2015M07 2015M10 2016M01 2016M04 2016M07 2016M10 2017M01 2012M04 2012M07 2012M10 2013M01 2014M10 2015M01 2015M04 2017M04 2017M07 2017M10 in November 2017.
Source: Eurostat
Table 3: HICP and Mainly administered prices, annual average rate of change (%), 2012-2017
GEO/TIME 2012 2013 2014 2015 2016 2017 Median Average (12-17) (12-17) All items (HICP) 1.9 0.5 0.3 0.0 -0.2 0.3 0.3 0.5 Mainly administered 7.3 3.2 1.2 10.5 -1.9 -1.4 2.2 3.2 prices Water Supply 0.0 0.0 0.0 174.7 -50.0 : 0.0 24.9 Sewerage Collection 0.0 0.0 0.0 174.7 -50.0 : 0.0 24.9 Gas 15.2 6.7 2.1 -2.4 -3.0 -1.6 0.3 2.8 Hospital Services 1.5 -0.5 0.0 0.0 0.1 0.5 0.1 0.3 Passenger transport 2.7 5.1 4.7 4.4 2.1 1.7 3.6 3.5 by railway Passenger transport 6.0 5.8 2.2 2.7 0.9 0.1 2.5 3.0 by road Combined passenger 6.8 7.3 7.1 1.9 0.2 2.2 4.5 4.3 transport Postal Services 1.0 6.1 7.2 8.9 2.9 16.5 6.7 7.1
Source: Eurostat
Table 3 sets out the annual changes in the Classification of Individual Consumption by Purpose (COICOP) sub- categories that Eurostat has at one point determined qualify as fully- or mainly-administered in Ireland. Some categories, such as Gas were identified as administered up to points in time, after which the category has dropped out of the HICP-AP basket. Others, such as Water supply and Sewerage collection was introduced in 201512. All other sub-headings are included in the HICP-AP index for the entirety of the time series. The table
11 Inflation in administered prices has been higher than headline HICP inflation in Ireland throughout the period 2011-2016 and the differential between the two has narrowed (with the exception of 2015). 12 Water supply and sewage collection are components of Group 04.4 of the COICOP classification, codes 04.4.1 and 04.4.3 respectively. This group also includes refuse collection (04.4.2) and other services relating to the dwelling (04.4.4). Water supply and sewage collection charges were introduced in Ireland on 1 January 2015 and subsequently suspended from 1st July 2016. See CSO, CPI Technical Paper Introduction of Water Supply and Sewage Collection
23 shows that transport related costs have increased at a rate consistently higher than HICP over the period 2012- 2017. Of all mainly administered price categories, the annual rate of change in prices of postal services is notable for the relatively large increases in price since 2012. The rate of increase in postal services was highest in 2017 (16.5%). This is likely to be attributable to increases of between 12 per cent and 39 per cent across the full range of mail services for An Post to continue to meet its Universal Service Obligation. Categories no longer classified as administered prices, such as insurance connected with health, postal services, gas and electricity, also increased on average over the five years at a more rapid rate than HICP prices.
Figure 5: Inflation in mainly administered prices, Ireland, UK and the Euro area, 2012-201713
Ireland UK Euro area (changing composition) Figure 5 shows that 12 between 2012-2015, inflation in Irish mainly 10 administered prices tended to outpace 8 inflation in the Euro area (changing composition). 6 Since 2015, inflation has
4 been decreasing at a faster rate. Regarding
2 the UK14, mainly Annual Change Annual Change (%) administered prices 0 have been higher than the Irish rates in every -2 year except for 2015- a result of the -4 introduction of water 2012 2013 2014 2015 2016 2017 charges in 2015. Source: Eurostat/ECB
13 Comparison with the Euro area is a comparison between other countries’ HICP-AP inflation but there are differences in the composition and categories that make up the Irish HICP-AP basket and the Euro area basket which is calculated by the European Central Bank. 14 Mainly administered prices in the UK refer to Water Supply, Sewage, Electricity, Gas, Passenger transport by railway and Postal Services 24
Costs of Doing Business 2018
Interest Rates Improvements in Irish competitiveness in recent years have been driven by a range of important external factors including a weak euro exchange rate, low international fuel prices and low interest rates which have helped reduce the costs of borrowing for the State, enterprise and consumers. As has been evident in the recent exchange rate developments, changes in any of these factors could have ramifications for national competitiveness. While the risk of an immediate and rapid pick up in interest rates appears unlikely based on current information, at some time we should anticipate the possibility that interest rates will rise in the medium-term. The global financial and economic crisis which commenced in 2008 resulted in significant monetary policy actions by Central Banks with reductions in key interest rates and the launch of large scale asset purchase programmes. In the Euro area, the accompanying sovereign debt crisis and sustained low inflation below the ECB’s mandated price stability threshold resulted in the ECB undertaking a major asset purchase programme, and lowering interest rates to around the lower zero bound. This accommodative monetary policy approach which has seen interest rates at historic low values, has helped stabilise financial markets, reduced borrowing costs and supported an increase in Euro area output. The Governing Council of the ECB sets the key interest rates for the euro area: ▪ The interest rate on the main refinancing operations (MRO), which provide the bulk of liquidity to the banking system; ▪ The rate on the deposit facility, which banks may use to make overnight deposits with the Eurosystem; and, ▪ The rate on the marginal lending facility, which offers overnight credit to banks from the Eurosystem.
Figure 6: Main ECB Policy Rates 1999-2017
Marginal lending facility Deposit facility Main refinancing operations Figure 6 shows the 6.5 evolution of the ECB’s 6.0 5.5 policy rates over the last 5.0 two decades. It shows 4.5 4.0 how in the pre-crisis 3.5 3.0 period the MRO rate 2.5 2.0 ranged from 2% to
Policy Rate (%)Rate Policy 1.5 4.5%. All rates were 1.0 0.5 rapidly reduced in 0.0 -0.5 2008/2009 with the -1.0 MRO falling from 4.25 per cent to 1 per cent
and have been at
01/01/2017 01/10/2017
01/10/2011 01/01/2011
01/07/2015
01/07/2012
01/07/2003
01/01/2014 01/10/2014
01/04/2013
01/10/2005 01/01/2005
01/10/1999 01/01/1999
01/07/2000
01/04/2007
01/07/2006 01/07/2009
01/01/2002 01/10/2002
01/01/2008 01/10/2008
01/04/2010 01/04/2001 01/04/2016 01/04/2004 historically low levels since 2015. Source: ECB
In January 2017, the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility would remain unchanged at 0.00 per cent, 0.25 per cent and -0.40 per cent respectively. In its forward guidance, the Governing Council stated that it expects the key ECB interest rates to remain at their present levels for an
25 extended period. Regarding non-standard monetary policy measures and net asset purchases, in October 2017, the ECB announced that its programme of asset purchases of approximately €60 billion per month would be reduced to €30 billion from January 2018 until the end of September 2018 or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim. If the outlook becomes less favourable, the ECB is ready to increase the APP in terms of size and/or duration. Euro area monetary policy is determined by the ECB and implemented through the European System of Central Banks, which comprises the ECB and the Central Banks of member states. The ECB Governing Council price stability target is a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the Euro area of below, but close to, 2 per cent15.While ECB policy is formulated for the Euro area, reflecting the size of its respective economies, the performance of Germany, France and Italy are an important determinant of monetary policy.
Figure 7: HICP Inflation trends, Ireland and selected Euro area economies, 2015-2017
Euro area 19 Germany France Italy Ireland Figure 7 shows recent 2.5 trends in HICP inflation in major Euro area 2.0 economies and Ireland. 1.5 Euro area inflation remains appreciably 1.0 below the ECB target
0.5 (red line). It highlights
the pickup in inflation in Annual Annual Percentage change 0.0 the Euro area in recent
-0.5 months rising from 0.6% to 1.9% year on year -1.0 November 2017 and
Ireland’s low relative
2017M11
2017M07
2015M11
2017M01 2017M10
2017M03
2016M11 2017M05
2015M12
2017M02
2017M08
2017M04
2016M07 2017M06 2017M09
2016M12
2016M01 2016M10
2016M03
2016M05
2016M02
2016M08
2016M04 2016M09 2016M06 level (0.5%). Source: ECB
While the Euro area economy taken as a whole is expanding robustly, with stronger growth rates in output and employment than previously forecast current projections for growth and inflation in the Euro area suggest that an increase in interest rates is not expected in the short term. However, if growth continues in the Euro area, it would appear unlikely that the prevailing level of low rates will continue in the medium to long term. In Budget 2018, the Department of Finance16 modelled the impact of a shock to the economy of a 1 percentage point increase in the main ECB policy interest rate over 5 years. Relative to the baseline projections the effect would reduce Irish GDP and employment by approximately 1 per cent and 0.7 per cent after 5 years. The impact on the public finances would result in the deficit to GDP ratio and the debt to GDP ratio rising by 0.3 and 2.3 percentage points. The Department’s analysis suggests that this is principally driven by output in the
15 The Harmonised Index of Consumer Prices (HICP) provides the headline inflation Figure for the Euro Area. It is calculated as a weighted average of national consumer price indices. The weights are based on national accounts data for household consumption expenditure. 16 Department of Finance, Medium Term Economic Outlook, 2017 26
Costs of Doing Business 2018
Euro area being reduced below the baseline level, and a strengthening of the euro relative to the baseline which has a negative competitiveness effect.
Ireland has benefitted from the ECB’s policy approach with an associated reduction in debt interest costs for Government, Households and enterprise. As set out in the National Risk Assessment 201717, while Government debt in Ireland remains high, the risk to government debt arising from an increase in interest rates on new borrowing is moderated by the structure of debt (mostly fixed rates and the long maturity profile of our existing stock of debt). The continued high level of private debt means households and the high proportion of mortgages on variable tacker rates would be affected by increases in interest rates in the medium term. While public, household and corporate debt levels in Ireland have been reduced in recent years, they remain relatively high. A continued focus on reducing public and private indebtedness and further reductions in the level of non-performing loans is warranted. Further reductions in debt levels could help reduce some of Ireland’s exposure to an interest rate shock. The impacts of increases in interest rates on domestic borrowing, loan repayment and economic activity will depend on the level of pass-through of rate increases by the banks. The determinants of the cost of credit in Ireland are complex and varied, but the concentrated lending market, coupled with higher credit risk premiums, have been cited as the reasons for higher interest rates in Ireland compared to the Euro area average. As noted by the ESRI18, while historically Irish banks would pass on policy rate changes since the beginning of 2009, rates have remained relatively high despite ECB rate reductions. Research by the ESRI19 suggests that a primary reason for a disconnect in pass-through between the policy rate and the standard variable rate is attributable to weak competition in the market. While there are no quick and easy ways to increase competition in the market, the policy focus should be on developing well considered measures which support competition in the sector over the medium term.
17 Department of An Taoiseach, National Risk Assessment, 2017 18 ESRI, Quarterly Economic Commentary, Winter 2017 19 McQuinn, K. and C. Morley (2015). ‘Standard Variable Rate (SVR) Pass-Through in the Irish Mortgage Market: An Updated Assessment’, ESRI Research Note.
27 Chapter 3 – Exchange Rates and Harmonised Competitiveness
Figure 8: Euro/pound sterling and euro/dollar exchange rate Index, January 2014-2018
Pound sterling US dollar The €/£ exchange rate 1.50 average was 0.88 in 2017
1.40 compared with 0.82 in 2016 and 0.73 in 2015. 1.30 Sterling was 0.91 in 1.20 August 2017. The €/$ 1.10 spot rate averaged 1.13
1.00 in 2017, up from 1.11 in 2015 -2016. The
Euro Exchange Rate Exchange Euro 0.90 sustained appreciation 0.80 of the euro-sterling 0.70 exchange rate poses
0.60 significant challenges
for export
2017M11
2017M07
2015M11
2017M01
2017M03
2014M11
2016M11
2017M05 2015M07
2015M01
2015M03
2014M07 2016M07
2017M09 competitiveness.
2015M05
2014M01
2014M03
2016M01
2016M03
2014M05
2016M05 2015M09 2014M09 2016M09 Source: Eurostat
Figure 9: Euro/pound sterling and euro/dollar exchange rate, year-on year change, 2015-2017
Pound sterling US dollar Variations in exchange 30 rates can significantly 25 and rapidly impact upon 20 competitiveness. In 15 2016, and the first half 10
5 of 2017 the Euro
0 strengthened and
-5 appreciated against
-10 Sterling in the run up to Year on Year Percentage Change Percentage Year on Year -15 and post the UK -20 referendum on EU -25 membership. In 2017,
the Euro strengthened
2017M11
2017M07
2015M11
2017M12
2017M01 2017M10
2017M03
2016M11
2015M07 2017M05
2015M12
2015M01 2015M10
2015M03
2017M02
2017M08
2017M04
2016M07 2017M06 2017M09
2015M05
2016M12
2016M01 2016M10
2016M03
2015M02
2015M08
2015M04
2016M05 2015M06 2015M09
2016M02
2016M08
2016M04 2016M09 2016M06 and appreciated by 12 per cent against Sterling. Source: Eurostat
28
Costs of Doing Business 2018
Figure 10: Harmonised Competitiveness Indicators20, Ireland, January 2011 - December 2017 (1999 = 100)
Nominal HCI Real HCI HCI data for December 115 2017 show that the nominal HCI increased 110 by 5% on an annual basis. In real terms, the
105 HCI increased by 3.5 per ) cent when deflated with
100 consumer prices. The
movement indicates a Index Index =100 (1999 95 decline in this measure of competitiveness
90 linked to the exchange rate movements, with subdued inflation likely 85
to be mitigating the
Jan-17
Jan-11
Jan-13
Jan-15
Jan-12
Jan-14
Jan-16
Sep-17
Sep-11
Sep-13
Sep-15
Sep-12
Sep-14
Sep-16
May-17
May-11
May-13
May-15
May-12 May-14 May-16 impact on the real HCI. Source: Central Bank of Ireland
Figure 11: Real effective exchange rate (REER), Ireland, deflated by Consumer Prices, 2011-2017
EA 19 EU 28 37 Countries 42 Countries The REER is a country’s 100 exchange rate relative to 98 a basket of exchange 96 rates of other countries 94 weighted by their 92 respective trade shares. 90 A negative value
88 indicates improving Index 2010=100 Index 86 competitiveness relative 84 to its principal trading 82 partners. Recent 2011 2012 2013 2014 2015 2016 2017 developments in exchange rates and inflation have served to improve Ireland’s performance. Source: Eurostat
20 Features of the Irish economy can HCI can affect movements in HCIs and care should be taken in interpreting movements in the indices as a measure of relative international competitiveness. The nominal HCI is affected by exchange rate developments and relative to other Euro area countries a high share of Ireland’s exports are destined for non-Euro area countries (UK and US). Real HCIs consider, relative price movements relative to trading partners. Using consumer prices as a deflator means the impact of intermediate goods and capital goods are not directly considered and the influence of indirect taxes and non-traded goods and services on the CPI limited its usefulness as an indicator of good indication of international competitiveness. See Barry, F, (2017) The Central Bank’s harmonised, competitiveness indicators, users beware, Administration, vol. 65, no. 4, O’Brien, D. (2010) Measuring Ireland’s price and labour cost competitiveness. Central Bank Quarterly Bulletin, 1
29 Chapter 4 – Labour Costs, Earnings and Tax
Figure 12: Total economy hourly labour costs 21,2017
Wages & Salaries Labour costs other than wages and salaries Total Hourly Labour
45 Costs denominated in 40 Euro are shown in Figure 35 12. Hourly labour costs 30 in the EU ranged from 25 €4.1 in Bulgaria to €42.5 20 in Denmark. At €31 per 15 hour, Ireland's hourly 10 rate was the 8th highest Total Total Hourly Labour Costs (€) 5 in the Euro area, 2% and 0
20% higher than the
EU
UK
Italy
Spain
Latvia
France
Ireland Poland
Finland Euro area (€30.3) and
Sweden
Denmark
Germany Euroarea
Netherlands the UK (€25.7). Luxembourg Source: Eurostat
Figure 13: Employers' social contributions and other labour costs paid by the employer as a percentage of total labour costs, 2017
2017 2013 Over the period 2013-
40 2017, as a percentage of
35 total labour costs, Irish
30 labour costs, other than
25 wages and salaries have
wage wage costs (%) 20 been flat. In 2017, these - 15 costs represented 13.7% 10 of the total labour costs, 5 Share Share of non a significantly lower
0 figure compared to the UK
Italy Euro area (25.9%). The
Spain
Latvia
France
Poland
Ireland
Finland
Sweden Denmark
Germany equivalent figure for the Euro area Euro Netherlands UK was 17.1%.
Source: Eurostat
21 Eurostat total economy data refers to enterprises with 10 or more employees and excludes agriculture and public administration 30
Costs of Doing Business 2018
Figure 14: Employer and employee social security contributions, 2016
Average rate of employees' social security contributions Average rate of employer's social security contributions Ireland has the 9th 60 lowest rate of social
50 security contributions in the OECD. Unlike 40 other countries, where either a cap on 30 employer social
Rate of taxation (%) taxation ofRate security costs or a 20 reduced rate above a
10 threshold exists, in Ireland, a flat rate is
0 charged on the full
US
UK
Italy
Spain
Japan
Korea
Latvia
France Ireland
Poland salary; as salaries
Finland
Sweden
Germany
Denmark
Switzerland Netherlands
New Zealand increase, Ireland's OECD OECD - Average competitiveness position is eroded. Source: OECD, Taxing Wages 2017
Figure 15: Eurostat Growth in Hourly Labour Costs 201722
In national currency In euro Between 2016 and 10 2017, hourly labour 8 costs in the whole 6 economy expressed
4 in € rose by 1.9%
2 both in Ireland and the Euro area. The 0 largest increases -2 were recorded in the Change Change in hourly labour costs (%) -4 Baltic Member
-6 States. The only
UK decrease was
Italy
Spain
EU 28
Latvia
France
Ireland
Poland Finland
Sweden observed in Finland (-
Germany
Denmark
Netherlands Euroarea 19 Luxembourg 1.5%). Expressed in national currency, hourly labour costs increased in the UK (+2.6%) (-4.1% in €).
Source: Eurostat
22 When comparing labour cost estimates over time, levels expressed in national currency should be used to eliminate the influence of exchange rate movements.
31
Figure 16: Growth in nominal labour costs, Labour Cost Index, 2017
EU28 Euro area Ireland UK Expressing growth in an index form, where 2012 111.0 labour costs=100, the 109.0
graph shows that Irish 100) - 107.0 nominal labour costs 105.0 have been increasing 103.0 since 2014 but 101.0 cumulatively have
99.0 increased by less than Labour Labour index cost (2012
97.0 the EU, Euro area and UK labour costs. The 95.0 2011 2012 2013 2014 2015 2016 2017 index does not reflect the different starting levels of labour costs in each country. Source: Eurostat
Figure 17: Mean nominal hourly labour cost per employee, (Constant 2011 PPP $ Currency), 2016
2016 2012 Figure 17 shows 50 hourly labour costs 45 expressed in 40 purchasing power 35 standards (PPS), a 30 25 measure which 20 accounts for price 15 differentials across 10
Constant 2011PPP (Currency) $ countries. A large 5 group of countries 0
have similar hourly
UK
Italy
Israel
Spain
Latvia
France
Ireland Poland
Finland labour costs in PPS
Sweden Germany
Netherlands terms. Ireland’s cost Luxembourg in 2016 was $37.6 compared to $31.6 in the UK. Source: ILOstat
32
Costs of Doing Business 2018
Figure 18: ILO Mean nominal hourly labour cost per employee (Constant 2011 PPP $ Currency) Growth rate
Figure 18 shows the Ireland UK trend in growth in 39 nominal hourly 37 labour cost per employee in Ireland 35 and the UK over the 33 period. While Irish
31 levels are above the UK, the gap between 29 the two is narrowing. 27 UK costs have risen Constant 2011PPP (Currency) $ faster in every year 25 and increased by 2012 2013 2014 2015 2016 1.1% in 2016 to $31.6 per hour compared to an increase of 0.9% to $37.6 per hour in Ireland. Source: ILOstat
Figure 19: Hourly labour costs, Business Economy, 2017
Business economy Industry Construction Services Within the business
50 economy (exl agriculture, public 45 admin), labour costs 40 per hour in Ireland 35 were highest in 30 industry €32.9 25 compared to €33.4 in 20 the euro area. Labour
15 costs in Irish services HourlyLabour Costs(€) 10 were €28.9 compared
5 to €29.3 and €25.2 in the Euro area and 0
UK. Costs per hour
UK
Italy
Spain
EU 28 EU
Latvia
France
Poland Ireland
Finland were €27.3
Sweden
Denmark
Germany Netherlands Luxembourg construction (Euro Euro area Euro19 area €26.7 and UK €25.4). Source: Eurostat
33
Figure 20: Hourly Labour Costs, Business Economy, Detailed NACE sectors, 2017
Ireland UK Euro area Figure 20 compares
60.0 hourly labour cost
50.0 levels in € across 40.0 economic sectors. 30.0 Hourly labour costs 20.0 are highest in Utilities 10.0 (€55) and lowest in
0.0 Accommodation and Total labour Total labour costs (€ per hourly)
ICT Food (€16). Ireland
(€46) is behind the Construction
Manufacturing UK (€46.2) in
recreation
motor repair technical
BusinessEconomy financial services. In
conditioning
Mining andquarrying
wastemanagement
Wholesale, retail trade,
Financial and insurance Arts, entertainment and
Water supply; sewerage, manufacturing (IE €
Accommodation and food
Professional, scientificand
Transportation and storage Administrative andsupport Electricity,gas,steam and air 31.6 and UK €24.6) and ICT (€43.8 and €34.3) Ireland is above UK levels. Source: Eurostat
Figure 21: Change in sectoral hourly labour costs (own currency) Ireland and UK, 2017
Ireland UK There is considerable
6 divergence within the 5 4 Irish economy and 3 2 between Ireland and 1 the UK in labour cost 0 -1 growth in 2016. In -2 -3 Ireland, the sectors -4
with the highest rates ICT % Change % (Own Currency levels) of growth were
Utilities (5%) and
Construction
Storage Manufacturing
TotalEconomy professional services
recreation
BusinessEconomy Transportation and
service activities (3.8%). Growth was
service activities
Mining andQuarrying
technicalactivities
Otherservice activities
Arts, entertainment and
wastemanagement and…
air conditioning supply
Water supply; sewerage,
repair of motor vehicles…
Accommodation and food Electricity,gas,steam and
Professional, scientificand negative in mining, Wholesale andretail trade; Administrative andsupport arts and other services. In the UK growth was highest in administrative (4.8%) and transport (4.7%). Source: Eurostat
34
Costs of Doing Business 2018
Figure 22: Growth in nominal labour costs, whole economy, percentage change, quarterly, 2013-2017
2017 2013 2015 Ireland had the 11th 8.0 highest percentage increase (2%) in nominal 6.0 labour costs in the Euro area (the corresponding 4.0 figure for the Euro area was 1.6%) in 2017. This 2.0 is the highest percentage increase 0.0 over the period 2012-
Annual Annual percentage change compared 2017. The increase in the -2.0 wage and salaries component is the 10th -4.0
UK highest in the Euro area
Italy
Spain
Latvia
France
Poland
Ireland
Finland Sweden
Denmark and the highest increase
Euro area Euro Germany Netherlands in Ireland since 2008. Source: Eurostat
Figure 23: Growth in labour costs23, by economic sector, annual percentage change, 2017
Ireland UK EU28 Euro area The rate of labour cost varies by sector. In 2017 9.0 8.0 the highest annual 7.0 increase was recorded in 6.0 Financial & Insurance 5.0 4.0 (4.9%) and Professional 3.0 & Technical (3.8%). 2.0 Growth was lowest in 1.0 0.0 Construction (0.6%). In
ICT the Euro area the
strongest growth was in Percentage change on previousperiod
Construction Professional &Technical,
Manufacturing and in the UK – in
Business Business Economy
Financial&Insurance Accomodation&Food
Public administration Public Financial & Insurance.
Professional&Technical
Transportation&storage
Administrative&support Wholesale, retail, motor retail, Wholesale,
Source: Eurostat
23 Labour cost for LCI (compensation of employees plus taxes minus subsidies)
35 Figure 24: Growth in labour costs, by economic sector, average annual percentage change, 2013-2017
Ireland 5 year average Euro area 5 year average UK 5 year average In the five years to the
5 end of 2017, labour costs
4 growth in the Irish
3 business economy was
2 1.2% compared to
1 1.42% in the Euro area
0 and 2.28% in the UK. -1 Growth in Ireland was
ICT highest in ICT (2.42%),
Administrative (2%) and Construction
storage Wholesale (1.54%).
Manufacturing
services
&technical Business Economy
Transportation andTransportation Growth was lowest in
Financial&Insurance
Accomodation&Food
Public administration Public
Professional, scientific Professional, Administrative&support Wholesale, retail, motor Wholesale, retail, Transportation (0.26%) and negative in Public administration (-0.28%). Source: Eurostat
Figure 25: Average hourly other labour costs24 2012-2017
2016 2012 In Q3 2017 the average 40 other labour costs 35 represent 13.4% of the
30 average hourly total labour costs (compared 25 to 13.2% in Q3 2012).
20 The average other labour costs have 15 increased in 13 out of 10 the 16 sectors examined
5 between Q3 2012 and Q3 2017. The highest 0
Employers' Employers' social contribution as percentage a total of labour costs (%) increases were in the
UK
Italy
Spain
Latvia
France
Ireland
Poland Finland
Sweden Real Estate (6.1%),
Denmark
Germany Netherlands Euro area 19 Mining and Quarrying (3.8%) and ICT (2.9%). Source: CSO
24 Other labour costs are comprised of statutory social contributions (e.g. employer PRSI), non-statutory contributions (employer pension contributions), benefits in kind (BIK), other expenses (e.g. employer training expenses), redundancy payments and subsidies. 36
Costs of Doing Business 2018
Figure 26: Average hourly earnings in Ireland by Q1 2013-201825
The average hourly Average Hourly Earnings excluding Irregular Earnings Q1 2018 Average Hourly Irregular Earnings Q1 2018 earnings increased by Average Hourly Earnings excluding Irregular Earnings Q1 2013 Average Hourly Irregular Earnings Q1 2013 3.5 per cent between Q1
40 2013 and Q1 2018; irregular earnings 35 increased by 14 per cent. 30 The highest increases 25 occurred in the Real
20 Estate (25.8%), Construction (9.7%) and Euro per Euro per hour 15 Administrative sectors 10 (8.9%). The highest
5 hourly earnings (€35.22 per hour) were recorded
0 ICT
Arts in Education; the lowest
Education earnings were in the
Real estate Real
Professional
Construction
Human Human health Manufacturing
Administrative accommodation &food
Wholesale&retail
Financial&insurance Public Public administration
Mining and Mining quarrying and sector (€12.76 per hour).
Accommodation&food Transportation&storage All NACE economic sectors All economic NACE Source: CSO
Figure 27: Growth rate in average total annual earnings by sector, Ireland 2014-2016
2015/2016 14/15 13/14 Average annual earnings 7 across all sectors in Ireland 6 5 grew by 2.1% over the 4 period 2012-2016. 8 out of 3 2 12 sectors recorded 1 increases between 2015 0 -1 and 2016. The largest -2 -3 increases were recorded in Growth in Average Total Earnings (%) Earnings Total Average in Growth -4 Professional, scientific and
ICT technical activities (6.4%),
Industry All sectors All
Education Construction (3.3%) and
Professional Construction
Accomm & food & Accomm Accommodation and food
Wholesale & retail & Wholesale
Finance & insurance & Finance Public administration Public Arts & entertainment & Arts services (3.3%). The Transportation & storage & Transportation largest decline was recorded in Public Administration. Source: CSO
25 Data for Q1 2018 is preliminary and subject to revision.
37
Figure 28: Average hourly earnings (excluding irregular earnings) by size of enterprise, Ireland, Q1 201826
< 50 employees 50 - 250 employees > 250 employees The average hourly 5 earnings in enterprises 4 employing less than 50
3 and between 50 and 250 people have been more 2 volatile over the period
1 examined. Earnings in enterprises with more 0 than 250 people were
-1 above the earnings in the Average Average hourly earnings (% change) other two categories and -2 in Q1 2018 they were -3 €24.54, compared to
-4 €18.13 for businesses with
less than 50 and €19.69 for
2017Q1
2017Q3
2013Q3
2015Q1
2015Q3
2017Q2
2017Q4
2018Q1
2013Q2 2014Q1
2013Q4 2014Q3
2016Q1
2016Q3
2015Q2
2015Q4
2014Q2
2014Q4 2016Q2 2016Q4 businesses employing between 50 and 250. Source: CSO
Figure 29: Monthly minimum wage PPS (2017) and minimum wage as a percentage of average wage (2011- 2017)27
55 In 2017, Ireland had the second highest monthly Slovenia 50 Greece minimum wage of FranceLuxembourg Lithuania Portugal €1563. The chart shows 45 Hungary Poland Belgium Latvia Malta UK that, when expressed in Netherlands Bulgaria Ireland Germany Purchasing Power 40 Romania Croatia Standards, the Estonia minimum wage was 35 Czech Republic Spain €1,403. The minimum wage as a percent of 30 average wage ranged Monthly Monthly minimum wage of % as average wage from 34% in Spain to 25 50% in Slovenia. In Ireland, it was 42.3% and 20 100 300 500 700 900 1,100 1,300 1,500 1,700 44.1% in the UK. Monthly minimum wage (Purchasing Power Standard)
Source: Eurostat
26 Q1 2018 preliminary estimates 27 Data relating to the minimum wage as a percentage of average wages is based on the latest year available. All data measuring monthly minimum wage levels relates to the first half of 2017. 38
Costs of Doing Business 2018
Figure 30: Average annual gross & net earnings, single individual, no children, 100% of average earnings28, 2015
Gross annual earnings (€) Net annual earnings (€) Ireland had the 8th €90,000 highest gross and 6th €80,000 highest net wage level in €70,000 €60,000 the Euro area-19 in 2015. €50,000 Net earnings were €40,000 almost 13% above the €30,000 Euro area average,
Annual Earnings (€) Earnings Annual €20,000 €10,000 partly a result of the
€0 relatively small gap
US UK
Italy between before and
Japan
EU 28 EU
Latvia
France
Ireland
Finland
Sweden Denmark
Germany after-tax wages in
Switzerland
Netherlands Euro area 19 area Euro Luxembourg Ireland (primarily a result of low social security contributions). Source: Eurostat
Figure 31: Average income tax plus employee and employer contributions less cash benefits – single individual earning 100% of average earnings29, 2016
2016 2012 For a single person 60 earning 100% of the
50 average wage in 2016, total average income tax 40 in Ireland was the seventh lowest in OECD 30 (27.1% compared to the
20 OECD average of 36%). Rate of taxation (%)oftaxationRate Irish taxes rates rose 10 marginally in the five
0 years to 2016 whereas US
UK OECD figures were
Italy
Spain
Japan
Korea
Latvia
France
Ireland
Poland Finland
Sweden comparable in 2012 and
Germany
Denmark
Switzerland Netherlands
New New Zealand 2016.
OECD-Average Source: OECD, Taxing Wages 2017
28 Gross wages include wages, taxes on income and employer and employee social security contributions. EU27 and Euro area 17 excludes Cyprus. 29 Where relevant, the Universal Social Charge is included in the Irish data.
39
Figure 32: Marginal income tax, single individual, no children, 201630 Single person at 67% of Average wage, no child Single person at 100% of Average wage, no child The Irish marginal tax Single person at 167% of Average wage, no child rate for employees 80 earning 100% or 167% of 70 average earnings in 2016 60 was 54.4%, above the 50 OECD average (47%) 40 and UK (49%). However,
30 at 36.3%, the rate for a Rate of taxation (%) taxation of Rate 20 single individual earning 10 67% of average earnings
0 in Ireland was below the
US
UK
Italy
Spain Japan
Korea OECD average of 41.8%.
Latvia
France
Ireland
Poland
Finland
Sweden
Germany
Denmark
Switzerland
Netherlands New Zealand New OECD-Average Source: OECD, Taxing Wages 2016
Figure 33: Average tax wedge, single individual at 100% of tax earnings, no children, 201631
2016 2011 Ireland historically has 60 one of the lowest tax wedge levels both 50 within the EU and the OECD at average wages. 40 In 2016, Ireland’s
30 average tax wedge was 27.1% of labour costs.
20 This compares very favourably to the OECD 10 average of 36.0%. At 167% of average wages, 0
the wedge is 54%
US
UK
Italy
Israel
Spain
Japan
Korea
Latvia
France
Ireland
Poland
Finland Canada
Sweden compared to 47% in the
Germany
Denmark
Switzerland
Netherlands Luxembourg
New Zealand New OECD and 49% in the OECD - AverageOECD - UK. Source: OECD, Taxing Wages 2016
30 Marginal rate of income tax plus employee and employer contributions less cash benefits
31 The average tax wedge is used by the OECD to measure the extent to which taxes on labour income discourage employment. The tax wedge is defined as the ratio between the amount of taxes paid by an average single worker without children (i.e. a worker on 100% of average earnings) and the corresponding total labour costs for the employer including employer social insurance costs.
40
Costs of Doing Business 2018
Figure 34: Average income tax plus employee and employer contributions less cash benefits, married couple with two children, earning 100% of average earnings, 2016
2016 2012 For a married couple 60 earning 100% of the 50 average wage with two children in 2016, the 40 combined total of 30 income tax and employee and employer 20
Rate of Taxation (%) Taxation of Rate contributions in Ireland 10 (8.3%) was the third lowest in the OECD 0
(26.6%). At higher
US
UK
Italy
Spain
Japan
Korea
Latvia France
Poland income levels (167% of
Ireland
Finland
Sweden Denmark
Germany average earnings), the
Switzerland
Netherlands New Zealand New OECD-Average average rate in Ireland remained competitive and below the OECD average. Source: OECD, Taxing Wages 2017
Figure 35: Average income tax rate, single individual earning 100% of average earnings, Ireland, selected economies 2016
Ireland UK US OECD - Average In Ireland, the average 38 income tax for a single 36 worker earning 100% of 34 the average wage over 32 the last 16 years has
30 been consistently lower
28 than the OECD average rate and rates in the UK 26 & US. The Irish rate in Rate of taxation (%) of taxation Rate 24 2016 was 27%, below 22 comparable UK (30.8%)
20
2001 2002 2004 2005 2006 2007 2009 2010 2012 2013 2015 2016 2003 2008 2011 2014 2000 & US (31.7%) rates. In 2016, the Irish rate fell by 1.8% to 27.1% while the average income tax across the OECD decreased by 1 % to 36%. Source: OECD, Taxing Wages 2017
41 Figure 36: Marginal income tax, married couples with children, earning 100%, 133% or 167% of average earnings, 2 children, 2016
Married 2 children, 100-33% avg earnings Married couples with Married, 2 children, 100-67 % avg earnings children, earning 100%, Married, 2 children, one earner 100% avg earnings 70 133% or 167% of the 60 average earnings pay marginal rate of 36.3% 50 in Ireland. The 40 corresponding average
30 rates across the OECD are 44.4%, 44.4% and
Rate of Taxation (%) Taxation ofRate 20 43.8% respectively. 10 Married couples in
0 Ireland also fare better US
UK than single people in
Italy
Spain
Japan
Korea
Latvia
France
Ireland
OECD-… Poland
Finland terms of marginal rate
Sweden
Germany
Denmark Switzerland
Netherlands of income tax. New New Zealand Source: OECD, Taxing Wages 2017
Figure 37: Corporation Tax Rates, 2008-2017
2017 2013 2008 Ireland’s corporation tax rate remains 40 internationally 35 competitive and is the 30 third lowest in the OECD 25 at 12.5%. While Ireland’s
20 rate has remained consistent over recent 15 years, many of our key 10 competitors have 5 Corporate Income Tax Rate (%) reduced their rates (e.g. 0 the UK and in 2018, the 32
UK US ).
US*
Italy
Israel
Spain
Japan
Korea
Latvia
France
Ireland
Poland
Finland
Canada
Sweden
Germany
Denmark
Switzerland
Netherlands Luxembourg New Zealand New Source: OECD
32 The Tax Cuts and Jobs Act of 2017 reduced US corporate tax rates to one flat rate of 21% tax rate on corporate income from January 1 2018. 42
Costs of Doing Business 2018
Chapter 5 – Property Costs
Figure 38: Quarterly change in capital values in Ireland, Q1 2015-Q4 2017
Office Capital Retail Capital Industrial Capital Overall (Right Axis) Figure 38 shows the 1,600 16,000 change in capital values
1,400 14,000 (in index form) in Ireland for a range of 1,200 12,000 commercial property 1,000 10,000 classes. Since Q1 2015, 800 8,000 values across all
600 6,000 categories have Capital Value Index CapitalValue consistently increased.
400 4,000 Index CapitalValue Overall Overall capital value 200 2,000 growth was recorded at 0 0 5.2% in Q4 2017 – this
comprised of annual
Q1 2017Q1
Q3 2017 Q3
Q1 2015Q1
Q3 2015 Q3
Q2 2017Q2
Q4 2017 Q4
Q1 2016 Q1
Q3 2016 Q3
Q2 2015Q2
Q4 2015 Q4 Q2 2016 Q2 Q4 2016 Q4 increases of 8.4%, 1.3% and 3.2% in Office, Retail and Industrial values respectively. Source: Jones Lang LaSalle, Irish Property Index
Figure 39: Cost of constructing a prime office unit, $ per square metre33, 2016
2016 2013 In Dublin, 2016 cost is
5,000 estimated at $2,553 compared with $3,519 in 4,000 London. In advanced 3,000 economies, 20 of the 25 markets saw 2,000 construction costs rise 1,000 US$ per US$per metre squared by more than general
0 inflation – the average price increase for these
economies was 2.7% Singapore
UK(London) with markets such as
China(Beijing)
Ireland(Dublin) Poland(Warsaw)
Canada (Toronto) Dublin seeing cost Germany(Munich) SouthKorea (Soeul) inflation as high as 7 %.
Netherlands(Amsterdam) Source: Turner and Townsend Construction Cost Survey
33 Prices quoted are the upper boundary of the cost of the constructing a prime office unit. A prime office unit refers to a city centre, self-contained building of a size and height typical of major cities in a country; building costs include for accommodation to a good finish with raised floors, carpet, suspended ceilings, air conditioning, lighting and power, but excluding partitioning.
43 Figure 40: Cost of constructing a High-Tech Factory, € per square metre, 2016
2016 2013 The cost of constructing
3,000 a High-Tech 2,500 Factory/Laboratory 2,000 varies considerably 1,500 across advanced 1,000 economies. In Dublin, 500 cost is estimated at 0
Cost per metre (US$)squared $2,234, over 6% since
2013. The comparable Singapore
UK (London) figure for London is
China(Beijing)
Ireland(Dublin) Poland (Warsaw)Poland
Canada Canada (Toronto) $2,494. The highest Germany(Munich) SouthKorea (Soeul) increase was recorded in
Netherlands(Amsterdam) Amsterdam, where the cost of construction increased by 28% over the five-year period. Source: Turner and Townsend Construction Cost Survey
Figure 41: Cost of renting a prime office unit, € per square metre per year, Q4 201734
2017 2016 2013 Office rental prices in 1600 Ireland in 2017 compare 1400 favourably to cities in 1200 the UK. In 2017, 1000 Cushman and Wakefield 800 report the cost per SqM 600 per year in Dublin City € per Sq.M per Yr perSq.M per€ 400 (€619) and Suburbs 200 (€324), Limerick and 0 Cork (€325) and Galway
Cork (€295). UK costs range
Bristol
Cardiff
Galway
Limerick Glasgow Dublin Dublin 2/4
Edinburgh from €1333 in the West
Manchester LondonCity
Birmingham End, €406 in Dublin Dublin Suburbs
London West End West London Manchester, and €303 in Cardiff. Source: Cushman and Wakefield, Office Snapshot Reports
34 Figures for both Dublin (D2/D$) and Cork are from Q2 2016.
44
Costs of Doing Business 2018
Figure 42: One and five-year Growth35 in Cost of renting a prime office unit, € per square metre per year, Ireland and the UK, Q4 2017
Growth 1 year Growth 5 year Annual growth rates in 80 Ireland are much 70 stronger than in the UK. 60 Year-on-year increases 50 in Irish locations ranged 40 from 67% (Limerick), 30 29% (Galway), 12%
% Change % 20 (Cork) and 9% (Dublin 10 Suburban). Rental Costs 0 -10 fell in London city and -20 West End (1.5%, 8.3%). On annual basis rents were unchanged in Dublin 2/4, Cardiff and Glasgow. Source: Cushman and Wakefield, Office Snapshot Reports
Figure 43: Cost of Renting a Prime High Street Retail Unit, € per square metre per month, Ireland and the UK, Q4 2017
16000 In Q4 2017 prime retail
14000 rents had increased on
12000 an annual basis across
10000 Ireland. The most 8000 expensive location was 6000 Dublin (€3,794, +4% 4000 € per Sq.M p Year Sq.M perp € year-on-year). Costs in 2000 Galway (1,349, +9%), 0 Cork (€1,265, 0%) and
Cork Limerick (€562, 5%)
Cardiff
Dublin
Galway
Glasgow Limerick
Edinburgh compare relatively
Manchester
London CityLondon Birmingham
favourably to the UK. London West EndLondon West Rental costs in the UK range from €1,267 in
Dublin (out of town retail park) ofretail Dublin town (out Cardiff to €2,163 and €16,000 in London City and West End. Source: Cushman and Wakefield, Retail Market Snapshots
45 Figure 44: Time and Cost of Dealing with Construction Permits in building a warehouse36, 2017
Dealing with Construction Permits - Cost Ireland scores well on Dealing with Construction Permits - Time (Right Axis) building control and 6 300 regulatory quality but 5 250 poorly on time and cost to build. The World 4 200 Bank estimates it takes 3 150 149 days to build a
2 100 Time(days) warehouse in Dublin compared with 86 days 1 50 37 Cost (% of Warehouse value) Warehouse (%ofCost in London. Cost is a
0 0 percentage of
US UK
Italy warehouse value and
Israel
Spain
Japan
Korea
Latvia
France
Ireland
Poland
Finland Canada
Sweden estimated at 4.6% in
Germany
Denmark
Switzerland Netherlands
Luxembourg Dublin compared to 1% New New Zealand in London. Source: World Bank, Doing Business
Figure 45: Time and Cost of Registering a Property, 2017
Registering Property - Cost Registering Property -Time (Right Axis) Figure 45 shows the 38 12 90 time and cost involved
80 in registering property, 10 70 in a standardised case of an entrepreneur 8 60 purchasing land and a 50 6 building already 40
Time (days) Time registered and free of 4 30
(% of property value) (% of property title dispute. Ireland 20 2 performs relatively well 10 in terms of cost as a
0 0 percentage of value
US UK
Italy 2.5% compared to 4.8%
Israel
Spain
Japan
Korea
Latvia
France
Poland
Ireland
Finland
Canada
Sweden Denmark
Germany in the UK. The process
Switzerland
Netherlands Luxembourg New Zealand New takes 31 days compared to 21 in the UK. Source: World Bank Doing Business
36 This category is based on the procedures, time, and costs to build a warehouse, including obtaining necessary licenses and permits, completing required notifications and inspections, and obtaining utility connections. 37 Cost is recorded as a percentage of warehouse value. The value is €2 million in Dublin and £1.4 million in London) 38 Cost is recorded as a percentage of the property value, assumed to be equivalent to 50 times income per capita. Only official costs required by law are recorded, including fees, transfer taxes, stamp duties and any other payment to the property registry, notaries, public agencies or lawyers. Other taxes, such as capital gains tax or value added tax, are excluded from the cost measure. Both costs borne by the buyer and the seller are included. If cost estimates differ among sources, the median reported value is used.
46
Costs of Doing Business 2018
Chapter 6 – Transport Costs
Figure 46: Europe Brent39 Spot Oil Price, USD per Barrel, 2012-2017
Monthly price 5 year median price The price for Brent 140 Crude is one of the primary benchmarks for 120 oil prices globally. 100 While the price of oil has been relatively subdued 80 in the period 2014-2016 60 (with the lowest price US$ per barrel per US$ recorded in January 40 2016 at $30.7 per 20 barrel), in the second half of 2017 the price of 0 oil has been gradually
increasing. Prices were
Jul-2017
Jul-2013
Jul-2015
Jul-2012
Jul-2014
Jul-2016
Jan-2017
Jan-2013
Jan-2015
Jan-2012
Jan-2014
Jan-2016
Apr-2017
Oct-2017
Apr-2013
Oct-2013
Apr-2015
Oct-2015
Apr-2012
Apr-2014
Apr-2016
Oct-2012 Oct-2014 Oct-2016 25% higher in 2017 than in 2016 averaging $53/barrel for the year. Source: US Energy Information Association
Figure 47: Average diesel and petrol costs per litre in Ireland, January 2012-January 2018
Petrol €/L Diesel €/L Figure 47 shows the 1.8 trends in consumer prices for petroleum products in Ireland over
1.6 )
€ the period January 2012-January 2018. 1.4 Year-on-year petrol and diesel prices increased Price per litre ( litre per Price 1.2 by 6.3% and 7.8% respectively in 2017 1 compared to 2016. The lowest prices were
recorded in February
09 July 2017 09July
09 July 2013 09July
09 July 2015 09July
09 July 2012 July 09 09 July 2014 09July
09 July 2016 09July 2016, at €1.2 per litre for
09 April 2017 09April
09 April 2013 09April
09 April 2015 09April
09 April 2012 09April
09 April 2014 09April
09 April 2016 09April
09 January 2017 09January
09 January 2013 09January
09 January 2015 09January
09 January 2012 09January
09 January 2018 09January
09 January 2014 09January
09 January 2016 09January
09October 2017
09October 2013
09October 2015
09October 2012 09October 2014 09October 2016 petrol and €1.04 per litre for diesel. Source: US Energy Information Association
39 Brent is the leading global price benchmark and is used to price two thirds of the world's internationally traded crude oil supplies.
47 Figure 48: Diesel and petrol costs per 1,000 litres, January 2018
Petrol ( incl Taxes) Diesel (incl Taxes) Petrol (no taxes) Diesel (no taxes) The costs of 1,000 litres 1800 of diesel (€1,299) and
1600 petrol (€1,399) In Ireland are higher than the Euro 1400 area average (€1,247 1200 and €1,358 respectively),
1000 ranking Ireland 7th and 6th most expensive in 800
per 1,000 litresper1,000 the Euro area. Taxes on € 600 diesel range from 49% to 63% across the 400 countries benchmarked 200 (Ireland - 57%) and for
0 petrol from 54% to 67% UK
Italy (Ireland - 62%).
Spain
Latvia
France
Ireland
Poland
Finland
Sweden
Germany
Denmark Euroarea
Netherlands Source: European Commission, Energy Statistics & Market Observatory
Figure 49: Trends in Transport Related Prices in Ireland, 2012 - Q3 2017
All Sectors Freight & Removal by Road In the transport sector Sea & Coastal Transport Air Transport prices increases have Warehousing,Storage & Cargo Postal & Courier 150 been relatively 140 moderate in recent 130 years, excluding prices 120 in Air transport which 110 have been more volatile 100 and prices in Sea and coastal transport and 90 Index Index (2010=100) Warehousing, Storage 80 and Cargo which have 70 been on a downward 60 2010 2011 2012 2013 2014 2015 2016 2017 trajectory since Q4 2016.
Source: CSO, Services Producer Price Index
48
Costs of Doing Business 2018
Figure 50: Administrative Costs and Time to Export40, 2017
Cost to export: Border compliance Cost to export: Documentary compliance The ease and cost of Total Time to Export (Right Axis) customs and admin 600 60 procedures has a
500 50 significant impact on trade flows. Total costs 400 40 in Ireland to export a
300 30 standardised cargo were $380 compared with
200 20 Cost Exportto (US $) Time Time Exportto (Hours) $305 in the UK. It takes 100 10 25 hours to complete the required procedures
0 0 US
UK in Ireland, which is
Israel
China
Japan
Korea
Latvia
Ireland Finland
Canada above the OECD time of
Germany
Singapore Switzerland New Zealand 15 hours but below the
OECD high income UK (28 hours). Source: World Bank, Doing Business 2018
Figure 51: Administrative Costs and Time to Import, 2017
Cost to import: Border compliance (USD) Cost to import: Documentary compliance (USD) The cost to import a Total time (right axis) container in Ireland is 1000 180 estimated by the World 900 160 Bank at $325, 800 140 700 significantly higher than 120 600 the OECD high income 100 500 80 average of $137. The 400 60 time taken to complete
300 Cost Importto (US$) 200 40 Time Importto (Hours) the necessary 100 20 procedures in Ireland
0 0 was 25 hours, compared
US
UK
Israel
China
Japan Korea
Latvia to 12.2 hours in OECD
Ireland
Finland
Canada Germany
Singapore high income average.
Switzerland New Zealand Times and costs for the OECD high income UK are reported as 5 hours and nil respectively. Source: World Bank, Doing Business 2018
40 The World's Bank Doing Business measures the time and cost (excluding tariffs) associated with three sets of procedures - documentary compliance, border compliance and domestic transport - within the overall process of exporting or importing a shipment of goods. The most recent round of data collection was completed in June 2017. Cost estimates of 0 are provided for Denmark, France, Italy, Luxembourg, Spain and Sweden. Average data is provided by the World Bank for an OECD high income grouping.
49 Figure 52: Growth in traffic by region, Ireland, 2016
HGVs All Vehicles Traffic growth was 4.6% across the network in Midwest 2016. The highest Dublin regional growth Mideast recorded in 2016 was in the South-East with Southeast 5.7% for the year. The Southwest Mid-West and Mid-East West experienced growth at
Midlands 5.4% and 5.2% respectively. For HGVs, Border the Mid-East and South- 0 1 2 3 4 5 6 7 8 West recorded highest Annual Percentage Change (%) regional growth with 7.4% and 7.2% respectively. Source: Transport Infrastructure Ireland
Figure 53: Travelling time for persons at Work, School or College, by region, 2016
2011 2016 Nearly 200,000 60000
Commute time >1 hour but <1.5 hours commuters (199,922), 50000 representing almost 11 per cent of all 40000 commuters, spent an 30000 hour or more Commute time >1.5 hours commuting to work in 20000 2016, with an average 10000
Population aged 15 years and over at work at and over years 15 aged Population travel time of 74 minutes. This has
0
Mid-West Dublin 1 hour1 - < 1½ hours Border Midland West Dublin Mid-East South-East South-West 1½hours andover Border Midland West Mid-East Mid-West South-East South-West increased by almost 50,000 persons (31%) on the 2011 figure of Travel Time by Region 152,000. Nearly 53,000 workers commuted 90 minutes or more. Source: CSO
50
Costs of Doing Business 2018
Figure 54: Traffic congestion41 levels, Europe 2016
Congestion Level Morning Peak Evening Peak Traffic congestion based
100% on TomTom's database 90% shows on average, journey times in busy 80% periods take 43%, 34% 70% and 27% more time in 60% Dublin, Cork and 50% Limerick respectively. 40% Dublin is one of the 30% most traffic congested 20% cities in Europe with 10% morning and evening 0%
congestion times 80%
Cork Paris
Berlin and 86% higher
Rome
Zürich
Dublin
Lisbon
Cardiff
Belfast Vienna
Athens
Madrid
London
Brussels
Moscow
Limerick Frankfurt
Bucharest compared to a free flow.
Edinburgh
Stockholm
Manchester
Amsterdam Copenhagen Luxembourg Source: TomTom International
Figure 55: Traffic Congestion levels, Ireland, 2008-2016
Dublin Cork Limerick Figure 55 shows increased economic 60 activity and high usage
50 of private cars relative to public transport has
40 resulted in increased road congestion levels
30 since 2013. In 2008
journey times in busy situation (%) 20 periods took 55%, 39% more time in Dublin and
10 Limerick respectively. At
34%, increases in Increase Increase in time travel compared freeflow to a 0 journey times due to 2008 2009 2010 2011 2012 2013 2014 2015 2016 congestion in Cork were
at 2008 levels in 2016. Source: TomTom International
41 Increase in overall travel times when compared to a free flow situation. For example, a congestion level of 36% corresponds to 36% extra travel time for any trip, anywhere in the city, at any time compared to what it would be in a free flow situation. The TomTom Traffic Index figures are based on speed measurements from TomTom's historical traffic database. These speed measurements are used to calculate the travel times on individual road segments and entire networks. By weighting based on the number of measurements, busier and more important roads in the network have more influence than quieter, less important roads.
51 Chapter 7 – Utility Costs
Figure 56: Non-household electricity prices (excluding VAT and other recoverable taxes and levies) 42, S1 2017,
S1 2017 S1 2013 In the first half of 2017,
0.2500 the Irish weighted average non- 0.2000 household43 electricity prices for non- 0.1500 household consumers
0.1000 (in purchasing power
standard) have declined € per per € kilowatt hour (PPS) 0.0500 compared to 2013. At €0.14, the electricity
0.0000 prices for business
UK
Italy Spain
Latvia consuming between 20
France
Ireland
Poland
Finland
Sweden
Denmark Germany
Euro Euro area and 500 MWh were Netherlands below the Euro area (€0.15) but above the UK price (€0.13). Source: Eurostat
Figure 57: Electricity prices for non-household consumers (Purchasing Power Standard), excluding VAT and other recoverable taxes and levies, low consumption bands, S1 2011-S1 2017
Euro area <20 MWh Ireland <20 MWh UK <20 MWh The price of electricity in Euro area 20 MWh to 500 MWh Ireland 20 MWh to 500 MWh UK 20 MWh to 500 MWh the lowest band (<20 0.2200 Euro area 500 to 2000 MWh Ireland 500 to 2000 MWh UK 500 to 2000 MWh MWh) in Ireland was
0.2000 below the Euro area but above the UK prices. 0.1800 The price of electricity in
0.1600 the 20 to 500 MWh band € per per € kilowatt hour (PPS) 0.1400 fluctuated below and above the Euro area 0.1200 prices, but was above 0.1000 the UK prices. The
0.0800 highest level of price S12011 S22011 S12012 S22012 S12013 S22013 S12014 S22014 S12015 S22015 S12016 S22016 S12017 convergence was in the 500 to 2000 MWh band. Source: Eurostat
42 It should be noted that Ireland’s energy supplies, excluding renewables, are often at the end of supply pipelines and this combined with low spatial density make energy more expensive to deliver in Ireland. 43 Until 2016, the domain of non-household consumers was defined as industrial consumers, consequently reporting authorities were allowed to include other non-household consumers 52
Costs of Doing Business 2018
Figure 58: Electricity prices for non-household consumers (Purchasing Power Standard), excluding VAT and other recoverable taxes and levies, high consumption bands, S1 2011 - S1 2017
Euro area 2 000MWh to 20 000MWh Ireland 2 000MWh to 20 000MWh UK 2 000MWh to 20 000MWh The price of electricity Euro area 20 000 to 70 000MWh Ireland 20 000 to 70 000MWh UK 20 000 to 70 000MWh for non-household 0.1150 Euro area 70 000 to 150 000MWh Ireland 70 000 to 150 000MWh UK 70 000 to 150 000MWh consumers in the 2000 0.1100 to 20000 MWh and 0.1050 20000 to 70000MWh 0.1000 bands have been below 0.0950 the Euro area prices 0.0900 € per per € kilowatt hour (PPS) since 2013. The Irish and 0.0850 Euro area electricity 0.0800
0.0750 prices in the 70000 to
0.0700 150000 MWh band have
0.0650 been close throughout S12011 S22011 S12012 S22012 S12013 S22013 S12014 S22014 S12015 S22015 S12016 S22016 S12017 the period examined. The UK prices in all bands were above the Irish prices in the last three years. Source: Eurostat
Figure 59: Gas prices for non-household consumers (Purchasing Power Standard), excluding taxes and levies, 2011-S1 2017
Euro area (< 1 000 GJ) Ireland (< 1 000 GJ) UK (< 1 000 GJ) The price of natural gas Euro area (1000-10000 GJ) Ireland (1000-10000 GJ) UK (1000-10000 GJ) in the three categories Euro area (100000-1000000 GJ) Ireland (100000-1000000 GJ) UK (100000-1000000 GJ) 0.0600 of non-household 0.0550 consumers have been
0.0500 consistently below the
0.0450 Euro area average over the period examined, 0.0400 except for S2 2016. The 0.0350 price difference
€ per kilowattper € hour(PPS) 0.0300 between Ireland and the 0.0250 Euro area diminished in 0.0200 2016 and S1 2017. UK
0.0150 prices categories have S12011 S22011 S12012 S22012 S12013 S22013 S12014 S22014 S12015 S22015 S12016 S22016 S12017 been below the Euro area and Irish prices since 2012. Source: Eurostat
53 Figure 60: Share of non-recoverable taxes and levies in the overall gas price for non-household consumers, S 1 2017
Proportion of price excluding taxes and levies The proportion of non- Proportion of VAT and other recoverable taxes and levies recoverable taxes and Proportion of non-recoverable taxes and levies levies in the overall 100 natural gas price in S1 90 80 2017 is relatively low in 70 Ireland (8.2%) compared 60 to the Euro area (14.8%) 50 but higher than the UK 40 30 (4.7%). At 11.6%, the 20 proportion of VAT and 10 other recoverable taxes 0
and levies is below the
UK
Italy
Taxes Taxes and levies % as of overall price (PPS)
Spain
Latvia
France
Ireland Poland
Finland Euro area (16.4%) and
Sweden
Denmark
Germany Euro Euro area Netherlands the UK (14.3%). Source: Eurostat
Figure 61: Business water service costs in Ireland by Local Authority, 2017
Rate National Average Figure 61 shows the 3.5 combined charge per m3 3 of water (including 2.5 water supply and
2 wastewater services) in
1.5 each Irish Local
€ per per €metre cubed 1 Authority area. The average cost of water 0.5 for business in Ireland is 0
€ 2.38 per m3 with
Sligo
Clare
Laois
Louth
Fingal
Mayo
Cavan
Offaly
Meath
Carlow
Leitrim
Donegal
Wicklow
Cork Cork Co.
S. Dublin S.
Wexford
Kilkenny
Cork Cork City Longford
Tipperary significant variation
Galway Co Galway
Monaghan
Dublin City Dublin
Westmeath
Galway City Galway
Roscommon Limerick CityLimerick Kildare Co Co Kildare Co between Local
Kerry County Kerry Council Authorities. Waterford City County Waterford & City Dunlaoighaire- Rathdown Dunlaoighaire- Source: Irish Water
54
Costs of Doing Business 2018
Figure 62: Business Standalone Fixed Voice Basket 44€ per month excluding VAT, Q3 2017,
Ireland UK Germany Spain Denmark Netherlands Figure 62 shows that in 90 Q3 2017 a basket of Standalone Fixed Voice 80 charges for Business in Ireland was €61.27, 70 which was 39% more expensive than the 60 corresponding basket in the UK. Year-on-year,
50 Irish prices increased by € per month excl VAT (PPP) VAT monthper € excl 5.7%. The most 40 expensive country benchmarked was the 30 Netherlands (€87.38). Q32016 Q4 2016 Q1 2017 Q22017 Q32017 Source: Comreg
Figure 63: Business Fixed Broadband, € per month excluding VAT, Q3 2017,
Ireland UK Germany Spain Denmark Netherlands The price of Fixed Broadband Services for 60 business in Ireland remained flat in the last
50 four quarters at €35.28. Although the fixed broadband charges have 40 been increasing gradually in the UK by 8.8% year on year and at 30 € per month excl VAT (PPP) VAT monthper € excl €32 Q3 2017, they are still lower than the corresponding charges 20 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 in Ireland.
Source: Comreg
44 Standalone fixed voice services are voice services not sold as part of a bundle or other services.
55 Figure 64: Business Mobile Broadband, € per month excluding VAT, Q3 2017
Ireland UK Germany Spain Denmark Netherlands At €19.84 in Q2-Q3 50 2017, Ireland had the second lowest Business Mobile Broadband costs 40 in the sample of countries. Prices have been relatively stable in 30 recent quarters. The least expensive country
€ per month excl VAT (PPP) VAT monthper excl € was the UK (€17.9) while 20 Spain was the most expensive country
10 benchmarked (€39.24). Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017
Source: Comreg
Figure 65: Business post-paid mobile phone services, € per month excluding VAT, Q3 2017
Ireland UK Germany Spain Denmark Netherlands Figure 65 shows that 40 Business post-paid mobile services in 35 Ireland remained stationary over the
30 previous 4 quarters (€28.33) and in Q3 2017
25 they increased to €30. While charges are below
20 Spain, Netherlands and
€ per month excl VAT (PPP) VAT permonth € excl Germany, Irish charges
15 were over twice as expensive compared to
10 the UK monthly charges Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 of €12.9.
Source: Comreg
56
Costs of Doing Business 2018
Chapter 8 – Credit and Financial Costs
Figure 66: Interest rates on bank overdraft and revolving loans, 2017
2017 2014 In 2017 Ireland had the 6 second highest interest rates on revolving loans 5 and overdrafts in the
4 Euro area, with only businesses in Greece 3 paying higher charges.
While in most Euro area Interest rate (%) rateInterest 2 countries the mean interest rate has 1 declined compared to
0 2014, in Ireland the UK
Italy interest rate of 4.9% is
Spain
Latvia
France
Ireland
Poland
Finland
Sweden
Germany Denmark Euroarea higher than the 2014 Netherlands figure and almost double the Euro area average (2.5%). Source: European Central Bank
Figure 67: Interest rates for non-financial corporations (new businesses45) by loan size, November 2017
Ireland ≤ €0.25m Ireland > €0.25 ≤ €1m Euro area ≤ €0.25m Euro area > €0.25 ≤ €1m Figure 67 shows that 7 Irish rates have been more volatile over the 6 period examined and are
5 higher than Euro area rates. The divergence is
4 noticeable for loans of up to €0.25 million,
3 where Irish interest rates Interest rate (%) rateInterest were 6.7% in November 2 2017 compared to 2.4% in the Euro area. For 1 loans, less than €1 million the Irish rate was 0
3.6%, Euro area (1.6%).
Jul-17
Jul-11
Jul-13
Jul-15
Jul-12
Jul-14
Jul-16
Jan-17
Jan-11
Jan-13
Jan-15
Jan-12
Jan-14
Jan-16
Apr-17
Oct-17
Apr-11
Apr-13
Oct-11
Oct-13
Apr-15
Oct-15
Apr-12
Apr-14
Oct-12 Apr-16 Oct-14 Oct-16 Source: European Central Bank
45 Any new agreement between a non-financial corporation and a bank
57 Figure 68: Interest rates for non-financial corporations (outstanding amounts) by duration, Jan 2011-Nov 2017
Ireland > 5 yr Ireland 1 ≤ 5 yr Ireland < 1 yr Euro area > 5 yr Euro area 1 ≤ 5 yr Euro area < 1 yr In the period 2011-mid- 5 2014, interest rates on 4.5 outstanding amounts in 4 Ireland were universally
3.5 lower than the Euro
3 area. As of late 2016,
2.5 rates for all durations are significantly higher
2 Interest Interest rate (%) in Ireland, and the gap 1.5 between the Irish and 1 the Euro area interest 0.5 rates is widening. Rates
0 are inversely correlated
Jan-17
Jan-11 Jan-11
Jan-13
Jan-15
Jan-14
Jan-16
Sep-17
Sep-11
Sep-13
Sep-15
Sep-12
Sep-14
Sep-16
May-17
May-11
May-13
May-15
May-12 May-14 May-16 with duration in Ireland.
Source: European Central Bank
Figure 69: Interest rates for Irish SMEs (outstanding amounts), Q1 2015-Q3 2017
Total Manufacturing Construction The interest rates on Wholesale/Retail Trade & Repairs Transportation and Storage Hotels and Restaurants Information and Communication outstanding amounts to 4.50 SMEs were consistently 4.30 lower than the rates on 4.10 gross new lending and
3.90 the difference is
3.70 particularly prominent in
3.50 the Construction Sector. The interest rates to
Interest rate (%) rate Interest 3.30
3.10 SMEs engaging in Transport & Storage, 2.90 Manufacturing and 2.70 Construction were 2.50 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 higher than the rates in the remaining sectors. Source: Central Bank of Ireland
58
Costs of Doing Business 2018
Figure 70: Interest rates on gross new lending46 for Irish SMEs, Q1 2015-Q3 2017
Total Manufacturing Construction The interest rates on Wholesale/Retail Trade & Repairs Transportation and Storage Hotels and Restaurants Information and Communication gross new lending for SMEs decreased 6.5 between Q1 2015 and Q3 6.0 2017 in most economic 5.5 sectors except for ICT. 5.0 The interest rates to
4.5 SMEs in Construction
Interest rate (%) rate Interest 4.0 and Transport & Storage were consistently higher 3.5 than the rates in the 3.0 remaining sectors. The 2.5
interest rates in
Jun-17
Jun-15
Jun-16
Sep-17
Sep-15
Mar-17
Dec-15
Sep-16
Mar-15 Dec-16 Mar-16 Wholesale/Retail Trade & Repair sector were least volatile. Source: Central Bank of Ireland
46 Gross new lending excludes restructures or renegotiations which do not increase the size of outstanding loans. It does include new funds drawn down following a restructure or renegotiation of an existing facility that were not included in credit advanced at the end of the previous quarter.
59 Chapter 9 – Business Services and Other Input Costs
Figure 71: Services producer price index47, Q1 2006-Q4 2017
115 In Q4 2017, the SPPI stood at 113.6. Following a period of 110 decline during the recession, an upward 105 trend has been evident since 2011. Services
100 prices were on average
4.2% higher in Q4 2017 Index Index (2010 =100) when compared with Q4 95 2016. In Q4 2017 notable price changes were: 90 Warehousing, Storage and Cargo Handling
(+2.9%), Employment
2017Q1
2017Q3
2011 Q1 2011
2011 Q3 2011 Q1 2013
2013 Q3 2013
2015 Q1 2015
2015 Q3 2015
2007 Q1 2007
2007 Q3 2007
2012Q1
2010 Q1 2010
2012Q3 Q1 2014
2010 Q3 2010
2014 Q3 2014
2016Q1
2016Q3
2008 Q1 2008
2008 Q3 2008
2006 Q1 2006 Q1 2009
2006Q3 2009Q3 and Human Resource Activities (+2.4%). Source: CSO
Figure 72: Services Producer Price Index, Annual Percentage change, Q3 2017
Sea and Coastal Transport The most notable Security and Investigation changes in the year Advertising, Media, Market Research were: Postal and Courier Freight and Removal by Road (+9.1%), Air Transport Legal, Accounting,PR,Consultancy (+7.2%), Computer Industrial and Building Cleaning Programming and Employment and Human Resource Activities Consultancy (+6.0%) Warehousing, Storage, Cargo Handling and Sea and Coastal Architecture, Engineering,Technical Testing Transport (-8.5%). In Computer Programming and Consultancy terms of contribution to Air Transport the overall SPPI Postal and Courier increases in Computer -10 -5 0 5 10 Programming Annual Percentage Change Consultancy account for 60% of the total change. Source: CSO
47 The SPPI measures changes in the average prices charged for a range of business service. The SPPI is an experimental data set and the indices are still under development. In most cases the services measured are provided to business customers only and so individual price indices should not be considered indicative of more general price trends in the economy. The index covers transaction costs from business to business and excludes consumers who are covered in the Consumer Price Index (CPI). Individual price indices are aggregated together to create a “service industry” index that is limited in coverage. 60
Costs of Doing Business 2018
Figure 73: Comparison of Service producer prices, 2016 (latest full year comparison)
Austria Figure 73 compares Ireland Service Producer Prices Germany levels in Ireland relative Sweden Poland to other European UK Countries. Producer Netherlands Prices was in 2014 when Finland Euro area (19 countries) prices increased by Lithuania 2.5%. Overall since France 2010, service prices in Luxembourg Italy Ireland increased by Spain 7.6% compared to than Denmark the Euro area average 85 90 95 100 105 110 115 (1.4%) and 4% in the UK. Index (2010 =100)
Source: Eurostat
Figure 74: The cost of a commercial contract, 201748
Attorney fees Court fees Enforcement fees Ireland is a relatively 50 expensive location in 45 which to resolve a 40 commercial dispute 35 through a first-instance 30 court. In terms of total 25 cost, at 26.9 %, broken 20 down as a percentage of
15 total costs in Attorney Cost (Percentage ofclaim) (Percentage Cost 10 Fees (19%), 5 Enforcement (6%), court
0 (2%), Ireland is above
US
UK
Italy Israel
Spain the OECD (high income
China
Japan
Korea
Latvia
France
Ireland
Poland
Finland
Canada
Sweden
Germany Denmark
Singapore countries) 21.5% but
Switzerland
Netherlands Luxembourg New New Zealand well below the UK (46%). Source: World Bank Doing Business 2018
48 This category is based on the ease or difficulty of enforcing commercial contracts. This is determined by following the evolution of a payment dispute and tracking the time, cost, and number of procedures involved from the moment a plaintiff files the lawsuit until actual payment. Cost is recorded as a percentage of the claim value, assumed to be equivalent to 200% of income per capita or $5,000, whichever is greater
61 Figure 75: Time to enforce a commercial contract, 201749
Filing and service Trial and judgment Enforcement of judgment In terms of time taken to 1200 resolve a dispute, the World Bank reports the 1000 time taken for filing and 800 service, trial and 600 judgement and enforcement (including Time (Days)Time 400 time for appeal) is 650 200 days in Ireland
0 compared to 437 days in
US UK
Italy the UK and 578 days on
Israel
Spain
China
Japan
Korea
Latvia
France
Ireland
Poland
Finland Canada
Sweden average across OECD
Germany
Denmark
Singapore
Switzerland
Netherlands Luxembourg New New Zealand High income countries. Source: World Bank Doing Business 2018
Figure 76: Cost of starting a business, percentage of GNI per capita, 2017 Updated
2017 2013 In the last five years 16 Ireland, has maintained
14 its competitive position
12 in terms of the cost to register a business as a
10 up procedures up - percentage of gross 8 national income. In 2017 6
Ireland ranks first in the (% of GNI per capita) perGNI of (% 4 Euro area and joint- 2
Cost of business start business of Cost second in the European
0 Union and OECD (0.2%).
US UK
Italy At 0 per cent, the UK
Spain
China
Japan
Korea
Latvia
OECD
France
Ireland
Poland
Finland
Sweden
Germany Denmark
Euroarea ranks first.
Switzerland Netherlands NewZealand Source: World Bank Doing Business 2018
49 This category is based on the ease or difficulty of enforcing commercial contracts. This is determined by following the evolution of a payment dispute and tracking the time, cost, and number of procedures involved from the moment a plaintiff files the lawsuit until actual payment. Time is counted from the moment Seller decides to file the lawsuit in court until payment. This includes both the days when actions take place and the waiting periods in between. The average duration of the following three different stages of dispute resolution is recorded: (i) filing and service; (ii) trial and judgment; and (iii) enforcement. Time is recorded in practice, regardless of time limits set by law if such time limits are not respected in the majority of cases. 62
Costs of Doing Business 2018
Figure 77: Insurance consumer price inflation, 2013-2017
Insurance Insurance connected with the dwelling Insurance is a significant Insurance connected with health Insurance connected with transport element within the CPI All items basket with a weighting 110 of 6%. While headline 100 price inflation has been
90 stable in recent years there has been a notable 80 increase in insurance 70 price inflation in the
Index (Dec 2016 =100) (Dec2016 Index period, mid 2015-mid 60 2017. Motor insurance 50 has moderated in recent
40 months, in the period
2014-2016, prices as
2017M11
2013M11
2017M07
2015M11
2017M01
2013M07 2017M03
2014M11
2013M01
2013M03 2015M07 2016M11 2017M05
2015M01
2013M05 2015M03
2014M07
2016M07 2017M09
2015M05
2018M01
2014M01
2014M03
2016M01
2013M09 2016M03
2014M05
2015M09 2016M05 2014M09 2016M09 measured by the CPI increased by 38%. Source: CSO
Figure 78: HICP Insurance price levels, Index 2012-2017
Ireland UK EU 28 Euro area 19 Figure 78 shows the 140 comparative trend in
130 transport insurance price changes in Ireland, 120 the UK and Euro area
110 index form. Since 2015 price changes for 100 transport insurance in
Index (2015=100) Index 90 Ireland and the UK have been well above EU 80 rates. On average 70 transport insurance
60 prices in Ireland were
17% above 2015 levels in
2017M11
2013M11
2017M07
2015M11
2017M01
2013M07 2017M03
2012M11
2014M11
2013M01
2016M11 2013M03
2015M07 2017M05
2015M01
2013M05 2015M03
2012M07
2014M07
2016M07 2017M09
2012M01
2015M05
2012M03 2014M01
2014M03
2016M01
2016M03 2013M09
2012M05
2014M05
2015M09 2016M05
2012M09 2014M09 2016M09 2017. In the UK prices were 24% above 2015 levels. Source: Eurostat
63 Figure 79: HICP Insurance price levels, 2012-2017
Figure 79 shows the annual average rate of change transport insurance prices as measured by the HICP. Price change in Ireland and the UK appear more volatile than in the Euro area. On an annual basis, Irish transport insurance declined by 5.7% in 2017 compared to increases of 11% and 1.1% in the UK and Euro area. However, this follows three successive years of significant Irish
inflation of 6% in 2014, 19.5% in 2015 and 24.7% in 2016. Source: Eurostat
Figure 80: Commercial rates, receipts from central government, and rates as a percentage of total local authority revenue, 2012-2017
Government Grants & Local Government Fund (left-hand axis) Revenue collected Commercial rates (left-hand axis) through commercial Commercial rates as % of total receipts (right-hand axis) rates doubled over the €1,800 39% period 2002-2017. Rates €1,600 38% as a proportion of total €1,400 37% Local Authority revenue €1,200 36% stood at 34.4% in 2017. €1,000 35% The proportion of €800 34% revenue received from €600 €400 33% Government grants and
€200 32% subsidies was 27%. Local Authority Revenue (€m)
€0 31%
Commercial Commercial Rates as of a % Total Receipts
2017
2013
2015
2012 2014 2016 Source: Department of Housing, Planning and Local Government
64
Costs of Doing Business 2018
Figure 81: Commercial rates, as a percentage of total local authority expenditure, 2013-2017
2017 2013 In the period 2013-2017, 60 the revenue collected by
50 Local Authorities through the levy of 40 commercial rates varied 30 between 34 and 38%. In 20 all counties, except for
10 Fingal, South Dublin and
0 Limerick, the
commercial rates to be
Cork
Sligo
Clare
Laois
Kerry
Mayo
Louth
Fingal
Cavan
Offaly
Meath
Carlow
Kildare
Leitrim
Galway
Donegal
Wicklow
Wexford Limerick
Kilkenny levied as a percentage
Longford
Tipperary
Waterford
Monaghan
Westmeath Roscommon South Dublin South of gross expenditure increased in the five- Commercial rates to be levied as % of gross expenditure of gross % as to levied be rates Commercial year period. Dun Laoghaire Rathdown Laoghaire Dun
Source: Department of Housing, Planning and Local Government
Figure 82: Local Authority Income from Commercial rates to be levied, percentage change, 2013-2017
350 There is significant 300 divergence in the rate of 250 valuation and 200 commercial rates levied
150 2017 2017 - and the proportion of 100 total local authority 50
0 income accounted for by change 2013 change -50 rates. Comparing 2013
with 2017, local
Cork
Sligo
Clare
Laois
Kerry
Mayo
Louth
Fingal
Cavan
Offaly
Meath
Carlow
Kildare
Leitrim
Galway
Donegal
Wicklow
Wexford
Limerick Kilkenny
Longford authority income from
Tipperary
Income from Commercial Rates to be levied (% levied be to Rates Commercial from Income
Waterford
Monaghan
Westmeath Roscommon SouthDublin commercial rates has increased considerably
in Waterford (+300%), Dun Laoghaire Rathdown Laoghaire Dun Sligo (+286%), Tipperary (189%), Louth and Fingal. Source: Department of Housing, Planning and Local Government
65 Chapter 10 – Broader Costs Environment
Figure 83: Harmonised Index of Consumer prices, annual changes 2008-2017
Ireland UK Euro area 19 Germany France Figure 83 shows the rate of consumer inflation in 5.0 4.5 the Euro area, its major 4.0 3.5 economies, and the UK 3.0 has been increasing at a 2.5 2.0 faster rate than Irish 1.5 inflation in the last two 1.0 0.5 years months. In 2017 0.0 Irish consumer prices -0.5 -1.0 increased by 0.3% (yoy) -1.5 compared with 1.5% for Annual average of ratechange (%) -2.0 -2.5 the Euro area and 2.7% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 in the UK. Irish inflation has tended to be below the Euro area average since 2009. Source: Eurostat
Figure 84: Consumer Price Index, January 2011-2018
CPI CPI excluding Energy and Unprocessed Food Goods Services While inflation and core
120 inflation have grown at a
115 very subdued rate in recent years, there has 110 been significant 105 divergence in the rate of 100 price inflation for goods 95 and services in Ireland
90 since 2013. The annual Index Index (December 2011=100) 85 average rate of inflation
80 in 2017 was 0.4%. The price of Goods
decreased on average by
2017M07
2017M10 2011M07 2017M01
2013M07
2011M10 2011M01
2013M01 2013M10
2015M07
2015M01 2015M10
2012M07
2017M04 2014M07
2016M07
2012M01 2012M10
2018M01
2011M04 2014M10 2014M01
2013M04
2016M01 2016M10
2015M04
2012M04 2014M04 2016M04 2.1%. The price of Services (which includes mortgage interest) rose by 2.1%. Source: CSO
66
Costs of Doing Business 2018
Figure 85: Consumer price levels, 2016 and rate of inflation 2017
3.0 Latvia Figure 85 shows both UK changes in prices 2.5 (inflation) and the price
Spain Luxembourg 2.0 level. Ireland’s current Sweden Germany price profile could be EU 28 US Poland 1.5 Euro area 19 described as ‘high cost, Italy Netherlands France and rising’ while the UK Denmark 1.0 is ‘high cost, rising Finland quickly’. Price levels in Switzerland 0.5 Ireland Ireland were 23.7 per HICP HICP 12 monthMoving Average Percentage Change (2017) cent above the EU 28 0.0 40 60 80 100 120 140 160 180 average in 2016 and Comparative price levels of final consumption by private households including indirect taxes, 2016 (EU28 = 100) increasing by 0.3% in 2017; the UK was 21.6 per cent above the EU average and increasing by 2.7% in 2017. Source: Eurostat
Figure 86: Average annual CPI inflation and contribution to total CPI inflation, 2017
3.0 Restaurants & Hotels Figure 86 examines the Transport 2.0 contribution of Education Housing, Water, Health individual categories of 1.0 Electricity, Gas, Other … Alcoholic Beverages & goods and services to Tobacco 0.0 -0.3 -0.2 -0.1 0.0 0.1 0.2 0.3 0.4 0.5 inflation (i.e. taking -1.0 Communications account of inflation Recreation & Culture Miscellaneous Goods Index Index (%) & Services -2.0 rates and the weighting Food & Non-alcohol beverages attached to each good -3.0 Furnishing & or service). The Household Equipment
-4.0 divisions which caused Change Change over months12 for Consumer Price Clothing & footwear -5.0 the largest contributions to inflation were Contributions to overall CPI percentage change in 12 months (%) Housing, Water, Electricity, Restaurants & Hotels and Transport. Source: CSO
67 Figure 87: HICP Irish consumer price levels relative to the European Union 28, 2016
Euro area 19 UK Ireland EU 28 Irish prices are above the Euro area average all Government services categories of goods and Consumer services Consumer goods services. Ireland is below Miscellaneous goods and services the UK in Services prices Restaurants and hotels Education but above in goods. Recreation and culture Health and Communication Transport Communication prices Health are relatively high in Housing, water, electricity, gas and other fuels Clothing and footwear Ireland. The differential Alcoholic beverages, tobacco and narcotics in alcohol and tobacco Food and non-alcoholic beverages prices is primarily due to 90 100 110 120 130 140 150 160 170 180 Index (EU 28=100) taxation policy.
Source: Eurostat
Figure 88: Cost of living correction coefficient50 for EU capitals, 2006-2017
2017 2014 2010 2006 Correction coefficients 160 are used by the European Commission 140 to ensure equality of 120 purchasing power of 100 European civil servants'
80 remuneration between different locations 60 within the EU. Figure 88
40 shows a cost of living Index (Brussels/Luxembourg (Brussels/Luxembourg =100) Index
Riga correction coefficient for
Paris
Sofia
Berlin
Rome
Dublin
Lisbon Vilnius
Tallinn
Vienna
Prague
Athens
Madrid
Zagreb
Nicosia
London
Valletta
Helsinki Warsaw
Brussels EU capitals relative to
Ljubljana
Budapest
Bratislava
Bucharest
Stockholm
Amsterdam Copenhagen Luxembourg Brussels. Dublin is the fifth most expensive location in 2017, 20% more expensive than Brussels. Source: Eurostat
50 Correction coefficients are calculated as the ratio between the 'economic parity' and the exchange rate to the Euro (where applicable). The economic parity tells us how many currency units a given quantity of goods and services costs in different countries. By definition, the correction coefficient for Brussels and Luxembourg is fixed to 100. 68
Costs of Doing Business 2018
Figure 89: Cost of living correction coefficient for EU capitals, 2006-2017
Excl Rents Total Building on the above, Copenhagen London Figure 89 shows the Stockholm Helsinki comparative cost of Dublin Paris Amsterdam goods and services, and Vienna Luxembourg excluding rent relative Brussels Berlin to Brussels. A basket of Rome Madrid comparable goods and Valletta Lisbon services in Dublin costs Ljubljana Tallinn 120 % of the cost of a Athens Prague similar basket in Bratislava Riga Zagreb Brussels. Excluding rent, Budapest Nicosia while Dublin prices Vilnius Warsaw remain relatively high Bucharest Sofia they are only 5% higher. 40 50 60 70 80 90 100 110 120 130 140 Index (Brussels/Luxembourg =100) Source: Eurostat
69 Chapter 11 – Focus on Residential Property and Childcare
Figure 90: Residential Construction cost index-in national currency 2004-2017
Ireland Euro area 19 UK The index shows the 125 trend in the cost for new residential buildings. 120 Between 2005 and mid- 115 2008 costs increased sharply in Ireland. After 110 its peak in the third 105 quarter of 2008 the index began to fall and 100
reached its lowest level Index (2010=100) Index 95 about one year later. During the last 4 years 90 prices have shown a 85 moderate quarterly growth. In Q 3 2017 the
80
2005Q2 2006Q2 2007Q2 2008Q2 2008Q4 2009Q2 2009Q4 2010Q2 2010Q4 2011Q4 2012Q4 2013Q4 2014Q4 2015Q2 2015Q4 2016Q2 2016Q4 2017Q2 2004Q4 2005Q4 2006Q4 2007Q4 2011Q2 2012Q2 2013Q2 2014Q2 Irish index was 101 compared to 108 in the
Euro area and 120 in the UK. Source: Eurostat
Figure 91: Annual Percentage Change sales of newly-built and existing dwellings; Index, 2010-2017
Ireland Dublin UK London Euro Area Figure 91 shows how 200 Irish prices dipped significantly in the 180 period 2010-2013 and
160 recovered in the period to 2017. In Q2 2017 the 140 index for Ireland was 109.3, Dublin 124. The 120 index for the UK was
Index Index (2010=100) 129 and 181 for London. 100 While growth has been
80 relatively constant in the Euro area, the UK 60 has experienced a pronounced uplift in 40 prices, particularly in 2010 2011 2012 2013 2014 2015 2016 Q1-2017 Q2-2017 London up to 2016. Source: OECD
70
Costs of Doing Business 2018
Figure 92: House price index (2015 = 100), rate of change-annual data, 2007-2017
2017Q2 2013Q2 2009Q2 2007Q2 Eurostat data shows 50 residential property 40 price inflation across 30 most benchmarked 20 10 countries in 2017. The 0 rate of annual increase -10 in Irish house prices,
-20 estimated at 10.6% in Annual (%)Annual rateof change -30 Q2 2017, is at pre- -40
-50 recession levels and the UK
Italy second highest in the
Spain
Latvia
France
Ireland
Poland
Finland
Sweden Germany
Denmark EU (behind Czech Netherlands Luxembourg Republic). The equivalent growth rates
in the UK for 2017 are EU (Changing Composition) EU(Changing
estimated at 5% and 3% Euro Area (Changing Composition) Area Euro (Changing respectively. Source: Eurostat
Figure 93: Residential Property Price Index, Ireland 2007-2017
National - all residential properties In the year to December National excluding Dublin - all residential properties Dublin - all residential properties 2017, residential property prices at 140 national level increased 130 by 12.3%. Dublin prices 120 increased by 11.6%. 110 Apartments in Dublin
100 increased by 14.7%. National prices 90 excluding Dublin were 80 13.3% higher. House 70 prices in the Rest of
60 Ireland increased 13.2% over the period. 50 Overall, the index is 40 22.9% lower than its
highest level in 2007.
2017M01
2011M01
2013M01
2017M05
2015M01 2011M05
2013M05
2007M01
2017M09
2012M01 2015M05
2010M01
2014M01
2011M09 2016M01
2007M05
2013M09
2012M05
2010M05
2014M05
2015M09 2016M05
2007M09
2008M01
2012M09
2009M01 2010M09
2014M09
2016M09
2008M05
2009M05
2008M09 2009M09
Source: CSO
71 Figure 94: Residential Property Index, Average annual Percentage Change, 2017
Fingal - houses On average in 2017 the Dún Laoghaire-Rathdown - houses rate of increase in house Dublin - houses Dublin - all residential properties prices was highest in the Mid-West including South Tipperary - houses West (16%) and lowest Dublin - apartments in Fingal (6.6%). National - houses Border excluding Louth - houses National prices Dublin City - houses increased by 10.8%. On National - all residential properties National - apartments a national basis South Dublin - houses apartments increased Mid-East including Louth - houses South-West - houses by 11% with prices Midland - houses increasing by 9% in South-East excluding South Tipperary -… Dublin. West - houses 0 2 4 6 8 10 12 14 16 18 Percentage Change
Source: CSO
Figure 95: Annual average rate of change in actual rents paid by consumers, 2008-2017
Ireland UK EU 28 Euro area 19 Figure 95 uses HICP 10 data to show the rapid and sharp changes in
5 rental prices which have occurred in Ireland
0 recently relative to the UK and Euro area. In 2017, Irish rent prices -5 paid increased by 6.7%. While the rate of -10
increase is less than Annual % ofratechange average Annual 2016, they are the -15 second highest in Europe and well above -20 rent inflation in the UK 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 (1%) and Euro area (1.2%) Source: Eurostat
72
Costs of Doing Business 2018
Figure 96: Residential Tenancies Board National Rent Index, Q4 2007-2017
National Index Houses Apartments The RTB Index for Irish residential rents stood 130 at 107 in 2017 Q4. The 120 Index for apartment and
110 house rents stood was 104 and 118 100 respectively. Rental 90 growth has been strong since 2012 and 80 Index Index (Q32007=100) accelerated in 2014- 70 2017. As of Q4 2017 the
60 average national rent for
Q4 2007 Q4 2008 Q2 2008 Q4 2010 Q2 2010 Q4 2011 Q2 2011 Q4 2012 Q2 2013 Q4 2014 Q2 2014 Q4 2015 Q2 2015 Q4 2017 Q2 2017 Q4 Q2 2009 Q2 2009 Q4 2012 Q4 2013 Q2 2016 Q2 2016 Q4 houses and apartments was €1055 and €1152 respectively. Higher rents for apartments reflect the higher share of this housing type in major urban centres. Source: RTB
Figure 97: Residential Tenancies Board National Rent Index, Annual Percentage Change, Q4 2012-2017
Houses Apartments Figure 97 shows the
12 upward trend in price changes for houses and 10 apartments since 2012.
8 On a year-on-year basis, rents for houses 6 increased by 6.5% in 2017 Q4. Apartment 4 rents increased by 5.3%
2 on a similar basis. As
Year Year on Year Percentage Change noted by the RTB, rents 0 are seasonal in nature so quarterly growth rates
-2
Q4 2012 Q4 2013 Q1 2014 Q1 2014 Q2 2014 Q3 2014 Q4 2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3 2017 Q2 2017 Q3 2017 Q4 Q3 2013 Q3 2013 Q4 2015 Q1 2015 Q2 2016 Q4 2017 Q1 Q2 2013 Q2 can be volatile.
Source: RTB
73 Figure 98: Irish Rents Index Dublin and GDA Q4 2007-2017
Dublin Greater Dublin Area (Excluding Dublin) Outside GDA The Dublin Rent Index
130 stood at 119 in Q4 2017, 14 index points higher 120 than the previous peak 51 110 in 2007 Q4. The GDA Rent Index stood at 108 100 and outside the GDA was 100. For Q4 2017, 90 the average rent for a
Index Index (Q32007 =100) 80 house stood at €1,557 in Dublin, €1,155 in the 70 GDA (excluding Dublin)
60
Q4 2007 Q4 2009 Q2 2010 Q4 2010 Q4 2012 Q2 2013 Q4 2013 Q4 2015 Q2 2016 Q4 2016 Q4 2008 Q2 2009 Q2 2011 Q4 2011 Q2 2012 Q2 2014 Q4 2014 Q2 2015 Q2 2017 Q4 2017 Q2 Q2 2008 and €789 outside the GDA. The average monthly rental prices for apartments stood at €1,530, €1,036 and €808 respectively. Source: RTB
Figure 99: Rents on a County by County Basis, Q4 2017
Average Rent Q4 2017 Average Rent Q4 2016 At County and City level, 1600 rents are highest in
1400 Dublin, the surrounding counties and larger 1200 urban counties such as 1000 Cork, Galway and 800 Limerick. As of 2017 Q4, 600 there were 6 counties
400 where the average rent exceeds €1,000 per 200 Standardised Average Monthly Rent, MonthlyRent, € Average Standardised month (Cork, Dublin, 0
Galway, Kildare, Meath
Cork
Sligo
Clare
Laois
Kerry
Mayo
Louth
Cavan
Offaly Meath
Dublin and Wicklow). The
Carlow
Kildare
Leitrim
Galway
Donegal
Wicklow
Wexford
Limerick
Kilkenny
Cork CityCork
Longford
Tipperary
Waterford Monaghan
Dublin Dublin City highest standardised
Westmeath
Galway City Galway
Roscommon Limerick City Limerick
Waterford Waterford City average rents were in Dublin. The lowest standardised average rents are in Leitrim. Source: RTB
51 The GDA contains counties Meath, Kildare and Wicklow. 74
Costs of Doing Business 2018
Figure 100: Gross fees for two children (age 2 and 3) attending full-time care52 at a typical childcare centre, as % of average earnings (AW), 2015
80 Gross childcare fees in
70 Ireland are relatively high compared to EU 60 and OECD averages and 50 are the 8th highest in 40 the OECD overall. As a percentage of average 30 wages, childcare fees 20 account amount to 50% 10 in Ireland compared to
0 the Euro area average of
Gross Gross Childcare Fees (% of Average Wages) US
UK 22%. Fees are highest in
Spain
Korea
Latvia France
Ireland Switzerland 70%) and
Japan *
Sweden
Portugal
Poland*
Finland* Denmark
Germany * the UK (England, 64%).
EU Average
Netherlands
Luxembourg
New Zealand
Switzerland * OECD Average
Euroarea Average Source: OECD
Figure 101: Out-of-pocket childcare costs for a two-earner couple family,2015
Childcare fee Childcare benefit/rebates Tax reduction Net Irish childcare costs Changes in other benefits Net cost Net cost, % of family net income for parents with two 80 children and combined 60 income at 167% of AW
40 as a % of income are amongst the highest in 20 the OECD. Childcare 0 benefit/rebates (11.2%) -20 are above the UK, Euro
-40 area and OECD averages, but high fees
-60 US
UK (50% of average wages)
Spain
Korea
Latvia
France
Ireland Japan*
Sweden means the out of pocket
Childcare related costs wage)costs average related(%ofbenefitsChildcareand
Poland * Poland
Finland*
Denmark
Germany * Germany
EUAverage
Netherlands
Luxembourg New New Zealand
Switzerland Switzerland * costs for Irish childcare OECDAverage
Euro area Average area Euro are relatively high. Source: OECD
52 'Full-time' care is defined as care for at least 40 hours per week. Data for countries marked with an * are based on estimates for a specific region or city, rather than for the country as a whole. Average earnings/the average wage refers to the gross wage earnings paid to average workers, before deductions of any kind (e.g. withholding tax, income tax, private or social security contributions and union dues) (see OECD, 2007: 186-187). See the OECD Tax and Benefit Systems website (http://www.oecd.org/els/soc/benefits-and-wages.htm) for more detail on the methods and assumptions used and information on the modelled for each country.
75 Figure 102: Out-of-pocket childcare costs for a lone parent family,2015
Childcare fee Childcare benefit/rebates Tax reduction For lone parents Changes in other benefits Net cost Net cost, % of family net income (earning 50% of the 80 average wage) with two 60 children Ireland is the 40 most expensive OECD 20 location in terms of fees 0 paid. As a proportion of
-20 income, childcare
-40 accounts for 42% of family income in Ireland -60 compared to 23% in the -80
UK and 12% in the Euro
US*
UK UK *
Spain
Korea
Latvia
France
Ireland Japan*
Sweden area. This the second
Childcare related costs wage)costs average related(%ofbenefitsChildcareand
Poland * Poland
Finland * Finland
Denmark
Germany * Germany
EUAverage
Netherlands Luxembourg
New New Zealand highest proportion in
Switzerland Switzerland * OECDAverage
Eurozone Average Eurozone the OECD. Source: OECD
Figure 103: Average Weekly Childcare Costs, Ireland, 2016
All children 0-12 Pre-school children Primary school children The average cost per 200 week per child for pre-
180 school children is €118.00, while the 160 average weekly cost per
140 primary school child is )
€ €73. The average weekly 120 cost for a child aged 0- 100 12 is €96. There is considerable divergence 80 Average Average Cost per Wek ( between Dublin and 60 other regions. The average weekly cost per 40 child is highest in 20 Dublin, at €150 per child
0 per week. It is lowest in Dublin State South-West Mid-East West Border Mid-West Midland South-East the South-East at €83. Source: CSO
76
Costs of Doing Business 2018
Figure 104: Consumer Prices for Childcare, Ireland, 2012-2017
All items Services Childcare Services Figure 104 shows the 120 trend in consumer prices
115 for childcare services relative to services and 110 overall consumer price
105 inflation. While childcare price levels have risen in 100 recent years, they are
not out of line with Index (Dec 2016=100) (Dec Index 95 movement in overall
90 prices. In the year to November 2017, on 85 average, childcare services prices increased 80
by 1.3% compared to a
2017M11
2013M11
2017M07
2015M11
2013M07 2017M03
2012M11
2014M11
2013M03 2016M11
2015M07
2015M03
2014M07
2016M07 2014M03 2016M03 rate of increase of 2.2% for services and 0.3% for all items. Source: CSO
77 Appendix 1 – NCC Policy Recommendations on Costs 2017
Policy Recommendations This report provides part of the evidential base to assist policymakers to identify the key challenges confronting Irish enterprise in terms of the relative costs of doing business in Ireland. The Council will further consider these challenges in its annual policy document, Ireland’s Competitiveness Challenge, which will be published later in 2018. Based on the benchmarking analysis contained in the Costs of Doing Business 2017 and Competitiveness Scorecard 2017 reports, the Council identified a range of policy areas relating to costs requiring action to enhance Ireland’s competitiveness performance. The most recent recommendations, drawn from the Council’s Competitiveness Challenge report published in December 2017 are restated below.
Cost Competitiveness Challenges Taxes and Labour Costs • Conduct a review of the Irish Tax System as it applies to SMEs and Small Mid-Caps to consider how its competitiveness could be enhanced in the context of Brexit. • Continue to reform and simplify the current regime of taxes and charges on employment, specifically to further encourage the take-up of employment, recruitment and retention of talent, whilst simultaneously maintaining a broad personal tax base. In the context of progressing Budget 2018, remove anomalies in relation to PAYE and the USC to support labour market participation and entrepreneurship. • Review income taxes (e.g., credits, thresholds and rates.) to support improvements in after-tax income, enhancing the incentive to work while simultaneously protecting labour cost competitiveness. Building on the changes in recent Budgets, the entry point to the top marginal income tax rate should be increased and maximum marginal rates for all employees should be below 50 per cent. • Consider further changes to the income tax system which will contribute to the decline in replacement rates as part of the Government’s consideration of income tax, and considering the factors encouraging take-up of employment. • Review VAT exemptions and outline the case for current reduced rates and exemptions. Consider the merits of further standardisation of rates to allow for reductions in more distortionary taxes such as those on labour. • Wage growth in both the public and private sectors should be underpinned by productivity growth. 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. It is essential that we continue to monitor labour cost trends with a specific eye on relative international competitiveness, and ensure that Irish wage levels do not move in a manner that undermines enterprise competitiveness and threatens job sustainability. Property Costs • Continue the periodic review of Rebuilding Ireland: Action Plan for Housing and Homelessness, focussing in more detail on various elements of the Plan’s five constituent pillars. • Introduce the Vacant Site Levy and regularly update the register to which the Levy applies. • Continue to evaluate the costs and benefits of demand inducing interventions in the residential property market.
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Costs of Doing Business 2018
• Consider the mandate of the Residential Tenancies Board regarding regulation of the rental sector and allow it to refine Rent Pressure Zone’s where necessary. Undertake detailed analyses of rental data to assist in evidence based policy making. • Publish the Report of the Expert Group on Cost Rental and grow the capacity for delivering cost rental options.
• Expedite the development of a commercial property price register encompassing data on commercial sales and leases. • Continue work on the development of a Commercial Property Statistical System once administrative data sources on commercial property have been developed by public bodies. • Prioritise the recommendations and actions arising from the Working Group on Construction costs and develop an implementation plan to take steps to tackle costs which are out of line with international norms and to inform policy decisions in relation to the development of both multi-storey apartment schemes in urban areas and traditional housing/duplex homes in suburban locations • Urgently commence the competition to champion best practice and cost-effective design of residential property and publish findings regarding efficiencies and innovative processes. Analyse the cost savings and disseminate the learnings from the competition to housing stakeholders. Transport Costs • Ensure that the public transport component of the forthcoming 10-year National Investment Plan, and the development of the new National Planning Framework prioritises investment in a manner that is evidence-based and responds to strategic challenges and opportunities for all regions. • Continue to invest in ongoing maintenance of the motorway and national road network to facilitate access to major urban areas, and to optimise the substantial investment already made while reducing the need for significant remedial work in the future. Examine the adequacy of the allocation for road infrastructure (in terms of the balance between expenditure on maintenance and upgrading, and new works) in the context of the National Investment Plan. • Consider and address the strategic development requirements and capacity needs of Tier 1 and Tier 2 ports as part of the Regional Spatial and Economic Strategies (RSES). • Implement in full the ports services regulation by 2019. • Publish a policy statement on public transport considering policy drivers (such as climate change targets from the Paris Agreement and the EU’s Effort-Sharing Decision on 2030 emissions targets), and the improving domestic economic context and associated pressure this places on transport-related emissions. • Undertake an assessment from an enterprise perspective of the National Mitigation Plan to evaluate green economy opportunities as well as potential negative impacts on the enterprise sector, particularly potential costs implications for enterprise. • Set out a medium- and long-term policy on fuel taxation. The Council recommends that, should Government decide on a policy of equalisation of diesel and petrol prices through alteration of excise duties or carbon tax rates, this should be done over successive Budgets. • In reviewing the carbon tax consider the impact of changes to the tax on business costs and enterprise competitiveness in addition to the contribution of the tax to the decarbonisation of the Irish economy. • Consideration to be given to provision of assistance to Brexit-exposed enterprise sectors currently reliant on diesel-fuelled vehicles (e.g. subsidies towards the purchase of lower-emitting or electric/ hybrid vehicles).
79 Utility Costs • Progress and enact the provisions of the Water Services Bill 2017 about the future funding of public water and wastewater services in Ireland. • Commence the consultative process to inform the harmonisation of non-domestic water tariffs to develop a framework to ensure non-domestic customers are charged fairly for usage of water and wastewater services • Prioritise the recommendations and actions arising from the OECD Review of utilities regulation in Ireland and set out an implementation plan for action. Alter the mandate of the CER accordingly to allow for best practice in the regulation of both electricity and gas. • Improve electricity supply/demand matching by location. • Review supports for electricity generation. Credit and Financial Costs • Continue to monitor the landscape for enterprise finance so that viable businesses are not constrained by an inability to access finance. Where gaps are identified, develop proposals to increase the use of non-bank finance by SMEs. • Consider devising competition indicators showcasing the degree of concentration in the business lending market to benchmark and track the level of competition in the sector. • Consider the development of an appropriate regulatory framework for the crowdfunding market • Clarify the eligibility criteria for the Brexit Working Capital Scheme and engage with industry stakeholders accordingly to optimally develop the Scheme. • Broaden the distribution capability and market coverage of the SBCI by adding new on-lenders and working to develop innovative products, thereby serving to drive competition in the SME finance market. • Continue to facilitate partnerships between SBCI and international lenders, especially in non-bank finance, to increase competition and provide alternative sources of finance for SMEs. • Remove specific barriers identified in the Mobile Phone and Broadband Taskforce Report thereby alleviating telecommunications deficits in Ireland and assisting the rollout of the National Broadband Plan. • Award the National Broadband Plan intervention to a contractor(s) and confirm the revised deployment schedule to ensure the timely rollout of the Plan. Ensure that the network is scalable and proofed to meet future demand for significantly higher download speeds (in excess of 100 Mbps) and higher upload speeds. Business Services Costs • Continue to develop a more comprehensive and representative data set on legal service prices • Commence as quickly as possible the implementation of the regulatory functions of the Legal Services Regulatory Authority and thereby introduce measures to reduce legal costs. • Establish the Office of the Legal Costs Adjudicator. Publish and maintain a public register of allowable legal costs. • Expedite the establishment of both the national claims information database and the Master Licence Record Project as set out in the Report on the Cost of Motor Insurance. • Prioritise the recommendations and actions arising from the second phase of the Cost of Insurance Working Group in relation to the Employer Liability and Public Liability insurance sectors. Devise a clear implementation plan for addressing issues identified. The plan should have specific timelines, reporting mechanisms and assigned responsibility.
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National Competitiveness Council c/o Department of Business, Enterprise and Innovation 23 Kildare Street, Dublin 2, D02 TD30 Tel: 01 6312121 Email: [email protected] Web: www.competitiveness.ie