Ireland’s Competitiveness Scorecard 2017

July 2017

Introduction to the National Competitiveness Council The National Competitiveness Council reports to the Taoiseach and the Government, through the Tánaiste and Minister for Enterprise and Innovation on key competitiveness issues facing the Irish economy and policy actions to enhance Ireland’s competitive position. National competitiveness is a broad concept that encompasses the diverse range of factors which result in firms in Ireland achieving success in international markets. For the Council, the goal of national competitiveness is to provide Ireland’s people with the opportunity to improve their living standards and quality of life. The Council uses a “competitiveness pyramid” framework to illustrate the various factors (essential conditions, policy inputs and outputs), which combine to determine overall competitiveness and sustainable growth. This framework is elaborated on further in Annex 1. In line with its Terms of Reference, each year the Council 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 Council 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.

In addition, the Council publishes a range of other papers, submissions and reports on a variety of issues of importance to Ireland’s competitiveness. . In April 2017, the Council published a report Benchmarking Competiveness: Ireland and the UK, 2017 which provides a statistical snapshot assessment of Ireland's current competitiveness performance across areas which are crucial to improving our international competitiveness position. Ireland’s competitiveness performance is considered with specific reference to the UK, to establish areas where policy attention could enhance Ireland’s competitiveness. . In February 2017, the Council published a report benchmarking Ireland’s recent productivity performance. Ireland’s labour productivity performance is strong in an international context. Increasing productivity across all sectors remains a significant challenge. Productivity growth is a key driver of national competitiveness, as it enables firms based in Ireland to compete successfully in international markets by facilitating output to be produced in a more efficient and effective manner. Ireland can take advantage of a sizeable competitiveness opportunity if we can avoid the ‘productivity trap’ being experienced by many developed economies. Facilitating enterprise and start-ups, trade, access to finance, skills and infrastructure are critical to productivity and competitiveness gains. . In 2016 the Council undertook a review of our Competitiveness Framework and a study to assess the affordability of residential property in Ireland in an international context. . NCC Competitiveness Bulletins focus on individual topics and highlight issues of concern to the Council, setting out briefly why a particular issue is of concern, and providing a summary of actions designed to enhance Ireland's competitiveness.

1 July 2017 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 Declan Hughes Assistant Secretary, Department of Jobs, Enterprise and Innovation Jane Magnier Joint Managing Director, Abbey Tours Danny McCoy Chief Executive Officer, 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 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 Jobs, Enterprise and Innovation Teodora Corcoran 23 Kildare Street, Dublin 2, D02 TD30 Eoin Cuddihy Tel: +353-1-631-2121 John Maher Email: [email protected] Web: www.competitiveness.ie

2 July 2017 Taoiseach’s Foreword As a small open economy, competitiveness is central to our future prosperity. Improved competitiveness has helped Ireland increase employment, exports and investment in recent years. Over two million people are now working, and the Action Plan for Jobs target of 45,000 extra jobs this year is on course to be exceeded. A failure to maintain competitiveness in the run-up to the economic crisis left the Irish economy vulnerable and ultimately resulted in the loss of jobs and fall in living standards suffered by the Irish people. We need to ensure that we don’t repeat the mistakes of the past, and that is why the Government, the Oireachtas and the Irish public need to pay attention to the analysis of the National Competitiveness Council. Whilst our competitiveness performance in recent years has been positive, it is essential to remain vigilant as we approach full employment and the economy begins to face capacity constraints. Increasingly the focus must be on growing participation in the workforce, and increasing skill levels, innovation and productivity across the economy, in both private and public sectors. In addition, Brexit creates large uncertainties and risks for the Irish economy, and in particular for those sectors most dependent on trade with the United Kingdom. In many cases, these sectors are employment intensive, operate in low-margin industries, and have a large regional footprint. Now, more than ever, Ireland needs to respond creatively to challenges such as infrastructure bottlenecks, skills deficits, and increasing costs. We need to help Irish companies become more resilient to Brexit by improving their levels of productivity and innovation. Ireland’s Competitiveness Scorecard 2017 is a very detailed analysis of Ireland’s competitiveness performance across many different variables, based on a sophisticated understanding of what determines a country’s competitiveness. It provides an objective evidence base for those making policy and resource-allocation decisions in a time of considerable uncertainty. I would like to thank the National Competitiveness Council for this comprehensive report and encourage everyone involved in policy-making to consider its analysis carefully so that we can enable Irish companies to compete successfully in international markets and provide Ireland’s people with the opportunity to further improve their living standards in the years ahead.

Leo Varadkar TD Taoiseach

3 July 2017 Tánaiste’s Foreword The trajectory of Ireland’s competitiveness performance in recent years has been positive, and is reflected in strong employment growth across sectors and regions. The strong performance of clients supported by the enterprise agencies in winning exports, market share and job creation in the face of intense global competition is to be commended and reflects the competitiveness of the environment in which to do business in Ireland.

At the same time, as set out in this report, a number of critical competitiveness issues are evident and my objective is to ensure the economy is resilient at sectoral and firm level to deal with imminent competitiveness challenges and to build further on the progress we have made.

Global uncertainty and Brexit in particular, has underlined the importance of building competitive advantage and generating uplift in enterprise export competitiveness to secure sustainable jobs and growth. A more diverse export base can reduce exposure to external demand shocks, exchange rate volatility and enhance growth and jobs. Supporting start-ups and facilitating enterprise evolve into new products, markets and sectors, while sustaining the advantages we enjoy in existing ones is a key priority for my Department.

Ensuring enterprise stays at the forefront of innovative activity is vital to deepening the resilience of our enterprise base and necessary for success in global markets, which for a small open economy like Ireland, is necessary for creating sustainable growth. The returns from innovation are a particularly vital component in securing productivity growth, consolidating and broadening our FDI base, and creating competitive advantage in intellectual property and commercial products and services. At firm level, the returns from innovation are associated with lower costs, increased turnover, productivity and job creation.

In the context of intense competition internationally for exports, mobile investment and talent, enhancing national competitiveness is vital to secure increases in incomes and future prosperity. Building the foundations of future growth means we must further enhance the competitiveness of our business environment. We must continue to invest in our infrastructure and talent base and talent, and harness the benefits from trade and the Single Market.

As Minister for Enterprise and Innovation, I will ensure policies which enhance national competitiveness and create the best possible environment for enterprise, innovation and investment across all regions are prioritised and implemented.

Frances Fitzgerald TD

Tánaiste and Minister for Enterprise and Innovation

4 July 2017 Chairman’s Preface

Ireland’s ability to provide well-paid jobs and good-quality public services like health, education and social protection relies upon us being able to sell our goods and services abroad. That requires a competitive economy and it also requires the enhancement of productivity by investing in people and capital, thereby equipping individuals with the skills and tools to work smarter.

MAINTAINING OUR SUCCESS: Ireland’s relative macroeconomic performance continued to improve over the last year. Improved public finances, productivity growth, export growth and the labour market have all contributed to Ireland’s improved competitiveness performance in international rankings. The exporting sectors of the economy continue to perform strongly and many of Ireland’s traditional strengths (such as our competitive taxation regime, highly skilled young workforce, and supportive environment in which to do business and invest) remain. This has led to an improvement in Ireland’s competitiveness rankings (we are ranked 6th in the latest IMD World Competitiveness Yearbook). This improvement is welcome and the achievement should be acknowledged. The key concern of the NCC is that Ireland maintains these rankings. This is a difficult challenge in a rapidly growing economy that is closing in on full employment. However, it is particularly crucial to address the significant downside threats to the Irish economy which include Brexit, a potential shift in trade and taxation policy in the US, and the uncertain nature of global growth, particularly, the potential for slower than projected growth in the UK and US.

CAUTION: To protect its economy, Ireland must address those competitiveness factors that are within its control. Moreover, as one of the world’s most globalised economies, we must take care when evaluating our economic success through national income statistics. Our strong improvements in macroeconomic metrics have driven the improvement in Ireland’s relative competitiveness score. Metrics derived with respect to national income, such as export values, expenditure ratios-to-GDP, measures of potential output, the structural deficit, debt and the expenditure benchmark, must be interpreted with caution. While the headline measures of success are positive, beneath the surface, a number of significant challenges are evident.

COSTS: A rapidly improving labour market and positive inflation are likely to pose challenges for competitiveness in terms of skill shortages, increasing consumer prices and business costs. Cost pressures are evident in key areas, in particular, in residential property, the shift in the value of Sterling and rising prices. Ireland has a relatively high share of trade outside the Euro area – meaning that Ireland is more exposed to the impact of exchange rate fluctuations. The value of the Euro against Sterling is critical for Irish exporters, particularly those in employment intensive sectors such as the agri-food sector which remain very dependent on strong trading activity with the UK. The euro’s appreciation relative to sterling poses significant concerns for parts of the exporting sector reliant on trade with the UK, especially the food sector and areas of the economy sensitive to cross-border trade. While overall labour-cost growth remains competitive, sector specific pressures exist. On an annual basis, there has been strong labour-cost growth in construction, professional services and accommodation and food.

EXPORT BASE: Despite our strong trade performance, our export base remains narrow. Brexit has underlined the importance of generating uplift in enterprise export competitiveness to secure future jobs and growth. A more diverse export base can reduce exposure to external demand shocks, exchange rate fluctuations and instability in export earnings, upgrade value-added, and enhance growth and jobs. Policies to facilitate enterprise to move into new products, markets and sectors, whilst maintaining the competitive advantages it enjoys in existing ones, are now critical.

5 July 2017 PRODUCTIVITY GAP: Such policies referred to above will help to bridge the productivity gap that exists between the most productive firms in Ireland and the rest of the enterprise base that is lagging. While Ireland’s productivity growth is relatively strong, it is skewed by a small cohort of firms in the manufacturing and ICT sectors. There is a need to increase productivity across many sectors and occupations, particularly in the indigenous and locally-trading sectors of the economy. This is perhaps the foremost medium-term domestic challenge to sustainable growth prospects.

INNOVATION: Ensuring Irish enterprise stays at the forefront of technology and innovative activity, and can support that through access to competitively-priced finance from a variety of sources, is critical for boosting productivity growth. While Ireland has a higher proportion of innovative enterprises than the Euro area-19 average in product, process and marketing, its performance is relatively weak in terms of organisational innovation. Business R&D expenditures as a percentage of GDP have been relatively flat over the period 2010- 2015. At the same time, while public investment in R&D is increasing, meeting our intensity target of 2.5% of GNP by 2020 is a significant challenge and that figure still places Ireland as an ‘innovation follower’ according to this indicator. Competitive economies require sufficient and effective investment in R&D, especially by the private sector; the presence of high-quality scientific research institutions; extensive collaboration in research between universities and industry; and sophisticated business practices and effective clusters. A challenge for the private sector, and for policymakers, is how to enhance the diffusion of knowledge and knowhow from the leading firms, including the multinational enterprises, to the rest of the Irish enterprise base. The productivity of the leading firms will be enhanced through higher rates of productivity across the board which will result in better products and services, a larger pool of skilled workers, and a lower cost base.

PUBLIC FINANCES: Careful management of the public finances within the EU budgetary guidelines will remain a challenge, particularly considering the need to address growing infrastructure and funding deficits, and to ensure that the economy does not overheat. Ireland’s exposure related to the concentration of corporation tax receipts among a very small cohort of firms remains a risk and it is essential that the tax base is broadened consistent with the OECD tax hierarchy for growth, which contends that taxes on immobile bases, such as property, and consumption are less distortive than those on personal and corporate income. Any loosening of fiscal discipline (by which we mean, for example, unsustainable current expenditure increases or shrinking tax ratios) at this stage would undo much of the progress achieved to date, and would have potentially significant negative implications for future competitiveness.

Sustainable growth and improved living standards for all is the primary goal of national competitiveness. To ensure Ireland has the capacity to absorb and respond to economic shocks, it is important to ensure our fiscal position remains sustainable. While we must continue to compete from a taxation perspective, we should avoid any narrowing of the tax base and ensure the tax system supports and rewards employment, enterprise, investment and innovation. Developing our infrastructure base, while complying with the EU’s fiscal rules, is a fundamental challenge to enhancing competitiveness. Improving and prioritising public investment, particularly our capacity to deliver regionally connected projects in line with the National Planning Framework are essential. However, any investment of valuable public funds must be done on a sound evidence base.

This report provides part of the evidential base to assist policymakers to identify the key challenges confronting Irish enterprise. The Council will further consider these challenges in its annual policy document, Ireland’s Competitiveness Challenge, which will be published later this year.

Professor Peter Clinch Chairman, National Competitiveness Council

6 July 2017

Table of Contents Executive Summary 8 Chapter 1: Ireland’s Competitiveness Performance and Outlook 17 Chapter 2: Sustainable Growth: Quality of Life, Income, Environmental Sustainability 24 Chapter 3: Competitiveness Outputs: Business Performance, Costs, Productivity, Employment 37 Chapter 4: Competitiveness Inputs: Business Environment, Infrastructure,Clusters and Firm Sophistication, Knowledge and Talent 69 Chapter 5: Essential Conditions: Institutions, Macroeconomic Sustainability, Endowments 100 Annex 1: Methodology 119

7 July 2017 Executive Summary

Competitiveness is a multidimensional concept incorporating many of interlinked and interdependent factors; reflecting this complexity, Ireland’s Competitiveness Scorecard analyses over 140 measures each of which articulates an aspect of Ireland’s competitiveness performance. Given the disparate nature of these indicators, the National Competitiveness Council does not attempt to create a single quantifiable measure of competitiveness – rather, each indicator is examined individually. Thereafter, taking a birds-eye view of all the data collected, the Council can draw the various strands of analysis together to present a comprehensive picture of Ireland’s international competitiveness performance. The 2017 Scorecard is divided into four main sections - sustainable growth (Chapter 2), competitiveness outputs (Chapter 3), competitiveness inputs (Chapter 4) and essential conditions for competitiveness (Chapter 5) - which correspond to the segments of the NCC’s competitiveness pyramid. Key findings are summarised below.

Ireland’s economic prosperity is inextricably linked to how competitive we are internationally. Competitiveness performance reflects the interaction of a wide range of factors that, combined, determine the ability of firms to compete successfully in international markets. Ireland’s performance across the main international competiveness indices has improved in recent years. The World Bank’s Ease of Doing Business report currently ranks Ireland 18th out of 190 economies. The Wold Economic Forum Global Competitiveness Report ranks Ireland 23rd out of 138 countries. The Institute for Management Development measure of competitiveness ranks Ireland 6th most competitive out of 63 countries. Both the nominal and real Harmonised Competitiveness Indicator are currently at relatively low levels by historic standards and recent data points to continued HCI competitiveness in Ireland. As a small peripheral EU economy, with limited resources, factors outside of our control such as exchange rates exert a significant influence on national competitiveness and the cost base for enterprise based in Ireland. Over the past year there has been a pronounced fall in the value of Sterling against the Euro. Following the UK referendum result in June 2016, the value of Sterling against the Euro fell sharply and in October and November 2016 was trading at times at £0.90. In the first half of 2017, Sterling has remained weak in relation to the Euro averaging around £0.85, but has fluctuated higher at times, averaging £0.87 in early June 2017. In contrast to continued weakness in Sterling, the Dollar has strengthened in relation to the Euro. As of May 2017, the Euro/Dollar exchange rate was $1.10 compared with $1.13 in May 2016.

Quality of Life Ireland performs relatively well in objective measures of well-being (income, education attainment, air and water quality) and health. According to the OECD’s Better Life Index Ireland ranks above the OECD average in subjective measures relating to housing, personal security, health status, education and skills, social connections, subjective well-being, work-life balance, and environmental quality, but below average in income and wealth, and civic engagement. As a result of exceptionally strong economic growth in recent years, Ireland's GDP per capita is the second highest in the Euro area in 2016. Disposable gross income fell during the recession but has increased since 2013. However, the annual adjusted disposable income per capita in PPPs was 20,181, 13 per cent below the Euro area figure 23,295. The Irish Gini coefficient score in 2015 was 29.8 compared with 31.1 in 2010 and is below the Euro area average (30.8) indicating that income distribution in Ireland is more equal than in the Euro area. The risk-of-poverty rate (16.3%) is below the Euro area average (17.2%). The risk of in-work poverty for

8 July 2017 working households is below the Euro area average and was 4.8 per cent down from 5.5 per cent in 2010. The proportion of the population considered materially deprived was 0.6% above the Euro area average in 2015. Climate change presents very significant challenges for Ireland, both in terms of mitigating our emissions and achieving national and international binding targets, as well as adapting to the effects of a changing climate. Ireland's 2020 target is to achieve a 20 per cent reduction of non-ETS sector emissions on 2005 levels, with annual binding limits set for each year over the period 2013 to 2020. EPA projections indicate that by 2020, Ireland’s emissions are likely to be in the range of 4-6 per cent below 2005 levels, well short of the target reduction level. While declining, fossil fuels account for 90 per cent of Irish gross inland fuel consumption in 2015. Ireland still has a much higher reliance on imported oil (48%) than the EU average to meet its energy consumption needs. Between 1990 and 2015, total emissions increased by 6.7 per cent to 59,878kt of CO2 equivalent. The agriculture (33%), transport (20%), energy (20%), and residential (10%) sectors account for the majority of emissions. The share of renewable energy production in Ireland continues to grow (albeit from a low base) with 9.6 per cent of gross final consumption derived from renewables in 2015.

Business Performance Ireland is one of the most open economies in the EU. Exports in Ireland increased from 103 per cent of GDP in 2010 to 124 per cent in 2015. Ireland’s share of total global export markets is 1.3 per cent, as of 2015. Ireland has expanded its share of the world’s services market up 0.2 per cent to 3 per cent in 2016. Over the same period, Ireland’s share of global merchandise exports grew from 0.7 per cent in 2015 to 0.8 per cent in 2016. Enterprise Ireland client exports grew by 6 per cent in 2016 reaching a record high of €21.6bn. Export growth to the UK, however, which accounts for €7.5bn of exports, slowed from 12 per cent in 2015 to 2 per cent in 2016. From a sectorial perspective, the Food sector reported the largest decline, with the value of Food exports to the UK falling by 2.8 per cent while non-food sectors saw exports increase by 6.4 per cent. While exports have been the primary engine of economic growth in Ireland in recent years, the composition and range of goods exported from Ireland has become increasingly concentrated. Chemicals and related products account for 56 per cent of merchandise exports. Exports in computer services represent 47.2 per cent of the total export in services. In terms of markets, the US accounted for 26% of merchandise exports up from 23% in 2011. Other key markets include Belgium (12.5%), UK (11.4%), Germany (6.7%) and Switzerland (5%). Computer services account for the largest share of exported services to the EU (including the UK), US and the rest of the major export destinations, apart from Luxembourg. Building on strong growth in 2015, the activity level of FDI and indigenous enterprise in 2016 was exceptionably strong in terms of export growth, jobs created and new investment. Export and employment performance by client companies of the enterprise agencies continues to be strong. Analysis by the World Bank shows that Ireland has a relatively supportive environment for entrepreneurship compared with many of our Euro area competitors.

Costs The Council published its Costs of Doing Business in Ireland report in June 2017 and concluded that despite the low inflation environment, Ireland remains a relatively expensive location in which to do business. Ireland’s price profile is described as “high cost, rising slowly”. Ireland regained cost competitiveness as a result of falls in relative prices, low inflation and favourable exchange rate movements. This made Irish firms more competitive internationally and made Ireland a more attractive location in which to base a business. 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. These include unfavourable exchange rate movements, higher international energy prices or imported inflation from our major trading partners. Specifically in terms of business costs, the cost base for enterprise has improved

9 July 2017 across a range of metrics since 2010, (e.g. the cost of starting a business, communications costs and average income taxes). Ireland, however, remains a relatively high cost location and already the return to sustained levels of growth has resulted in upward cost pressures at sectoral level (e.g. labour) and property costs.

Productivity In the long-run, Ireland’s productivity is the primary determinant of living standards relative to other countries and the engine of economic growth. Ireland’s labour productivity performance is strong in an international context. Irish labour productivity growth has been above that in competitor countries since 2013 and was 2.3 per cent in 2016. However, Ireland’s performance has been greatly affected by shifts in the composition of employment and the influence of a number of high value added sectors on output. The narrow base of enterprises in high value added sectors (particularly in High tech manufacturing and ICT) disguises, to a degree, underperforming sectors and skews Ireland’s productivity level and growth rate.

Employment While employment has not yet returned to peak pre-recession levels, over 2.05 million were in employment in Q1 2017, an annual increase of 3.5 per cent. Employment growth in the year to Q1 2017 was spread relatively equally across the different sectors of the economy with employment growing in 11 of 14 economic sectors. Consistent with the increase in employment levels, unemployment and long term unemployment are on a steady downward trajectory. The number of unemployed and long term unemployed persons in Q1 2017 was 146,200 and 78,655 respectively. Unemployment decreased on a year on year basis and fell from 15.1 to 6.8 per cent, on a seasonally adjusted basis, between Q1 2012 and Q1 2017. On a monthly basis unemployment was 6.3 per cent in June 2017 compared to 8.3 per cent a year earlier. Long term unemployment and youth unemployment levels are also declining, yet they remain high. Eurostat data shows youth unemployment declined further in 2016 and is now below both the EU28 and the Euro area averages (17.2%). Ireland has a high proportion of youth neither in employment, education or training (NEET). Out of the total age cohort 15- 24, 7.4 per cent were classified as NEET in 2016, compared with the EU28 and Euro area 19 averages of 3.8 per cent and 3.7 per cent respectively. There is evidence of higher than average job vacancy rates in a number of sectors. Recent research by the Expert Group on Future Skills Needs (EGFSN) anticipates job opportunities arising from both expansion and replacement demand for a range of occupational roles including in ICT, data analytics, manufacturing, medical devices, pharmaceuticals, food and beverages, international sales and marketing, project management, freight transport, hospitality, distribution and logistics.

Business Environment Maintaining a growth-friendly taxation system while simultaneously broadening the tax base, is critical to maintaining existing levels of employment and creating new jobs in Ireland. The Department of Finance report that Exchequer tax revenues the first half of 2017 are on-profile. Year on year tax receipts to end June 2017 were up €842 million (4%) underpinned by an improving economy. Year on year increases are evident in corporation tax (+10.7%), income tax (+3.1%) and VAT (+11%). Excise duties recorded shortfalls against profile and are down 12.1 per cent year on year. The Irish income tax system is progressive particularly at low and middle incomes. Ireland remains competitive in terms of the levels of income tax and social security contributions as a proportion of total labour costs. However, Ireland’s marginal tax rate is high at higher incomes with the highest rate applying at just below the average industrial wage, compared to the UK’s rate applying at 4.2 times the average industrial wage. Ireland’s corporation tax rate remains internationally competitive at 12.5 per cent. In 2016 Ireland had the 5th highest rate of capital gains tax in the OECD at 33 per

10 July 2017 cent. The Irish VAT rate (23%) is higher than the OECD average (19.2%), however, there are a number of lower VAT rates and exemptions for certain activities. While access to and affordability of credit has improved, Irish firms continue to face higher interest rates and greater volatility in those rates than their competitors abroad. In April 2017, the interest rate in Ireland on loans of up to €1 million was more than 74 per cent higher than the Euro area average rate for new business; the rate on loans of up to €1 million was more than 79 per cent more expensive in Ireland. While bank financing will continue to be crucial for enterprise, broadening the finance options available and increasing levels of private equity, crowdfunding and venture capital funding remains a challenge. Figure 4.1.4 shows the intensity of total venture capital investment is marginally below the OECD average with the greater portion of venture capital in Ireland attributed to early stage investments. Private equity accounts for 0.16 per cent of GDP in Ireland (down from 0.28 per cent in 2007). This is well below the levels in the best performing Euro area countries and significantly below the level seen in the UK (0.72). Non-performing loans at the end of 2016 made up 9 per cent of gross loans, down from 16.1 per cent in 2011. This compares to an OECD High Income average of 3.85 per cent.

Physical Infrastructure Although absolute levels of Irish investment in infrastructure are recovering, inland capital investment as a percentage of GDP (0.4%) is low relative to pre-crisis levels. Public investment as a proportion of gross fixed capital formation (2.4%) is below both the UK and Euro average (2.7%). Perceptions regarding the quality of Irish infrastructure are relatively low. The WEF ranks Ireland’s overall quality of infrastructure 38th, significantly lower than both the UK (24th) and the US (11th) in terms of perceptions. The Capital Plan is now being reviewed to ensure that capital spending is strictly aligned with national economic and social priorities, consistent with Programme for Partnership Government objectives. The level of investment projected over the medium term represents a significant challenge in light of demographic pressure, EU budgetary commitments and deficits in telecommunications, innovation, and transport and water infrastructure. Developing our infrastructure base, while complying with the EU’s fiscal rules, is a fundamental challenge to enhancing competitiveness.

Clusters and Firm Sophistication The European Commission’s Cluster Mapping tool indicates that Ireland has a relatively high degree of specialisation and cluster presence in biopharma, digital, medical devices and business services sectors. The EU Innovation Scoreboard classifies Ireland as behind the EU average in the finance and firm investments dimensions of innovation. European Commission/Eurostat data shows Business R&D expenditures as a percentage of GDP has been relatively flat in Ireland over the period 2010-2015. Firms in Ireland were more likely to be innovative (61%) compared to the EU average (49%) with relative performance strong across all firm sizes. Ireland has a higher proportion of innovative enterprises than the Euro area-19 average in product, process and marketing but performance is relatively weak in terms of organisational innovation. The proportion of sales of new to market and new to firm innovations as a percentage of turnover has fallen in recent years and at 9.3 per cent is below the EU average of 12.4 per cent.

Knowledge and Talent The EU Innovation Scoreboard provides a comparative assessment of the research and innovation performance of EU Member States. The 2016 Scoreboard places Ireland 6th in the overall ranking of EU Member States, classed as an innovation follower with an above average performance. Set in an international context, the IMD’s 2016 Competitiveness Yearbook 2017 ranks Ireland 1st for attracting and retaining talent. Ireland’s other strengths are in relation to the availability of skilled labour (5th), financial skills (6th) and the ability to attract foreign talent (10th). Relative weaknesses include the pupil-teacher ratio in secondary

11 July 2017 education (43rd), language skills (44th) and the cost of living index (45th). GDP per capita expenditure on education (primary to higher education) was amongst the lowest among OECD countries. In recent years Ireland’s ranking has improved for this measure, most significantly for expenditure at second-level education. However, Ireland’s overall ranking remains slightly below the OECD average and the gap is most pronounced at tertiary level. Ireland performs better in terms of spend when measured per student, particularly at primary and secondary levels. At all levels, average educational attainment in Ireland has improved. Ireland has made significant progress in reducing early school leavers. Participation in life-long learning has fallen since 2011 and stood at 11.9 per cent in 2016.

Institutions The World Bank's Doing Business index assesses regulations affecting SMEs and measures regulations applying to companies throughout their life cycle. In 2017 Ireland is ranked 18th overall and 5th in the Euro area, a decline of 1 place from last year. Ireland has a comparatively good enterprise environment conductive to doing business but lags behind the UK in a number of areas, such as dealing with construction permits, getting electricity, trading across borders and enforcing contracts. Ireland is ranked in the top ten in terms of perceptions of judicial independence, protection of minority shareholders, strength of investor protection and property rights.

Macroeconomic sustainability Following GDP growth of 8.5 per cent and 26.3 per cent in 2014 and 2015 respectively, Eurostat estimates that in 2016 the Irish economy was the fastest growing EU economy for the third year in a row with growth of 5.2 per cent. Preliminary national accounts data indicates that the principle contribution to economic growth came from domestic demand (investment and consumer spending). Exports in Ireland increased from 103 per cent of GDP in 2010 to 124 per cent in 2015. Ireland has the second highest level of exports as a percentage of GDP in the OECD after Luxembourg. While Ireland’s current account was in deficit in the fourth quarter of 2016 (largely due to an increase in research and development service imports), the annual current account is in surplus, indicating that Ireland is paying its way in the world. Reflecting improved economic and fiscal positions, Irish bond yield movements are continuing to trade in line with core European sovereign yields. The focus of policy in reducing general government deficit has been effective and the general government deficit continued to fall in 2016 to 0.6 per cent of GDP down from 2 per cent in 2015 and below the threshold of 3 per cent of GDP set out in the Stability and Growth Pact. The Department of Finance’s estimates indicate that the structural balance in 2016 was -1.9 per cent of GDP, and that based on current trajectory and assumptions within Budget 2017, Ireland is on track to reach the target of 0.5 per cent in 2018. Economic growth has contributed to improvements in the debt to GDP ratio. While the debt to GDP ratio remains high, it has decreased substantially from its peak of 119.5 per cent in 2012-2013 to 75.4 per cent in 2016. It is important that this downward trajectory continues if Ireland is to achieve the Stability and Growth Pact target of a 60 per cent debt-to GDP ratio. Recognising that metrics derived with respect to ratios-to-GDP may be skewed due to on-shoring of intellectual property, and in order to ensure that public finances are in a position to withstand Brexit related shocks, the Department of Finance has set an additional mid-term goal of achieving debt-to-GDP ratio of 45 per cent of GDP. In 2016 Irish Government revenue represented 27.5 per cent of GDP. Expenditure amounted to 28% of GDP. Figure 5.2.8 shows that across the EU, 'Social Protection' accounts for the major share of Government spending, followed by 'Health', 'General Public Services', and 'Education'. In line with EU rules, future increases in public expenditure will be based on the potential growth rate of the economy and safeguarded from dependence on cyclical revenues. Moving beyond the public finances, households continued to reduce debt as a proportion of income in 2016. Notwithstanding this positive trend, Ireland has the fourth most indebted households in the EU. The

12 July 2017 indebtedness of the business sector (non-financial corporations) remains evident with the Irish level the third highest in the EU, although a proportion of the debt is associated with non-residential loans.

Endowments In 2016 Ireland continued to have the youngest population in the EU (median age 36). The combined effect of natural increase and positive net migration resulted in an overall increase in the population of 38,400 bringing the population estimate to 4.67 million in April 2016. The evolution of the old age dependency ratio is a crucial element in determining the sustainability of Ireland’s healthcare and pension systems. Ireland has the 7th lowest old age dependency ratio in the OECD. Ireland’s rising dependency ratio increases the importance of expanding labour force participation and productivity. Despite the substantial percentage increase in the population (3.4%) between 2011 and 2016, the labour force growth (active population, 15 years and over) for the same period is only 0.3 per cent, below the EU average of 2.1 per cent. Total emigration from Ireland continues to decline. In 2016 62.7 per cent of the Irish population lived in urban areas, a marginal increase of 0.7 per cent compared to 2011. The rural population constitutes 37.3 per cent of the total population. That 44 per cent of the urban population lives in Dublin is an important consideration from a planning and development perspective.

13 July 2017 Ireland’s competitiveness performance – the policy challenges While the economy is in its strongest place since the onset of the recession, and growing at a strong rate, Ireland’s competitiveness is at a critical juncture. Driven by domestic demand sources, economic growth is forecast for 2017 and 2018 with continued strong employment growth and a further decline in unemployment. Employment grew in 11 of the 14 economic sectors during 2016 with the largest annual increases recorded in industry, construction and accommodation and food services. A rapidly improving labour market and positive inflation may pose challenges for competitiveness in terms of skill shortages, increasing consumer prices and business costs. While the overall economic outlook for Ireland is positive, the economy faces significant threats from external factors, including the outcome of the Brexit negotiations, a potential shift in trade and taxation policy in the US, a slowdown in UK and US growth and the uncertain nature of the political economy of the EU. As an exceptionally open economy, heavily dependent on international trade and investment, Ireland’s economic outlook is highly dependent on growth and demand levels in our major trading partners, the EU, US and UK. This makes it crucial that we address those factors within our control. The competitiveness and consistency of our tax offering, legal, regulatory and administrative environment, cost base, the availability of talent, technology and property solutions will remain vital to our ability to withstanding the ebb and flow of global economic developments. Brexit represents the foremost downside economic risk for Ireland. The immediate impact of Brexit has been uncertainty, reduced growth prospects and a shift in exchange rates. The depreciation of Sterling relative to the Euro and dealing with the permanency of the exchange rate shift is an important competiveness consideration. The triggering of Article 50 and the imminent structural shift in the UK’s trading relations with EU partners has far reaching implications for Irish competitiveness across a range of policy areas– including trade, investment, skills, and sector specific competitiveness impacts – particularly, for indigenous Irish enterprise in sectors such as Agri-food, Traditional Manufacturing and Tourism. In addition, recent analysis by the ESRI suggests that a hard Brexit could have significant implications for the fiscal space. With growth in taxation returns slower than expected to date in 2017, continued revenue growth cannot be taken for granted. Careful management of the public finances within the EU budgetary guidelines will remain a challenge, particularly in light of the need to address growing infrastructure and funding deficits. While the exact cyclical position of the economy is difficult to precisely estimate, after three years of strong economic and labour market growth, the Council considers it imperative that an appropriate fiscal and budgetary position consistent with the EU budgetary framework is adopted to ensure Ireland is best positioned to withstand shocks, and to ensure that the economy does not overheat. As a highly globalised economy, Irish National Accounts data now include a very significant amount of activity carried out elsewhere, but formally recorded as part of Irish GDP. The narrow base of sectors driving economic growth, in particular, the activities of a small cohort of multinational firms, the influence of contract manufacturing and the relocation of intellectual property assets, have limited impact on actual activity in the Irish economy. Metrics derived with respect to national income, such as export values, expenditure ratios-to- GDP, measures of potential output, the structural deficit, debt and the expenditure benchmark, have become skewed and must be interpreted with caution. It remains to be seen whether the quarterly changes in national income and related increases in Irish corporation tax revenue might be one-off adjustments or recurring. However, it would be hazardous to rely on volatile and potentially transitory revenue sources, to fund permanent levels of current public spending, or reductions in tax rates which can prove difficult to reverse. The introduction by the CSO of the GNI* measure will help better inform domestic policymaking but internationally measures relative to GDP will remain the benchmark against which many measures of Ireland’s competitiveness performance will be assessed.

14 July 2017 It remains to be seen whether the quarterly changes in national income and related increases in Irish corporation tax revenue might be one-off adjustments or recurring. However, it would be hazardous to rely on volatile and potentially transitory revenue sources, to fund permanent levels of public spending, or reductions in tax rates which can prove difficult to reverse. Ireland’s exposure related to the concentration of corporation tax receipts among a very small cohort of firms remains a risk and it is essential that the tax base is broadened in line with the OECD tax hierarchy for growth, which contends that taxes on immobile bases, such as property, and consumption are less distortive than those on personal and corporate income. Any loosening of fiscal discipline (i.e. unsustainable current expenditure increases, or shrinking tax ratios for example) at this stage would undo much of the progress achieved to date, and would have potentially significant negative implications for future competitiveness. However, the Council recognises the budgetary challenges of reducing the deficit level while at the same time ensuring that fiscal policy supports sustainable economic and employment growth, and facilitates sufficient public investment in productivity enhancing capital projects. It is important to achieve appropriate balancing of the need to meet our obligations under the Stability and Growth Pact and put in place a sustainable, counter-cyclical, medium-term fiscal planning process. We encourage that the fiscal space remaining goes towards investing in the conditions of future competitiveness, specifically building innovation capacity, economic infrastructure, particularly digital and energy related and on enhancing our productivity and skills base. Ireland’s move up the international rankings (we are ranked 6th in the latest IMD World Competitiveness Yearbook) is welcome. However, our strong improvements in macroeconomic metrics have driven the improvement in Ireland’s relative competitiveness score. This may suggest that our current performance, which is relatively strong, is overstating our overall competitiveness position and masking weakness in the underlying drivers of future competitiveness performance and sector specific challenges, particularly related to costs and productivity. The Council considers it more important than ever that we do not become complacent about the need for continued reform and that policy continues to work to improve Ireland’s competitiveness performance in areas that can be influenced by domestic policy action. The overarching themes emerging from the Scorecard analysis, which will be considered in the Council’s 2017 Competitiveness Challenge Report are summarised below. . Ensuring growth is sustainable: Sustainable growth and improved living standards for all is the primary goal of national competitiveness. To ensure capacity to absorb and respond to economic shocks it is important to ensure our fiscal position remains sustainable. While we must continue to compete from a taxation perspective, we should avoid any narrowing of the tax base and ensure the tax system supports and rewards employment, enterprise, investment and innovation. Developing our infrastructure base, while complying with the EU’s fiscal rules, is a fundamental challenge to enhancing competitiveness. Measures to reduce infrastructure bottlenecks including by improving and prioritising public investment, particularly our capacity to deliver regionally connected projects in line with the National Planning Framework will be vital to enhancing competitiveness. Related to infrastructure prioritisation, meeting Ireland’s climate change commitments and transitioning to a low emissions economy presents significant challenges and opportunities at sectoral level and will be central to the direction of long term economic growth prospects. 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. Ireland’s current price profile could be described as “high cost, rising slowly”. This must be supported by an administrative and regulatory framework that ensures costs and supply-side conditions remain competitive.

15 July 2017 . Generating an uplift in enterprise competitiveness with a particular emphasis on productivity: As a small open economy, productivity and cost competitiveness remain fundamental to long term growth prospects. Brexit has underlined the importance of generating uplift in enterprise export competitiveness to secure future jobs and growth. A more diverse export base can reduce exposure to external demand shocks, exchange rate fluctuations and instability in export earnings, upgrade value-added, and enhance growth and jobs. Policies to facilitate enterprise evolve into new products, markets and sectors, whilst maintaining the competitive advantages we enjoy in existing ones, are critical at this time. Current productivity growth is strong but overall performance in Ireland is heavily influenced by the performance of the Manufacturing and ICT sectors and in particular the performance of FDI enterprises in these sectors. Bridging the productivity gap that exists between the most productive firms and laggard firms is a major challenge to sustainable growth prospects. Facilitating workplace innovation and delivering uplift in management skills and labour force quality at all levels is particularly vital. Ensuring Irish enterprise stays at the forefront of technology and innovative activity, is able to access competitively-priced finance is also an important challenge. Business R&D expenditures as a percentage of GDP have been relatively over the period 2010-2015. While public investment in R&D is increasing, meeting our intensity target of 2.5% of GNP by 2020 is a significant challenge. From a competitiveness perspective, the returns from innovation are a vital component in securing productivity growth, diversifying and broadening the enterprise and exports base, growing FDI, and creating competitive advantage in intellectual property and commercial products and services.

16 July 2017 Chapter 1: Ireland’s Competitiveness Performance and Outlook

International competitiveness performance Competitiveness is a complex concept incorporating a myriad of interlinked and interdependent factors; reflecting this complexity, Ireland’s Competitiveness Scorecard analyses data over 140 charts each of which tells a part of Ireland’s competitiveness story. These measure a range of inputs, outputs and outcomes. Given the disparate nature of these indicators, the National Competitiveness Council does not attempt to create a single quantifiable measure of competitiveness – rather, each indicator is examined individually. Thereafter, taking a birds-eye view of all the data collected, the Council can draw the various strands of analysis together to present a comprehensive picture of Ireland’s international competitiveness performance. Figure 1.1 presents Ireland’s ranking from amongst 33 OECD member states across a range of international indices. In this figure, a ranking of 1 (i.e. close to the centre of the chart) represents a strong performance (i.e. a ranking of 1 would imply that Ireland is deemed to be the most competitive of 33 countries in the OECD).

Figure 1.1 Overview of Ireland’s international rankings amongst OECD countries 2016

Ireland's Rank in OECD These indices cover a

Transparency International, number of policy areas – Corruption Perception Index 2016 some based on directly 20 18 quantitative aspects of 17 Forbes Best Countries for 16 Reputation Institute Country policy (e.g. the World Business 2016 14 Index 2016 12 Bank Doing Business 10 8 Index); others measure 6 qualitative, more 4 9 3 2 18 OECD FDI Regulatory 16 WEF Global Competitiveness subjective issues such as 0 Restrictiveness Index 2016 Report 2017 5 reputation, quality of life, entrepreneurship 9 and FDI; indices such as 12 the IMD and WEF Global Entrepreneurship Index IMD World Competitiveness 2017 Yearbook 2017 competitiveness indices capture a mixture of World Bank Doing Business 2017 both.

Source: Various International Organisations

Indices and rankings are useful, if imperfect, measures of competitiveness performances. In some instances, Ireland’s ranking is not a question of absolute deterioration or improvement in these categories but rather a matter of other countries improving their position relative to Ireland's. Advanced economies, such as Ireland, at the upper end of the rankings, can find it harder to get high impact from their reforms due to their already strong performance (i.e. as a country nears the frontier or limit of best practice, the harder marginal improvements are to achieve). In addition, the methodology, surveys and data used in these benchmarking reports differ significantly. Methodologies are frequently revised and this can have an impact on Ireland’s ranking. While acknowledging that year on year fluctuations in data may be subject to ‘data noise’, (particularly as regards perception based indicators) performance across these rankings indicates the dynamic and global nature of competitiveness.

17 July 2017 Figure 1.2 examines how Ireland’s ranking has evolved in the last decade in three of the most high profile enterprise competitiveness-related indices1. Our position in the World Economic Forum (WEF) and Institute for Management Development (IMD) rankings deteriorated prior to and over the course of the recession but has gradually started to recover in recent years. The 2017 WEF Global Competitiveness Report shows Ireland is currently ranked 23rd most competitive economy, an improvement of 1 place in the year. Using the IMD measure of competitiveness Ireland is currently ranked 6th, an improvement of 1 place from the previous year. In terms of quantitative data, international indices of competitiveness such as the WEF and IMD reports combine current economic performance metrics (e.g. economic growth, fiscal position, productivity levels, employment, prices indicators) with measures of potential future success (e.g. investment in infrastructure, education and innovation) as well as qualitative measures. Ireland’s performance has improved in the last three years especially in relation to performance based on current economic metrics. This development generally improves Ireland’s overall competitiveness score. This may suggest that our current performance, which is relatively strong, is overstating our overall competitiveness position and masking weakness in the underlying drivers of future competitiveness performance. The World Bank’s 2017 Ease of Doing Business report places Ireland 18th out of 190 economies – a fall of 1 places from the previous year. While Ireland’s performance and overall score has improved, other countries have also improved their performance and improved at a faster rate. In addition, the World Bank has been incorporating changes in methodology which affect Ireland’s ranking and can make comparison with previous years difficult. The report tracks changes in regulations affecting businesses and sheds light on how easy or difficult it is to open and run a small to medium-size business. Globally, Ireland is a top twenty performer with regard to measures of paying taxes (5th), ease of starting a business (10th), protecting minority investors (13th) and resolving insolvency (18th). Our ranking is less impressive in getting credit (32nd), getting electricity (33rd), dealing with construction permits (38th), registering property (41st), trading across borders (47th) and enforcing contracts (90th).

Figure 1.2 Ireland’s global competitiveness rankings, 2007-2017

IMD WEF World Bank Since 2011, Ireland’s 1 More Competitive international 6 competitiveness 6 ranking, as measured

11 by the IMD and WEF,

Ranking Ranking has improved. Ireland is 16 now 6th in the IMD’s 18 World Competitiveness Less Competitive Less 21 rd 23 Yearbook 2017 and 23

26 in the WEF Global Competitiveness 31 Report. Ireland is th 2017 2011 2013 2015 2007 2012 2010 2014 2016 2008 2009 ranked 18 by the World Bank and remains below peak. Source: IMD, WEF, World Bank, 2017

1 The Council’s recent report Benchmarking Competitiveness: Ireland and the United Kingdom, 2017 assesses Ireland’s performance across these three global competitiveness benchmarks in greater detail

18 July 2017 Competitiveness, exchange rates and inflation Ireland’s competitiveness narrative can be illustrated using Harmonised Competitiveness Indices (HCIs). The purpose of HCIs is to provide meaningful and comparable measures of countries' price and cost competitiveness that are also consistent with the real effective exchange rates (REERs) of the Euro. Ireland's HCI captures the impacts of both exchange rates and relative price movements. The latest HCI data for April 2017 show that the nominal HCI decreased by 0.8 per cent on a year-on-year basis. The real HCI decreased by 2.4 per cent when deflated with consumer prices. Both the nominal and real HCI are currently at relatively low levels, by historic standards and recent data points to continued HCI competitiveness in Ireland. Favourable exchange rates vis-à-vis our main trading partners makes firms based in Ireland more cost competitive and allows them to trade more effectively in international markets. As a result of the scale of Ireland’s non-Euro denominated trade, (i.e. with the UK and US), Euro exchange rates have a greater impact on our relative international competitiveness than is the case in many Euro area countries. Over the past year there has been a pronounced fall in the value of Sterling against the Euro. Following the UK referendum result in June 2016, the value of Sterling against the Euro fell sharply and in October and November 2016 was trading at times at £0.90. In the first half of 2017, Sterling has remained weak in relation to the Euro averaging around £0.85 but has fluctuated higher at times, averaging £0.87 in early June 2017. In contrast to continued weakness in Sterling, the Dollar has strengthened in relation to the Euro. As of May 2017, the Euro/Dollar exchange rate was $1.10 compared with $1.13 in May 2016. Low levels of price inflation have been a characteristic of Ireland and most OECD economies in recent years. In 2016, consumer price inflation was low or negative through much of the year. However, inflation has been positive in the first half of 2017 reflecting a pick- up in energy and services prices. Prices on average, as measured by the CPI, were year on year 0.2 per cent higher in May 2017. The CSO report the most notable annual changes were increases in Transport (+2.2%), Alcoholic Beverages & Tobacco (+2.1%), Restaurants & Hotels (+1.8%) and Education (+1.7%). Prices as measured by the EU Harmonised Index of Consumer Prices (HICP) were unchanged in May 2017 compared with May 2016. Our price profile might be described as “high, rising slowly”. At present, Ireland is experiencing moderate consumer price growth. Eurostat data shows price levels in Ireland were 25 per cent above the EU 28 average in 2016.

Economic outlook Table 1.1 shows the European Commission’s forecasts for economic growth for Ireland and our major trading partners. The Irish economy was the fastest growing economy in the EU in 2016. The European Commission's forecast for 2017 and 2018 indicates that the economy will continue to expand but at a slower pace, and Ireland will be the 4th fastest growing economy in the EU after Luxembourg, Malta and Romania. Projections for the next two years indicate that strong labour market performance and increased domestic demand as a result of continued increase in private consumption and investment will be the main factors underpinning economic growth. However, while the overall economic outlook for Ireland is positive, the OECD2 in its 2017 Economic Outlook suggests that the Irish economy is overheating somewhat. Strong economic growth and shortage of housing supply fuel the property prices and contribute to an increase in property-related loans, thus possibly forming another property bubble. In addition, as an open economy, the country is highly exposed to risks related to the external environment. It is expected that economic growth in both the EU and the euro area will remain moderate (below 2% over the next two years).

2 OECD Economic outlook, Volume 2017

19 July 2017 The extent of the impact of the outcome of the Brexit negotiations on the Irish economy remains uncertain. In the short-term, as the UK remains Ireland’s largest market in the EU, a forecast of UK GDP growth of 1.8 per cent in 2017, diminishing to 1.3 per cent in 2018, coupled with a potential further weakness in Sterling would have a negative impact on the Irish economy. The economic outlook for the US, Ireland’s principle trading partner outside of the EU, indicates that the US economy will continue to grow by 2.2 – 2.3 per cent over 2017-2018 but this forecast may be downgraded due to potential protectionist policy changes in the areas of taxation and trade. Table 1.1 Economic Growth Outlook, (Annual percentage change) European Commission

2016 2017 2018 World 3 3.4 3.6 EU 1.9 1.9 1.9 Euro area 1.8 1.7 1.8 Ireland 5.2 4 3.6 Germany 1.9 1.6 1.9 France 1.2 1.4 1.7 Italy 0.9 0.9 1.1 UK 1.8 1.8 1.3 US 1.6 2.2 2.3 China 6.7 6.6 6.3 Japan 1 1.2 0.6 Source: European Commission Spring Economic Forecast 2017

Table 1.2: Forecast Annual percentage change key indicators, Ireland, 2017

GDP GNP HICP Employment Rate Department of Finance 4.3 4.2 0.6 2.7 Central Bank of Ireland 3.5 3.3 0.7 2.6 ESRI 3.8 3.5 0.7 2.9 European Commission 4 n/a 0.6 2.6 OECD 3.7 n/a 0.8 n/a Source: Various Bodies

Despite the uncertainties associated with the external environment and a range of domestic challenges, economic forecasts indicate that the Irish economy will expand with a moderate pace. Employment will continue to grow and the main drivers of economic growth are projected to be domestic investment and consumption.

20 July 2017 Table 1.3: Forecast Annual percentage change in the composition of Irish economic growth, 2015-2021

2016 2017 2018 2019 2020 2021 Real GDP 5.2 4.3 3.7 3.1 2.7 2.5 Real GNP 9 4.2 3.5 2.8 2.3 2.1 Exports 2.4 5 5.1 4.2 3.9 3.8 Imports 10.3 -2 5.3 4.5 4.2 4 Personal Consumption 3 2.8 2.7 2.5 2.2 2 Government Consumption 5.3 2.6 2.1 2 1.9 1.8 Investment 45.5 -17.1 5.4 4.3 3.3 2.9 Source: Department of Finance Stability Programme Update

Although contingent on a number of external factors, the Department of Finance’s projections for growth in the medium term (Table 1.3) are positive. Achieving these projections will require balanced growth, underpinned by increased contribution from all sectors of the economy whilst respecting the parameters set out by the Stability and Growth Pact.

21 July 2017 Competitiveness Implications of Brexit While the Irish economy is experiencing strong growth, it is at a critical juncture. In particular, the challenges of Brexit and the imminent structural shift in the UK’s trading relations with the EU has far reaching implications for Ireland across a range of policy areas including trade, investment, the labour market, and energy, as well as many sector specific competitiveness impacts – particularly Agri-food, Traditional Manufacturing, Tourism and sectors exposed to cross border trade. Ireland is in a unique geographic situation – the UK is our land bridge to the EU, with 80 per cent of our exports being exported to the UK for direct use or onward transit. The immediate impact of Brexit has been uncertainty, reduced growth prospects and increased currency volatility. Through currency effects, there have been immediate short term cost implications for Irish exporters, many of whom are dependent on the UK market. The permanency of the exchange rate shift is an important competiveness consideration. Ireland’s ability to achieve sustainable growth is dependent on our ability to trade internationally.

The EU and UK commenced the first round of exit negotiations on 19 June 2017. The policy implications arising from these negotiations will have a significant bearing on Ireland’s future. While the UK is and will remain a key trading partner for Ireland it is also a country it competes with for mobile investment and export market share. While the UK is a key trading partner it is also a crucial competitor in terms of mobile investment and export market share. The World Bank’s Ease of Doing Business report ranks Ireland 18th and the UK 7th out of 190 economies. The WEF Global Competitiveness Report ranks Ireland 23rd and the UK 7th most competitive out of 138 countries. The IMD measure of competitiveness ranks Ireland 6th and the UK 19th out of 61 countries. In April 20173, the Council considered Ireland’s strengths and weaknesses relative to the UK with respect to competiveness and benchmarked performance across a range of areas. For example, in comparison to the UK, Ireland performs well in international competitiveness rankings with respect to: th th • World Bank ease of starting a business; (Ireland 10 , UK 16 , World Bank) st st • Labour productivity; (Ireland 1 , UK 21 , IMD) th th • Quality of institutions; (Ireland 12 UK 14 , WEF ) st th • Attracting and retaining talent. (Ireland 1 , UK 14 , IMD)

The UK has higher rankings with respect to: th • Ease of Doing Business overall ranking; (Ireland 18 , UK 7th, World Bank) st th • Perceptions of infrastructure quality; (UK 31 , Ireland 38 IMD) th th • Public expenditure per capita on education; (UK 14 , Ireland 18 ,IMD) th • Export Concentration by partner. (UK 15th, Ireland 55 , IMD) The challenges posed by Brexit provide urgent impetus to pursue policies that enhance competitiveness. The Council considers policy needs to focus on Ireland’s macroeconomic environment as well as microeconomic structural factors such as innovation capacity, the quality of infrastructure, costs of doing business and productivity across all economic sectors. The Council is particularly concerned about the challenges confronting our indigenous enterprise sector arising from Brexit. Specifically, the cost competitiveness implications caused by shifting exchange rates and uncertainty regarding trade pose real threats to continued growth. Brexit will inform the Council’s consideration of policy recommendations to improve competitiveness which will be set out in the 2017 Competitiveness Challenge report.

3 NCC Competitiveness Benchmarking, Ireland and the UK, 2017

22 July 2017 Report Structure The 2017 Competitiveness Scorecard is set out in four main sections - sustainable growth (Chapter 2), competitiveness outputs (Chapter 3), competitiveness inputs (Chapter 4) and essential conditions for competitiveness (Chapter 5) – these correspond to the layers of the NCC’s competitiveness framework. This report uses internationally comparable metrics, with the OECD, the EU, the UN, IMF and the WTO as the sources for the majority of indicators. Indicators from specialist international competitiveness bodies (e.g. from the World Bank’s Doing Business report, the World Economic Forum’s Global Competitiveness Report and the Institute for Management Development’s World Competitiveness Yearbook) are also used. Where further depth is of benefit, national sources such as the Central Bank and the CSO are used. Subject to data availability, Ireland’s performance is benchmarked over time against 19 other countries. Countries have been chosen to provide a mix of Euro area members (Finland, France, Germany, Italy, the Netherlands and Spain), other non-Euro area European countries (Denmark, Sweden, Switzerland and the UK), and newer EU member states (Hungary, Latvia and Poland). Seven non-European countries which are global leaders or are of a similar size to Ireland are also included where data is available. These countries are Brazil, China, Japan, South Korea, New Zealand, Singapore, and the US. This allows for comparison between Ireland and many of its closest trading partners and competitors. Ireland is also compared to a relevant peer group average – either the OECD or the Euro area average4. Measuring and benchmarking competitiveness performance relative to third countries highlights Ireland’s strengths in a number of areas but is also intended to identify potential threats and elaborate on weaknesses and to determine corrective actions. Benchmarking competitiveness is useful - it informs the policymaking process and raises awareness of the importance of national competitiveness to Ireland’s wellbeing. Nonetheless, there are limitations to benchmarking: . The most recent and up-to-date data is used. While every effort is made to ensure the timeliness of the data, there is a natural lag in collating comparable official statistics across countries. Competitiveness indices and rankings can seek to measure a vast range of issues. Generally, these indices are based on weighting systems. The relevance and importance of the individual metrics included will vary across countries. There are also factors that are difficult to benchmark (e.g. the benefit of being in the GMT time zone or of speaking English fluently); . Secondly, 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 measures of competitiveness. There are no generic strategies to achieve national competitiveness as countries face trade-offs; and . Finally, it is important to note that trade and investment between countries is not a zero-sum game; economic advances by other countries can, in aggregate terms, lead to improvements in living standards for the Irish population.

4 OECD rankings and averages are based on a maximum of 32 countries. Turkey and Mexico are not included in the analysis, in part due to how their size and income levels affect averages and in part due to data availability. The OECD-32 countries are as follows: Australia, Austria, Belgium, Canada, Chile, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Israel, Italy, Japan, South Korea, Luxembourg, Netherlands, New Zealand, Norway, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, Switzerland, UK and the US.

23 July 2017

Chapter 2 Sustainable Growth

24 July 2017 Sustainable Growth

At the apex of the Council’s Competiveness Framework is sustainable growth. Competitiveness is not an end in itself, but is a means of achieving sustainable improvements in growth and living standards. The ultimate goal of economic policy making is to achieve broad based improvements in people’s well-being. The Council monitors progress on this goal by assessing economic, social and environmental dimensions of societal wellbeing. Both in Ireland and internationally, there is increasing interest in benchmarking quality of life improvements - incorporating aspects of living standards, income levels, equality, health and life expectancy. The Scorecard benchmarks three elements of sustainable growth: quality of life, income (growth rates, levels and distribution) and environment sustainability. . Quality of Life: A key objective of competitiveness is to support a high quality of life, which is broader than material living standards. Quality of life is measured by indicators of life satisfaction, health and life expectancy.  Ireland performs relatively well in objective measures of well-being (income, education attainment, air and water quality) and health. Eurostat data shows life expectancy in Ireland has increased over the past decade and the latest comparable data shows that Irish life expectancy in 2014 (81.4 years) is above the EU28 average (80.9 years). Further, the proportion of life expectancy at age 65 lived in good health continues to improve and is higher for both men and women in Ireland compared with the EU28 average. Healthy life years at birth in Ireland for females were estimated at 67.9 years in 2015, the third highest rate in the EU and 4.6 years above the EU average. Male healthy life years at birth in Ireland in 2015 were estimated at 66.6 years, 4 years higher than the EU average.  In the OECD’s Better Life Index (Figure 2.1.1), Ireland performs well in many measures of subjective well-being relative to most other countries in the Better Life Index. Ireland ranks above the average in measures relating to housing, personal security, health status, education and skills, social connections, subjective well-being, work-life balance, civic engagement, and environmental quality, but below average in income and wealth, and jobs and earnings. The Index indicates that Irish people report to being more satisfied with their lives than the OECD average. On a rating of general satisfaction with life on a scale from 0 to 10, Ireland scores 6.8, higher than the OECD average of 6.5. Ireland ranks 8th in the OECD in terms of the UN’s human development index which measures average achievement in three basic dimensions of human development—a long and healthy life, knowledge and a decent standard of living (Figure 2.1.2). . National Income: High and rising incomes are a key measure of the success of national competitiveness. The indicators used in this section cover the level, growth and distribution of Ireland’s national income. Indicators include median incomes, income distribution, risk of poverty and material deprivation.  Over the course of the recession, Ireland's GDP per capita declined but remained relatively high. As a result of exceptionally strong economic growth in recent years, Ireland's GDP per capita is the second highest in the Euro area in 2016 (Figure 2.2.1).  Ireland’s household net financial wealth to income ratio has been rising steadily from 126.62 in 2010 to 207.51 in 2015. However, the indicator remains below the EU average of 252 .55. Disposable gross income fell during the recession but has increased since 2013. In Ireland, the annual adjusted disposable income per capita in PPPs was 20,181, 13 per cent below the Euro area figure 23,295.  The median equivalised net income in Ireland was €21,688 in 2015, above the Euro area median (€17,759). However, median equivalised disposable income remains below 2008 levels (€22,995). (Figures 2.2.2 and 2.2.3)

25 July 2017  The Irish Gini coefficient score in 2015 was 29.8, compared with 31.1 in 2010. Ireland is below the Euro area average (30.8) indicating that income distribution in Ireland is more equal than in the Euro area (Figure 2.2.4).  The risk-of-poverty rate (16.3%) is below the Euro area average (17.2%). It increased by 1.1 per cent between 2010 and 2015. Social transfers play a significant role in reducing poverty risk in Ireland: excluding social transfers, the at-risk-of poverty rate was 36.2 per cent. Figure 2.2.6 shows the risk of in-work poverty for working households is below the Euro area average and was 4.8 per cent down from 5.4 per cent in in 2014 and 5.5 per cent in 2010. The proportion of the population considered materially deprived increased in Ireland over the recession. It was 5.7% in 2010, peaked at 9.9% in 2013 and has declined since (7.5% in 2015). The Irish rate was 0.6% above the Euro area average in 2015. . Environmental Sustainability: The quality of a natural environment and the commitment to environmentally sustainable policies is a key determinant of sustainable growth. The essence of environmental sustainability is a stable relationship between human activities and the natural world, one that does not diminish the prospects for future generations to enjoy a quality of life at least as good as our own. Indicators in this section include per capita CO2 emissions, waste generation and renewable energy use.  The Paris Agreement, which entered into force in November 2016, aims to limit global average temperature rise to well below 2 degrees Celsius above pre-industrial levels, with an ambition of 1.5 degrees Celsius. The EU is committing to a reduction of at least 40 per cent in EU-wide emissions by 2030 compared with 1990 levels, which will be met through reductions of 43 per cent in the Emission Trading System (ETS) and 30 per cent in the non-ETS sector compared with 2005 levels. Under the 2009 EU Effort Sharing Decision (ESD), which applies to greenhouse gas emissions (GHG) outside the scope of the EU Emissions Trading System, Ireland has a series of challenging commitments. For each year between 2013 and 2020, Ireland has been given a carbon budget for GHG emissions, the cumulative effect of which mandates Ireland to achieve a 20 per cent emissions reduction based on 2005 levels. This target is considered jointly the most demanding 2020 reduction target allocated under the ESD and one shared only by Denmark and Luxembourg. Ireland has also committed to increasing the share of renewables in final energy consumption to 16 per cent by 2020 and to move towards a 20 per cent increase in energy efficiency.  While declining, (98% in 1990), Figure 2.3.3 shows fossil fuels account for 90 per cent of Irish gross inland consumption in 2015. Ireland still has a much higher reliance on imported oil to meet its energy consumption needs (48%) than the EU average. Figure 2.3.4 shows the relative decoupling of energy use from economic growth. This is a result of changes in the structure of the economy, particularly the growth of the less energy intensive services sector, greater use of gas and renewables, and improved energy efficiency. However, 2015 saw an increase in the overall energy requirement linked to increased domestic economic activity in the industry and transport sectors.  Between 1990 and 2015, total emissions increased by 6.7 per cent to 59,878kt of CO2 equivalent. The agriculture (33%), transport (20%), energy (20%), and residential (10%) sectors account for the majority of emissions (Figure 2.3.6). Emissions by the agriculture and industrial sectors have declined and are below 1990 levels.  The EU 2030 targets envisage a domestic EU greenhouse gas reduction target of at least 40 per cent compared to 1990. Ireland was given a 39 per cent target in the 2016 Effort Sharing Regulation issued by the Commission which was reduced to 30 per cent based on cost-effective mitigation potential, and further reduced to 20.6 per cent net of flexibility options in the land use, land-use change and

26 July 2017 forestry sector, and the possibility to make a one-off transfer or surplus emissions allowances from ETS into non-ETS.  Ireland’s emission levels peaked in 2001, 28.5 per cent above 1990 levels. Ireland’s emissions have fallen on a year-on-year basis since 2008, but the rate of decline has slowed since 2011. In 2014 emissions were 5.6 per cent above the 1990 level.  Figure 2.3.8 shows the share of renewable energy production in Ireland continues to grow (albeit from a low base) with 9.6 per cent of gross final consumption derived from renewables in 2015.

27 July 2017 2.1 Quality of Life Figure 2.1.1 OECD Better Life Index, Indicators of life satisfaction5, Ireland, 2014

Ireland OECD Ireland performs well in measures of well-being Income and wealth in the Better Life Index. 10 Subjective well-being 9 Jobs and earnings Ireland ranks at the top 8 7 in social connections 6 5 and above the average Personal security 4 Housing 3 in housing, personal 2 1 security, health status, 0 subjective well-being, Environmental quality Work and life balance work-life balance, civic engagement and

Civic engagement and environmental quality Health status governance but below average in

Social connections Education and skills jobs and earnings and income and wealth. Rank n/a Source: OECD Economic Survey of Ireland 2015

Figure 2.1.2 Human development index, 2010 - 2015

2015 2010 The Human

1 Development Index 0.9 measures average 0.8 achievement in three 0.7 basic dimensions of 0.6 human development - a 0.5 long and healthy life, 0.4 knowledge and a decent 0.3 standard of living. 0.2 Human Development rank Index Development Human Ireland performs 0.1 strongly, ranking 8th in 0 US UK the world and above the Italy OECD Spain Brazil China Japan Latvia France Poland Ireland Finland

Sweden OECD average. Hungary Portugal Denmark Germany th Switzerland South Korea South Netherlands New Zealand OECD rank: 8 (-) Source: UN

5 Life satisfaction is measured on a scale from 0 to 10, with 0 being the lowest score- indicating least satisfied.

28 July 2017 2.2 National Income Figure 2.2.1 GDP per capita current prices, 20166

2016 2011 Over the course of the

80000 recession, Ireland's GDP 70000 per capita declined but )

€ 60000 remained relatively 50000 high. As a result of 40000 exceptionally strong 30000 economic growth in

GDP per capita ( capita per GDP 20000 recent years, at €56,800, 10000 Ireland's GDP per capita 0 is the second highest in UK Italy EU28 Spain Latvia France Ireland the Euro area. Finland Sweden Hungary Germany Denmark nd Switzerland

Netherlands Euro area-19 rank: 2 Euro area-19 Euro (↑1)

Source: Eurostat

Figure 2.2.2 Adjusted gross disposable income of households per capita in PPPs 7

Disposable income, as a 2015 2010 concept, is closer to the 35000 idea of household 30000 income than GDP. 25000 In Ireland, the annual 20000 adjusted disposable 15000 income per capita in 10000 PPPs was 20,181, 13% 5000 below the Euro area per capita in PPS

- 0 figure 23,295.

UK Disposable income fell Italy Spain EU 28 Latvia France Ireland Poland Finland

Sweden during the recession but Hungary Germany Denmark Grossdisposable income households of

Switzerland has increased since Netherlands Euro area 19 area Euro 2013. Euro area-19 rank: 10th (↑1) Source: Eurostat

6 No data available for Switzerland for 2016, provisional data for 2015 used instead. Data for Netherlands, Greece, Cyprus, Spain and France is provisional, data for Poland and Portugal is estimated. 7 Adjusted gross disposable income of households per capita in PPS reflects the net resources, earned by households which are available for consumption and/or saving. It includes the flows corresponding to the use of individual services which households receive free of charge from the government. These services, called "social transfers in kind", mainly include education, health and social security services.

29 July 2017 Figure 2.2.3 Median equivalised8 disposable net income (€) , 2015

2015 2010 The median equivalised 45000 net income in Ireland

40000 was €21,688 in 2015, above the Euro area 35000 median (€17,759). 30000 Median incomes 25000 declined in the period 20000 equivalised 2009-2011 but have € 15000 increased since.

10000 However, median equivalised disposable 5000 income remains below 0 2008 levels (€22,995) UK Italy Spain EU 28 Latvia France Ireland

Poland th Finland Sweden

Hungary Euro area-19 rank: 4 (-) Germany Denmark Switzerland Netherlands Euro area 19 area Euro Source: Eurostat

Figure2.2.4 Gini9 coefficient of equivalised disposable income, 2015

2015 2010 The Gini Coefficient is a

40 measure of equality of

35 income in the population. The Irish 30 Gini coefficient score in 25 2015 was 29.8, 100) - 20 compared with 31.1 in

Scale (0 15 2010. Ireland is below the Euro area average 10 (30.8) indicating that 5 income distribution in Coefficient of equivalised disposable income 0 Ireland is more equal UK Italy Spain

EU 28 than in the Euro area. Latvia France Ireland Poland Finland Sweden Slovenia Hungary Denmark

Germany th

Switzerland Euro area-19 rank: 10 Netherlands Euro area 19 area Euro (↑2) Source: Eurostat

8 Equivalised disposable income is defined as the total income of a household, after tax and other deductions, divided by the number of household members. 9 The Gini Coefficient is a measure of equality of income in the population where 0 represents a situation where all households have an equal income and 1 indicates that one household has all of national income.

30 July 2017 Figure 2.2.5 At-risk-of poverty rate, (60% of median income after social transfers), 2015

The Irish at-risk-of- 2015 2010 poverty rate (16.3%) is 25 below the Euro area average (17.2%) and has 20 been below the Euro area since 2008. On an 15 annual basis the Irish rate decreased by 0.1%. 10 It increased by 1.1%

population) between 2010 and 2015. 5 Social transfers play a significant role in reducing poverty risk in 0 Ireland: excluding social At risk of poverty rate (percentage total of (percentage rate poverty of At risk UK

Italy transfers, the at-risk-of Spain EU 28 Latvia France Ireland Poland Finland Sweden

Hungary poverty rate was 36.2%. Germany Denmark Switzerland Netherlands Euro area 19 area Euro Euro area-19 rank: 10th (↓1) Source: Eurostat

Figure 2.2.6 In-work at-risk-of poverty rate, persons employed aged 18+,2015

In 2015 the percentage 2015 2010 of working persons aged 14 18+ at risk of poverty in 12 Ireland has fallen to 10 4.8%, down from 5.4% in 8 in 2014 and 5.5% in 2010. 6 The Irish rate was almost

(%) 4 half the Euro area rate 2 (9.4%) in 2015 and below 0 the UK rate 8.2%. rd UK Euro area-19 rank: 3 Italy Spain EU 28 Latvia France Ireland Poland Finland Population at work at risk of poverty

Sweden (↑2) Hungary Germany Denmark Switzerland Netherlands Euro area 19 area Euro

Source: Eurostat

31 July 2017 Figure2.2.7 Percentage of population defined as severely materially deprived10, 2015

2015 2010 Material deprivation covers issues including 30 economic strain, 25 durables and housing. The proportion of the 20 population considered 15 materially deprived increased in Ireland over 10 the recession. It was 5 5.7% in 2010, peaked at Percentage of total population 9.9% in 2013 and has 0 declined since (7.5% in UK Italy Spain EU 28

Latvia 2015). The Irish rate was France Ireland Poland Finland Sweden Hungary Denmark Germany 0.6% above the Euro Switzerland Netherlands Euro area 19 area Euro area average in 2015. Euro area-19 rank: 11th (↓4) Source: Eurostat

10 Material deprivation" covers indicators relating to economic strain, durables, housing and environment of the dwelling. Severely materially deprived persons have living conditions severely constrained by a lack of resources, they experience at least 4 out of 9 following deprivations items: cannot afford i) to pay rent or utility bills, ii) keep home adequately warm, iii) face unexpected expenses, iv) eat meat, fish or a protein equivalent every second day, v) a week holiday away from home, vi) a car, vii) a washing machine, viii) a colour TV, or ix) a telephone.

32 July 2017 2.3 Environmental Sustainability

Figure 2.3.1 Environmental performance index (Scale 0-100), 201611

2016 EPI score (left axis) 10-Year percentage change (right axis) The Yale Environmental

100 25 Performance Index 90 assesses 20 indicators of 20 80 environmental health 70 15 and ecosystem

100) 60 - 50 10 protection and resource 40 management. Ireland’s

Score (0 5 30 performance has 20 0 improved since 2010 and 10 0 -5 over a ten year Ten year percentage change scorein US UK timeframe has improved Italy Brazil Spain China Japan France Ireland Poland Finland

Sweden by 3.5% Hungary Germany Denmark OECD-32 Singapore th Switzerland Netherlands South Korea

New Zealand OECD rank:17 (-)

Source: Yale Centre for Environmental Law and Policy

Figure 2.3.2 Components of the ECO-Innovation index12, Ireland, 2016

Ireland EU average (100) The European Eco-

Eco-Innovation Index Innovation Index 160 illustrates eco- 140 120 innovation performance 100 98 across five dimensions: Socio Economic Outcomes Eco Innovation Inputs 80 112 60 Overall, Ireland is 40 considered an average 80 20 0 eco-innovation

45 performer with scores around the EU average 72 Resource Efficency Outcomes 141 Eco Innovation Activities across most dimensions. Ireland performs best on inputs and resource

Eco Innovation Outputs efficiency outcomes. Rank EU 28: 13th (↓5) Source: European Commission

11 Ranking and Score based on 2014 data 12 Index covers different aspects of ecoinnovation by applying 16 indicators grouped into five thematic areas. (1) inputs comprising investments (financial or human resources), which aim at triggering eco-innovation activities, (2) activities, illustrating the extent companies are active in eco-innovation, (3) outputs, quantifying activities in terms of patents, academic literature etc (4) Resource efficiency outcomes, covering resource (material, energy, water) efficiency and GHG emission s (5) Socio-economic outcomes, illustrating the extent eco-innovation performance generates positive outcomes for social aspects (employment) and economic aspects (turnover, exports). See https://ec.europa.eu/environment/ecoap/scoreboard.

33 July 2017 Figure 2.3.3 Gross inland consumption, percentage by fuel type, 2015

Total petroleum products Solid fuels Gas Renewable energies Figure 2.3.3 shows there Electrical energy Waste (non-renewable) Nuclear heat is considerable 100 heterogeneity across

80 the EU in terms of the composition of national

60 fuel consumption. While declining, (98% in 1990) 40 fossil fuels account for 90% of Irish gross inland 20 consumption in 2015. Grossinland consumption (%) Ireland still has a much 0 higher reliance on

-20 petroleum products UK

Italy (48%) than the EU Spain EU 28 Latvia France Ireland Poland Finland Sweden Hungary Germany Denmark average (34%). Netherlands Euro area 19 area Euro Rank: n/a Source: Eurostat

Figure 2.3.4 Index of GDP, total primary energy (TPER13) and energy-related CO2, 1990-2016

GDP Index TPER Index Energy CO₂ Index Fig 2.3.4 shows the relative decoupling of 450 TPER from economic 400 growth. 2015 saw an 350 increase in overall 300 energy with TPER 250 growing by 4.9%. This 200 was linked to increased domestic economic

Index (1990=100) Index 150 activity in the industry 100 and transport sectors, 50 which are closely 0 aligned with the 2011 1997 2013 1991 1993 2015 2007 1995 2012 2010 2001 2014 2003 1992 1990 1998 1994 2005 1996 1999 2002 2000 2008 2004 2006 2009 economy, increasing by 4.8% and 5.9% respectively.

2016 Provisional Rank: n/a Source: SEAI/CSO

13 Total Primary Energy (TPER) is also known as gross inland consumption

34 July 2017 Figure 2.3.5 Total Final Energy Consumption by Sector, Ireland, 1990-2015

Industry Transport Residential Commercial/Public Services Agriculture In 2015, overall energy 14000 consumption increased by 4.7% to 11,337 ktoe. 12000 Energy use in transport accounts for 42% of the 10000 total and grew in 2015 by 5.9% to 4,789 ktoe 8000 but was 16% lower than in 2007. Consumption in 6000 industry grew 4.8% to

Kilo tonnes oil equivelantof (ktoe) 2,397 ktoe. Over the 4000 1990 – 2015 period, the share of industry TFC 2000 dropped from 24% to 21%. 0 1990 2000 2005 2010 2011 2012 2013 2014 2015 Rank: n/a Source: SEAI

Figure 2.3.6 Emissions by national climate change sectors (Kt CO2 equivalent), Ireland, 1990-2015

Agriculture Transport Energy Industries Residential Manufacturing Combustion Industrial Processes Between 1990 and 2015,

25,000 total emissions increased by 6.7% to 59,878kt of CO2 20,000 equivalent. The agriculture (33%), transport (20%), energy 15,000

kt CO2 equivalent CO2 kt (20%), and residential (10%) sectors account

10,000 for the majority of emissions. Emissions by the agriculture and

5,000 industrial sectors have declined and are below 1990 levels. Transport 0 emissions however have 2011 1997 2013 1991 1993 2015 2007 1995 2012 2001 2010 2014 2003 1992 1990 1998 1994 2005 1996 1999 2002 2000 2008 2004 2006 2009 increased by 130%. Rank: n/a Source: EPA

35 July 2017 Figure 2.3.7 Greenhouse Gas Emissions (Kt CO2 equivalent indexed to 1990), Ireland, EU 28, 1990-2014

Ireland EU 28 1990 C02 level The EU 2030 targets

140 envisage a domestic EU greenhouse gas 130 reduction target of at least 40% compared to 120 1990. Ireland’s emission

110 levels peaked in 2001, 28.5% above 1990 100 levels. Ireland’s emissions have fallen on 90 a year-on-year basis

Emmissions Index Emmissions Index (1990 =100) 80 since 2008, but the rate of decline has slowed 70 since 2011. In 2014 emissions were 5.6% 60 above the 1990 level. 2012 2010 2014 1992 1990 1998 1994 1996 2002 2000 2008 2004 2006 Rank: n/a Source: Eurostat

Figure 2.3.8 Share of renewable energy in gross final energy consumption, 2015

2015 2010 2020 Target Increasing the share of

60 renewables in gross final consumption of energy

50 is one of the headline indicators of the Europe

40 2020 strategy. Ireland’s use of renewable energy

30 sources has increased over the period 2010-

20 2015 but at 9.1% in 2015 we remain below our Energy from renewable sources (%) 10 target of a 16% share of renewables in gross final

0 consumption. UK

Italy Rank: EU 28: % distance Spain EU 28 Latvia France Ireland Poland Finland

Sweden th Hungary Germany Denmark from target 25 Netherlands Source: Eurostat

36 July 2017

Chapter 3 Competitiveness Outputs

37 July 2017 Competitiveness Outputs The outputs of competitiveness are represented in the second tier of the competitiveness framework. These can be seen as the metrics of current competitiveness. The metrics in this tier cover business performance, costs, productivity and labour supply. These indicators are defined as “competitiveness output” indicators and are not directly within the control of policymakers. Ireland’s performance in these areas is directly related to the quality of previous policies instituted at the input level and the ability to build a strong intermediate stage of competitiveness. . Business Performance: The performance of the business sector is central to the Council’s definition of competitiveness. The enterprise sector is the driver of the economy and as such, is critical to income growth and maintaining high employment levels in Ireland. A strong and vibrant exporting sector is essential to sustaining the government finances and funding public services. Business performance is assessed across a range of headings including investment flows, export composition and market flows.  Ireland has expanded its share of the world’s services market, reaching 3% in 2016, up from 2.2% in 2005. Over the same period, Ireland’s share of global merchandise exports declined from 1% to 0.8% in 2016. Ireland’s share of total global export markets is 1.3%, as of 2016. (Figure 3.1.2)  Figure 3.1.3 shows Ireland’s share of world total exports at a sectoral level. Strong growth was recorded in the Transport (27%), Telecoms, Computer & Information (20.3%) and Machinery (17.5%) sectors over this 5 year period.  While exports have been the primary engine of economic growth in Ireland in recent years, the composition and range of goods exported from Ireland has become increasingly concentrated. Figure 3.1.4 shows that within the services sector computer and business services dominate, whilst chemicals (and particularly medical and pharmaceutical products) are the primary goods exports.  Irish merchandise exports to the EU-28 amounted to 22.3% of GDP in 2016. Ireland is also a significant exporter to non-EU countries (24.1% of GDP). As a result of the scale of non-euro denominated trade, Irish firms are particularly exposed to exchange rate fluctuations. The EU, US and UK remain Ireland’s principal markets for exports. The UK is particularly important for services and food exports.  Building on strong growth in 2015, the activity level of FDI and indigenous agency client companies in 2015 was exceptionably strong in terms of export growth, jobs created and new investment. From an indigenous enterprise perspective, export and employment performance continues to be strong. Over the period of its 2014-2016 Strategy ‘Driving Enterprise, Delivering Jobs’, 45,592 new full time jobs were created by Enterprise Ireland client companies. This brings the total number of people employed by Enterprise Ireland supported companies to 201,108 – an all-time high for the Agency. Enterprise Ireland’s 2017-2020 Strategy ‘Build Scale, Expand Reach’ aims to increase client company exports to €26 billion per annum by the end of 2020. Furthermore, the Strategy contains an ambitious target to grow the level of exports to over two thirds outside the UK over this period. Data from the Annual Business Survey of Economic Impact shows that the value of exports by Irish owned companies increased by 67 percent to €18.7 billion in the period 2010-2015.  The attraction of FDI continues to be a central feature of Ireland’s enterprise policy, and foreign firms contribute substantially to capital investment, exports, productivity, jobs, expenditure in the Irish economy and to the exchequer. OECD data highlights the hugely significant contribution of FDI to our economy. The most recent data shows that Ireland’s stock of inward investment (283% of GDP) is the second highest in the Euro area. In January 2017 IDA Ireland reported that the number of investments secured increased by 14.5 per cent in 2016, and that client companies created 11,842 net jobs in 2016 – IDA clients account for almost 10 per cent of direct employment in Ireland. IDA Ireland

38 July 2017 has completed two years of its five year strategy, Winning: Foreign Direct Investment 2015-2019 - with the latest results indicating a strong performance towards delivering its 2019 target of 80,000 new jobs and 900 investments.  Analysis by the World Bank shows that Ireland has a relatively supportive environment for entrepreneurship compared with many of our Euro area competitors. CSO QNHS data reflects this and shows that the numbers of self-employed persons as a percentage of total employment in Ireland continues to increase, albeit at a slow pace. Figure 3.6.4 shows that although the proportion of self- employed in Ireland has fallen in recent years it remains above the Euro area average. . Costs: Cost competitiveness is critical to ensuring that enterprises based in Ireland have the ability to compete successfully in international markets. This section examines the overall cost level and the rate of change for a number of key business inputs. Data on both pay and non-pay is included.  The Council published its Costs of Doing Business in Ireland report in June 2017 and concluded that despite the low inflation environment, Ireland remains a relatively expensive location in which to do business. The analysis in the Costs report warns that the return to economic growth has resulted in a series of upward cost pressures. These are briefly surmised below.  In Ireland, the hourly labour cost was €30.4 in 2016, compared to €26.7 in the UK and €29.8 for the Euro area 19. While labour cost growth has been positive in Ireland, the growth has been below EU and Euro area averages in the 5 year period to 2016, representing a competitiveness gain for Ireland. Sectoral wage growth rates have been lower in Ireland than the Euro area over the corresponding period with the notable exception of Wholesale & Retail and ICT. In 2016, growth in labour costs in Ireland was strongest in Professional, scientific & technical activities (+3.4%, Euro Area+1.5%), Transportation & storage (+2.6%, Euro Area +1.1%) and Administrative and support service activities (+2.3%, Euro Area +0.8%).  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, reflecting the improving economy. This in turn, has boosted capital values, the price that would have been paid for property if it had been purchased at the point of valuation, in all commercial sectors (e.g., office, industrial and retail). Commercial property prices in Ireland, however, still compare favourably to comparable cities in the UK but concerns persist about the availability of prime office space for rent in large urban centres in the short term as the market tightens and vacancy rates decline. This could result in future rent increases and any shortage of supply of new commercial space could adversely impact our competitiveness.  The differential average price for electricity between Ireland and the UK has gone from a point where we are almost 12 per cent more expensive in 2012 to a situation where in the first half of 2016 electricity prices are 6 per cent cheaper in Ireland. Whilst industrial gas prices are now equal to the average prices across the Euro area, comparable prices are over 15 per cent lower in the UK. Ireland is relatively cost competitive for telecoms, especially for business mobile broadband. However, concerns persist around the issues of quality (speed) and the regional availability of high speed services. Services prices in Ireland have risen continuously since the beginning of 2012 and the magnitude of the increase has been higher than the Euro area 19 average during this period also.  Inflation has been low in Ireland and most advanced economies in recent years. In the Euro area, since 2013, inflation has been declining and remains well below the European Central Bank’s target level. The annual average growth rate in Eurostat’s Harmonised Indices of Consumer Prices was 0.2 per cent in 2016. The corresponding figure for Ireland was -0.2 per cent. Prices on average, as measured by the Consumer Price Index, registered no growth in 2016 compared to 2015 and were 0.2 per cent higher in April 2017 compared with April 2016. As highlighted by the CSO, the most notable changes

39 July 2017 in the year were decreases in Transport (-0.52%) and Miscellaneous Goods & Services (-0.04%). The aspects which caused the largest upward contribution in the month were Restaurants & Hotels (+0.12%) and Alcoholic Beverages & Tobacco (+0.08%). Ireland, however, remains a relatively expensive location in which to live and do business with a price profile which can be described as “high cost, rising slowly”. Irish consumer prices remain over 25 per cent above the European Union average. . Productivity: In the long run, a country’s standard of living is dependent upon productivity. The charts in this section examine Ireland’s labour productivity performance in an OECD context, as well as multi-factor productivity.  Ireland’s labour productivity performance is strong in an international context. Figure 3.5.1 shows Ireland had the 3rd highest output per hour worked among OECD member states in 2016.Output per hour was $79.7 in GDP terms, an increase of 28 per cent over 2011. Figure 3.5.4 shows significant differences in productivity are evident when considering output as a measure of GDP or the OECD’s measure of Gross National Income. As a measure of GDP, Ireland’s output is approximately 80 per cent above the OECD baseline, as a measure of GNI, the differential falls to 44 per cent.  OECD data shows that taking the period 2010-2015, Ireland’s labour productivity annual growth rate was 5.5 per cent which significantly exceeds the OECD average (0.8%). Irish labour productivity growth has been above that in competitor countries since 2013 and was 2.3 per cent in 2016. However, Ireland’s performance has been greatly influenced by shifts in the composition of employment and the influence of a number of high value added sectors on output. The effects of corporate restructuring, including the relocation of firms with significant IP assets and aircraft leasing, led to noteworthy increases in total output and hence labour productivity, particularly in 2015 (Figure 3.5.2).  The narrow base of enterprises in high value added sectors (particularly in foreign owned Pharma and ICT) disguises, to a degree, underperforming sectors and skews Ireland’s productivity level and growth rate.  Multifactor productivity (MFP) reflects the overall efficiency with which labour and capital inputs are used together in the production process. Figure 3.5.8 shows growth decelerated in nearly all countries after the crisis compared with the period 2001-2007 Irish MFP grew by 0.9 per cent in 2001-2007 and growth increased to 1.3 per cent in the years 2009-2014. . Employment: Employment is a key determinant of living standards, and growth in employment combined with productivity growth is the main driver of economic growth. This section considers a range of indicators, measuring key aspects of labour market performance including employment and unemployment. Some labour market indicators such as participation rates and a number of other demographic indicators are examined in the section on endowments (Chapter 5).  Figure 3.6.1 illustrates the continued improvement in the labour market. While employment has not yet returned to peak pre-recession levels, over 2.05 million were in employment in Q1 2017, an annual increase of 3.5 per cent. The increase in total employment of 68,600 in the year to Q1 2017 was represented by an increase in full-time employment of 84,200 and a decrease in part-time employment of 15,600. Overall, the majority of sectors in Ireland have experienced growth in employment between 2011 and 2016 as recovery took effect. Employment growth in the year to Q1 2017 was spread relatively equally across the different sectors of the economy with employment growing in 11 of 14 economic sectors.  Figure 3.6.2 shows the Irish employment growth rate in 2016 was well above both the Euro area and EU28 averages. As set out earlier, Irish employment growth is relatively strong and balanced from a sectoral and regional perspective. Consistent with the increase in employment levels, unemployment

40 July 2017 and long term unemployment are on a steady downward trajectory. The number of unemployed and long term unemployed persons in Q1 2017 was 146,200 and 78,655 respectively. Unemployment decreased on a year on year basis and fell from 15.1 to 6.8 per cent, on a seasonally adjusted basis, between Q1 2012 and Q1 2017.  Long term unemployment and youth unemployment levels are also declining, yet they remain high. Eurostat data shows youth unemployment declined further in 2016 and is now below both the EU28 and the Euro area averages (17.2%). This is significantly below the 29.1 per cent rate recorded in 2011. The proportion of self-employed in Ireland has risen since 2011 (from 0.75% to 0.85% in 2016). It remains above the Euro area-19 average (0.33%). Ireland also has a high proportion of youth neither in employment, education or training (NEET). Out of the total age cohort 15-24, 7.4 per cent were classified as NEET in 2016, compared with the EU28 and Euro area 19 averages of 3.8 per cent and 3.7 per cent respectively. (Figure 3.6.8)  Figure 3.3.9 shows that for a long term unemployed, one earner married couple with 2 children earning 100 per cent of the average wage; the Irish replacement rate (80%) exceeds the OECD average (54.4%). The rate for single individuals (50.6%) also exceeds the OECD average (31.5%). The unemployment trap measures the percentage of gross earnings lost to taxes when a person becomes employed. This occurs through the loss of unemployment benefits combined with higher tax and social security contributions. Figure 4.4.12 shows the how tax systems fare in encouraging those who are unemployed into taking up employment. Other disincentives also exist which limit the attractiveness of returning to work. In particular the high cost of childcare is a pressing concern.

41 July 2017

3.1 Business Performance

Figure 3.1.1: Gross fixed capital formation (GFCF), current prices (% GDP), 2015

Investment is a key Private sector 2015 General government 2015 Total 2010 driver of economic 0.3 growth. Following a 0.25 sharp drop during the recession, investment 0.2 activity in Ireland has 0.15 increased significantly. In GNP terms, Irish 0.1 private investment Percentage of GDP (24%) exceeds the Euro 0.05 area average (17%), 0 although public US UK investment (2.4%) is Italy EU28 Spain Japan France Ireland Poland Finland below average (2.7%). Sweden Hungary Germany Denmark Switzerland euro euro 19area

Netherlands Euro area-19 rank: th 4 (↑13) Source: UNCTAD

Figure 3.1.2: Ireland’s share of world trade, 2016

Ireland has expanded its Ireland's share of global commercial services exports share of the world’s Ireland's share of global merchanidise exports services market, Ireland's share of total global exports reaching 3% in 2016, up 3.5% from 2.2% in 2005. Over 3.0% the same period, 2.5% Ireland’s share of global merchandise exports 2.0% declined from 1% to 1.5% 0.8% in 2016. Ireland’s 1.0% share of total global Percentage of global exports 0.5% export markets is 1.3%, as of 2016. 0.0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Rank: n/a

Source: WTO

42 July 2017

Figure 3.1.3: Ireland’s share of world trade by Sector, 2015

2015 2010 This indicator measures Ireland’s share of world 16% total exports at a 12% sectoral level. Ireland lost market share in 8% insurance & pensions, financial services and 4% pharmaceuticals

Percentage of Global Trade between 2010 and 2015. 0% Strong growth was recorded in the Travel Clothing Financial Transport

Chemicals Transport (27%), Agricultural Telecoms, Computer & Goods-related Pharmaceuticals Information (20.3%) and Insurance & pension & Insurance

Machinery & transport Machinery (17.5%)

Telecoms, computer & info & computer Telecoms, sectors over this 5 year

period. Rank: n/a Source: WTO

Figure 3.1.4: Total goods and services exports by sector from Ireland (€million), 2015

2015 2012 While exports have been the primary engine of €70,000 economic growth in €60,000 Ireland in recent years, m) € €50,000 the composition and €40,000 range of goods exported €30,000 from Ireland has €20,000 become increasingly

Value Exports of ( €10,000 concentrated. Within €0 the services sector, business and computer

Food services dominate, Insurance Transport

Chemicals whilst chemicals (and

Commodities particularly medical and Crude materials Crude Communications Financial services Royalties/Licences

Computer services Computer pharmaceutical Tourism and travel Misc manufacturing Misc Manufactured goods Beverages tobacco & Operational leasing Machinery & transport products) are the Trade related services primary goods exports. Total other business services business other Total Rank: n/a Source: WTO

43 July 2017

Figure 3.1.5: Intra and extra-EU merchandise exports (% GDP), 2016

Ireland is one of the Intra 2016 Extra 2016 2011 most open economies in 90% the EU. Irish 80% merchandise exports to 70% the EU-28 amounted to 60% 22.3% of GDP in 2016. Ireland is also a 50% significant exporter to 40% non-EU countries (24.1% 30% of GDP). As a result of Exports Exports GDP) (% 20% the scale of non-euro 10% denominated trade, Irish 0% firms are particularly exposed to exchange UK Italy EU28 Spain rate fluctuations. France Ireland Poland Finland Sweden Hungary Germany Denmark EU 28 rank:

Netherlands th Total exports: 10 (↓1) th Extra-EU: 8 (↑1) Source: Eurostat

Figure 3.1.6: Ireland’s Merchandise exports classified by commodity and principal countries, 2016

50000 Merchandise exports Commodities and transactions not 45000 totalled €116.9 billion in classified elsewhere Miscellaneous manufactured articles 2016. Chemicals and 40000 related products Machinery and transport equipment 35000 accounted for 56% in Manufactured goods classified chiefly total and account for the 30000 by material largest share of million Chemicals and related products € 25000 exported goods to the Animal and vegetable oils, fats and

Exports, Exports, 20000 waxes US, UK, and rest of the Mineral fuels, lubricants and related EU. The UK accounted 15000 materials for €13.3 billion, (11.5%) Crude materials, inedible, except fuels 10000 of total exports and is Beverages and tobacco 5000 the primary destination

Food and live animals for Food exports, 0 UK Other EU US China Rest of accounting for 28% of World total Food exports. Rank: n/a Source: CSO

44 July 2017

Figure 3.1.7 : Share of total Irish Merchandise Exports, classified by country, 2016

2016 2011 The US accounted for 30 26% of merchandise exports up from 23% in 25 2011. Other key

20 markets include Belgium (12.5%), UK (11.4%),

15 Germany (6.7%) and Switzerland (5%). 10 Notable non EU/US

Share of Total Goods Exports(%) markets with increasing 5 market share compared with 2011 are China 0

UK (3.1%), Japan (2.4%), USA Italy Spain China Japan France Poland Mexico Canada Sweden Belgium Australia Germany Australia (1.2%), Mexico Other EA* Switzerland Netherlands South Korea Saudi Arabia

Other countries (1.1%), Canada (0.8%), Northern Ireland Northern Korea (0.8%) and Saudi Arabia (0.7%). Rank n/a Source: CSO

Figure 3.1.8: Ireland’s Services exports classified by service type and principal countries, 2015

Transport Tourism and Travel Insurance Financial services Royalties/Licences Computer services Ireland's exports of 9,000 computer services

8,000 represent 47.2% of the

7,000 total export in services, followed by financial 6,000 services (9.08%) and

million 5,000 € insurance (8.47%). 4,000 Computer services Exports, 3,000 account for the largest 2,000 share of exported 1,000 services to the EU 0 (including the UK), US US and the rest of the major Italy Spain Brazil China Korea Japan France Canada

Sweden export destinations, Germany Switzerland Netherlands apart from Luxembourg. Rank n/a Source: CSO

45 July 2017 Figure 3.1.9 : Share of total Irish Services Exports, classified by country, 2015

2015 In 2015 Ireland's total exports in services 25 accounted for €121,605 20 million. The largest share of services is 15 exported to the EU (54% 10 of total export). In terms of individual countries, 5 the largest share of

0 exports in services is Share of Total Export by Country (%) by Country Export of Total Share US UK attributed to the UK - 19.35% of total export, Belgium Italy Spain Brazil China Korea Japan France Canada Sweden the US (10.01%) and Germany Switzerland Luxembourg

Netherlands Germany (7.87%).

Rank n/a Source: CSO

Figure 3.1.10: Direct expenditure in the economy by enterprise agency clients by sector, 201514

In 2015, total Information, Communications & Other Services expenditure by Energy, Water, Waste & Construction enterprise agency Manufacturing & Other Industry (including Primary Production) clients increased by 45,000 34.1% to €42.6 billion 40,000 from 2010. The 35,000 proportion of 30,000 expenditure by industry and manufacturing and 25,000 ICT has increased

millions 20,000

€ significantly. 15,000 Rank: n/a 10,000 5,000 0 2010 2015

Source: DJEI, Annual Business Survey of Economic Impact

14 Figure 3.1.10 shows direct expenditure in the Irish Economy (payroll, Irish materials, and Irish services) by enterprise agency client companies.

46 July 2017 Figure 3.1.11: Exports by Irish owned clients of enterprise agencies by sector, 2015

2015 2010 Exports by Irish owned 8,000 clients of enterprise 7,000 agencies increased by 6,000 67% in the five years to 5,000

4,000 2015. The Food, Drink million € 3,000 and Tobacco sector and 2,000 Business Services 1,000 account for more than 0 50% of the exports by indigenous companies. Education Chemicals All sectors recorded Business Services Rubber & Plastics Rubber Financial Services

Electrical equipment increases in export Non-Metalic Minerals Food, Drink & Tobacco & Drink Food, Machinery & Equipment Machinery Computer Consultancy Computer volume over the 5 years Other IT & Computer ITOther &Services in question. Basic & Fabricated Metal Products Energy, Water, Waste & Construction Waste Energy, Water, Textiles, Clothing, Footware & Leather Footware Clothing, Textiles, Computer, Electronic & Optical Products Rank: n/a

Source: DJEI, Annual Business Survey of Economic Impact

Figure 3.1.12: Exports by Foreign owned clients of enterprise agencies by sector, 2016

2015 2010 Exports by Foreign owned clients of 45,000 enterprise agencies 40,000 increased by 41% in the 35,000 30,000 five years to 2015. The 25,000

million Computer Programming

€ 20,000 15,000 and Chemical Sectors 10,000 account for more than 5,000 0 50% of exports by Foreign owned

Chemicals companies. However,

Other Services little export growth was Rubber & Plastics Rubber Financial Services Products Electrical equipment

Transport Equipment Transport recorded in the chemical Food, Drink & Tobacco & Drink Food, Machinery & Equipment Machinery Computer Consultancy Computer

Computer Programming sector over the time Other IT & Computer ITOther &Services Medical Device Manufacturing Computer, Electronic & Optical period in question. Basic & Fabricated Metal Products Computer Facilities Management Rank: n/a Source: DJEI, Annual Business Survey of Economic Impact

47 July 2017 Figure 3.1.13: FDI outward stock15 (% GDP), 2015

Levels of outward direct 2016 2012 investment from Ireland 300 by Irish MNCs and 250 foreign MNCs based 200 here increased from 182% of GDP in 2012 to 150 283% in 2015. Much of 100 this increase can be 50 attributed to the foreign assets of foreign owned

Outward FDI Stock (% GDP) 0

US companies being re- UK 16 Israel Korea Latvia OECD domiciled in Ireland . Ireland Poland Hungary Germany OECD rank: Netherlands New Zealand st 1 (-) Source: OECD

Figure 3.1.14: Growth in Greenfield Investments17, 2011-2016

Figure 3.1.14 shows the Ireland United Kingdom European Union United States absolute growth rates in 160% the number of greenfield investments 140% between 2011 and 2016. Ireland experienced 120% steady growth rates in investment except for a 100% significant fall off in 2013 (2011=100) and an almost 50% 80% increase in 2016. This is a result of the surge in

Greenfield Investment Growth Index FDI inflows which 60% occurred in 2015. 2011 2012 2013 2014 2015 2016 Rank: n/a Source: UNCTAD

15 Foreign Direct Investment (FDI) stocks measure the total level of direct investment at a given point in time, usually the end of a quarter or of a year. The outward FDI stock is the value of the resident investors' equity in and net loans to enterprises in foreign economies. 16 For more information on the impact of this, see CSO, Domiciled PLCs in the Irish Balance of Payments, July 2015 17 A green field investment is a form of foreign direct investment where a parent company builds its operations in a foreign country from the ground up by building a new facility.

48 July 2017 3.2. Costs - Labour Figure 3.2.1: Average annual gross & net earnings, single individual, no children, 100% of average earnings, 201618

Gross annual earnings (€) Net annual earnings (€) Gross earnings include

€90,000 wages, taxes on income

€80,000 and employer and

€70,000 employee social security ) € €60,000 contributions. While

€50,000 gross earnings are 4.6% below the Euro area €40,000 average, net earnings €30,000 Annual earnings ( earnings Annual are 14.9% above the €20,000 average, reflecting the €10,000 relatively small gap €0 between before and US UK Italy EU28 Spain Japan France Ireland Poland after tax wages in Finland Sweden Hungary Germany Denmark Ireland. Switzerland Netherlands Euro area-19 Euro Rank: n/a Source: Eurostat

Figure 3.2.2: Annual growth in Business labour costs (wages and Salaries), 2011-2016

Irish labour costs fell in EU28 Euro area 19 UK Ireland 2011. While labour cost 4.5 growth has been positive between 2012 and 2015, the rates 3 recorded have been consistently below EU and Euro area averages, 1.5 representing a competitiveness gain for 0 Ireland. In 2016 growth rates in Ireland Annual Percentage Change Percentage Annual converged with those in -1.5 both the Euro area and 2011 2012 2013 2014 2015 2016 the UK.

Rank: n/a Source: Eurostat

18 Gross wages include wages, taxes on income and employer and employee social security contributions.

49 July 2017 Figure 3.2.3: Labour cost index, 2012-2016

Figure 3.2.3 shows EU28 Euro area 19 UK Ireland similar data as the 3.2.2 110 but expressed in index form. Setting 2012 108 labour cost levels equal to 100, it is evident that 106 Irish labour costs have cumulatively increased 104 by less than EU and Euro area and UK labour costs 102 respectively. However, an index such as this Labour CostIndex (2012=100) 100 does not reflect the different starting levels 98 of labour costs in each 2012 2013 2014 2015 2016 country. Rank: n/a Source: Eurostat

Figure 3.2.4: Annual growth in labour costs in Ireland by sector, 2012-2015

2012-13 2013-14 2014-15 Figure 3.2.4 shows that total earnings across all 6% sectors in Ireland grew 4% by 1.2% between 2014

2% and 2015 with increases recorded in 8 out of the 0% 12 sectors examined.

-2% The largest increase in

GrowthTotal in Earnings 2015 was recorded in -4% ICT. Construction and Finance & Insurance ICT (J) earnings fell by 2.1% and All sectors

Education (P) 0.7% in 2015. Finance & Professional(M) Industry (B to E) Construction (F) Construction Public admin(O)

Accomm & food(I) Insurance costs also fell

Wholesale & retail(G) in 2015. Transport Transport & storage(H) Finance & insurance (K,L) insurance & Finance Arts & entertainment(R,S) Rank: n/a

Source: CSO

50 July 2017 Figure 3.2.5: Earnings per hour and hours worked, Q4 2015

Average Hourly Other Labour Costs (Euro) Figure 3.2.5 examines Average Hourly Irregular Earnings (Euro) Irish Labour Costs for a Average Hourly Earnings excluding Irregular Earnings (Euro) Q3 2011 range of sectors. It 50 includes data on regular and irregular earnings as 40 well as “other labour 30 costs. The highest 20 hourly labour costs Euro per hour 10 occur in sectors such as finance and insurance, 0 ICT and education.

ICT (J) Earnings per hour range Arts (R,S) Admin (N) Admin from €12.19 Transport (H) Transport Education (P) Real estate (L) estate Real (Accommodation & Construction (F) Construction Professional (M) Professional All NACE All NACE sectors Public admin (O) Human health (Q) Manufacturing (C) Accomm & food (I) & food Accomm Food) to €33.35 Wholesaleretail & (G) Miningquarrying & (B) Finance & Insurance (K) Insurance & Finance (Education). Rank: n/a Source: CSO

51 July 2017 3.3 Other Business Costs Figure 3.3.1: 5-year Growth19 in Cost of renting a prime office unit, € per square metre per year, Q4 201620

16 In the 5 years to Q4 2016 Compound Annual 13 Growth Rates 10 associated with Office Rents were 14.1% in 7 Dublin (D2 and D4 4 districts) and 7% in Cork. The rates in Dublin were 1 over 3 times the -2 equivalent rates in both Compound Annual Growth Rate (%) Rate Growth Annual Compound London City and

Cork* London’s West End. Edinburgh Milan CBD) Paris (CBD) Manchester

Berlin (CBD) Berlin Rank: n/a Madrid (CBD) London (City) Frankfurt (CBD)Frankfurt Dublin (D2/D4)* Helsinki (Centre) Copenhagen (City) London (West (West London End) Amsterdam (Central) Amsterdam Source: Cushman and Wakefield, Office Snapshot Reports

Figure 3.3.2: Cost of Renting a Prime Retail Unit, € per square metre per month21

In 2016 prime retail 2016 2014 rents had increased by €14,000 31.5% in Ireland since €12,000 2014. Ireland was the th €10,000 5 most expensive €8,000 location in the Euro €6,000 area. Rents range from €4,000 €550 per square metre in per metre squared € €2,000 O’Connell Street, €0 Limerick to €5,920 in

UK Grafton Street, Dublin. Italy Spain China Japan France Ireland Poland

Finland th Sweden

Hungary Euro area-13 Rank: 5 Germany Denmark Singapore Switzerland euro euro 17area Netherlands South Korea (↑2) New Zealand Source: Cushman and Wakefield, Main Streets Across the World

19 This growth is measured in Compound Annual Growth Rate (CAGR) Terms. CAGR equates to the mean annual growth rate of an investment over a specified period of time longer than one year. 20 Figures for both Dublin (D2/D4) and Cork are from Q2 2016. 21 The chart is based on the most expensive retail location in each country, and uses data collected in September 2014. Data for retail rents relates to the expected rent obtainable on a standard unit and/or shopping centre in a prime pitch in 330 locations across 65 countries around the world. Rents in most countries are supplied in local currency and converted to a common currency for purposes of international comparison. Data for Ireland is based on rents for Grafton St. in Dublin. The chart excludes data on the US (New York - €29,822 per metre squared) for presentational purposes.

52 July 2017 Figure 3.3.3: Industrial electricity prices22 (excluding VAT), S1 2016

S1 2016 S2 2012 In the first half of 2016, weighted average €0.18 industrial electricity €0.15 prices in Ireland were €0.12 2.9% higher than the €0.09 simple Euro area 19 €0.06 average but 6% cheaper per kilowatt hour

€ €0.03 than the UK average €0.00 price. Nominal prices in

UK S1 2016 here were 4.5% Italy Spain France Poland

Finland lower than in S2 2012. Sweden Hungary Denmark Germany Rank: n/a Euro area 19 area Euro Netherlands

Ire (Weighted Avg) (Weighted Ire

Source: Eurostat, SEAI

Figure 3.3.4: Industrial gas prices for (excluding VAT)23, S1 2016

S1 2016 S2 2012 In the first half of 2016 weighted average 0.07 0.06 industrial gas costs in 0.05 Ireland were in line with 0.04 the average Euro area 19 0.03 price. The weighted 0.02 average price in Ireland per kilowatt hour € 0.01 has fallen by 17% since 0 S2 2012 whereas UK

Italy average prices across Spain France Poland Finland Sweden

Hungary the Euro area fell by Germany Denmark Netherlands Euro Area 19 Area Euro 19.5% over the corresponding period. Irl (Weighted Avg) (Weighted Irl Rank: n/a Source: Eurostat, SEAI

22 The Irish figures are weighted average electricity prices whereas the remaining prices are simple arithmetic averages. Weighted average figures for other European countries will be available later in 2017. 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. 23 The Irish figures are weighted average gas prices whereas the remaining prices are simple arithmetic averages. Weighted average figures for other European countries will be available later in 2017. Again 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.

53 July 2017 Figure 3.3.5: Business Fixed Broadband, € per month excluding VAT, Q4 2016

Spain Netherlands Ireland Figure 3.3.6 shows that UK Germany Denmark over the previous six 60 quarters Fixed Broadband costs remained stationary and 50 in Q4 2016 for Irish Business were €35.28, 40 significantly less than the most expensive country benchmarked 30

per month excl VAT (PPP) (Spain at €51.52). The € least expensive country 20 benchmarked was Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Denmark (€28.11).

Rank: n/a Source: Comreg

Figure 3.3.6: European Services Producer Price Index, Q2 2012-Q3 2016

Figure 3.3.6 compares Euro area (19) Germany Ireland Spain France United Kingdom the evolution of SPPI’s 108 36 across the EU . Since 2010, service prices have 104 risen markedly in both Ireland (6.8%) and Germany (4%), and to a 100 lesser extent the UK (3.4%), compared to the Euro area 19 (0.7%). 96 Corresponding prices in France and Spain were 92 lower in Q3 2016 than in comparable quarter in Services Producer Price Index (Q1 2012=100) 2010. 2013Q1 2013Q3 2015Q1 2015Q3 2012Q3 2013Q2 2014Q1 2013Q4 2014Q3 2016Q1 2016Q3 2015Q2 2015Q4 2012Q2 2012Q4 2014Q2 2014Q4 2016Q2 Rank: n/a Source: Eurostat

54 July 2017 Figure 3.3.7: Childcare-related costs and benefits, percentage of average wage24, 2012

Childcare fee Childcare benefits Tax reductions Net Cost This data takes account of childcare fees, child 80 benefit and relevant tax 60 reductions. For couples, 40 earning 167% of the

20 average wage, Ireland is nd the 2 most expensive in 0 the OECD, resulting in -20 low rates of female labour force Percentage of average wage -40 participation. For lone -60 parents (67% of the US UK EU27 Israel Spain Japan average wage) Ireland is France Ireland Poland Finland Sweden Hungary Germany Denmark OECD-30 the most expensive Switzerland Netherlands South Korea New Zealand OECD location. st OECD rank: 31 Source: OECD

24 Data for couples refers to a situation where the first earner earns 100% of the average wage and the second earns 67% of the average wage.

55 July 2017 3.4 Prices Figure 3.4.1: Consumer price levels (2016) and average annual inflation, 2012-2016

8 Figure 3.4.1 examines High prices, rising quickly Hungary both changes in prices 7 UK (inflation) and the price Finland 2016)

- level. It shows that 6 Netherlands Ireland’s current price Italy 5 profile is “high cost, EU 28 Germany rising slowly” with 4 consumer prices 25% France Poland Denmark above the EU 28. 3 Ireland Inflation in Ireland over

2 Sweden the past 4 years has been significantly less

HICP InflationHICP (Percentage Change2012 1 than the equivalent Low prices, rising slowly across the EU28. 0 0 20 40 60 80 100 120 140 160 Euro area-19 Rank: Comparative price levels of final consumption by private households including th indirect taxes, 2016 HICP: 19 (↓2)

Source: Eurostat

Figure 3.4.2: Price levels (2016) and GDP per capita (2016)

140 Denmark While Irish and Euro area inflation is low, Irish 130 Ireland consumer prices remain Finland Sweden 120 Luxembourg over 25% above the Euro UK area average. In 2016, 110 Netherlands France Ireland was the second Germany Italy 100 most expensive location EU28 in the EU28 for Spain 90 consumer goods and Portugal 80 Slovenia services and the highest Estonia in the Euro area. 70 Latvia Comparative Price Level, 2016(EU28=100) Slovakia Euro area-19 rank: Lithuania th 60 Hungary Price Levels: 19 (↓1) Poland 50 0 50 100 150 200 250 300 GDP purchasing power standard per capita, 2016 (EU28=100)

Source: Eurostat

56 July 2017

Figure 3.4.3: Average annual inflation rate by commodity group, Ireland, EU and Euro area, 2011-2016

EU28 Euro area 19 Ireland Figure 3.4.3 examines

20% average annual inflation in Ireland and the EU 15% over the period 2011 to 10% 2016 across a range of 5% commodity categories. 0% Overall, Irish HICP

-5% inflation was below both Average Annual Inflation (%) Inflation Annual Average the Euro area and EU -10% average. However, for Misc Goods Health education Irish inflation Housing All Items Transport Education Recreation exceeded the average Restaurants annual rate. Communications Alcohol & Tobacco Food & Non-Alcohol Clothing & Footwear Rank: n/a Source: Eurostat

Figure 3.4.4: Irish price levels relative to the European Union 28 (including indirect taxes), 201625

Figure 3.4.4 compares Education relative prices for a Transport range of goods and Household & maintenance services in Ireland with Recreation and culture the EU28 average price. Clothing and footwear Irish prices are above the Restaurants and hotels* Euro area average for 11 Food & non-alcoholic beverages out of 12 categories of Total goods and services Misc. goods & services (education being the Communication exception). The wide Housing & utilities differential in alcohol Alcohol & Tobacco and tobacco prices is 0 0.5 1 1.5 2 primarily a consequence EU 28 = 100 of taxation policy. Rank: n/a Source: Eurostat

25 *In the period March - May 2017, the total number of trips to Ireland increased by 4.8% to 2,496,400 - an overall increase of 113,500 compared to the same period twelve months earlier. STR Global data shows the Average Daily Rates (ADR) for hotel rooms Ireland increasing at a faster rate than competitor destinations such as the UK, Scotland and Northern Ireland are compared over the years 2014-2017.

57 July 2017

Figure 3.4.5: Euro, Dollar and Sterling exchange rates, Jan 2012-April 2017

In 2016, the Euro GBP (LHS Axis) USD (RHS Axis) strengthened and £1.00 $1.80 appreciated by 16 per £0.95 $1.60 cent against Sterling £0.90 $1.40 posing significant $1.20 challenges for parts of £0.85 $1.00 the exporting sector £0.80 $0.80 reliant on trade with the £0.75 $0.60 UK. The Euro/Sterling £0.70 $0.40 exchange rate has Dollar Exchange Rate Exchange Dollar Sterling Exchange Rate Exchange Sterling £0.65 $0.20 oscillated around £0.85 in 2017. Further volatility £0.60 $0.00 and depreciation of Sterling represents a Jul-15 Jul-08 Jun-11 Jan-12 Apr-17 Jan-05 Oct-13 Apr-10 Feb-16 Mar-13 Dec-07 Sep-16 Oct-06 Dec-14 Feb-09 Sep-09 Aug-12 Nov-10 Aug-05 Mar-06 May-07 May-14 major threat to Irish export competitiveness. Rank: n/a Source: European Central Bank

58 July 2017 3.5 Productivity

Figure 3.5.1 GDP per hour worked, (USD, constant prices, 2010 PPPs), 2016

2016 2011 Ireland had the 3rd

90 highest output per hour worked among OECD 80 member states in 2016. 70 Output per hour was 60 $79.7 in 2016 in GDP 50 terms, an increase of 40 28% over 2011. 30 However, Ireland’s 20 performance is 10 significantly affected by GDP phw,US$, constant prices, 2010 PPPs 0 the measurement US UK multinational activities Italy Spain Japan Korea Latvia OECD France Ireland Poland Finland

Sweden in the national accounts. Hungary Germany Denmark Switzerland Netherlands Euro area 19 area Euro New Zealand OECD rank: GDP phw 3rd (↑2) Source: OECD

Figure 3.5.2 Growth in GDP per hour worked, (USD, constant prices, 2010 PPPs), 2011- 201626

Ireland UK US Euro area OECD Irish labour productivity 25 growth has been above that in competitor 20 countries since 2013 and was 2.3% in 2016. 15 However, corporate restructuring, including 10

change the relocation of firms with significant IP assets 5 and aircraft leasing , led to noteworthy increases 0 in labour productivity,

GDP per hour worked, US$ ConstantPrices, 2010, Annual percentage particularly in 2015 -5 (22.5%). 2011 2013 2015 2012 2014 2016 OECD rank: 1st (↑1) Source: OECD

26 Data for 2016 for US, Euro area and OECD corresponds to 2015 figure

59 July 2017

Figure 3.5.3 Growth in labour productivity (GDP per hour worked) Total economy, 2010-2015

6 Across the OECD, labour productivity growth has

5 been subdued in most OECD countries in

4 recent years. Large disparities exist among OECD Member States in 3 terms of growth rates. Taking the period 2010- 2 2015, at an annual rate of growth, Ireland’s

Growth in labour productivity, percentage rateannual at change percentage productivity, labour in Growth 1 growth was 5.5% which significantly exceeds the OECD average (0.8%). 0 US UK Italy Spain Japan Korea Latvia

OECD OECD rank: Ireland Poland Finland Sweden Hungary Germany Denmark Switzerland Netherlands New Zealand GDP phw growth (1st) Source: OECD

Figure 3.5.4 GDP and GNI27 per hour worked, Percentage differential to the OECD average, 2015

GDP per hour worked, 2015 GNI per hour worked, 2015 In Ireland significant

100 differences in

80 productivity are evident when considering 60 output as a measure of 40 GDP or GNI. As a 20 measure of GDP, 0 Ireland’s output is

-20 approximately 80% current prices & PPPs above the OECD -40 baseline, as a measure -60 US UK of GNI, the differential Italy Spain Japan Korea Percentage point difference from the OECD(OECD=0), Latvia France Ireland Poland Finland

Sweden falls to 44%. This Hungary Germany Denmark Euro area Euro Switzerland Netherlands

New Zealand reflects the presence of

multinationals. Rank: n/a Source: OECD

27 GNI is GDP plus net receipts from abroad of compensation of employees and property income plus net taxes and subsidies receivable from abroad. Property income from abroad includes interest, dividends and all or part of the retained earnings of foreign enterprises owned fully or in part by residents.

60 July 2017 Figure 3.5.5 Labour productivity growth by main economic activity, 2009-2015

Manufacturing Business sector services excl. real estate Construction Across the OECD, labour 20 productivity growth in manufacturing has 15 tended to outpace services sector growth. 10 Between 2009 and 2015, Irish growth in

annual rate annual 5 manufacturing was 16% compared with 3% in

0 services and -2% in construction. Irish

Real grossvalue added hourper worked, percentage change at -5 manufacturing UK Italy Spain

Korea productivity data has Latvia France Ireland Poland Finland Sweden Hungary Germany Denmark Euro area Euro

Switzerland been significantly Netherlands New Zealand influenced by corporate restructuring. Rank: n/a Source: OECD

Figure 3.5.6 Labour productivity, Value Added per Employee,€000’s, 2015

Foreign owned Irish owned There is considerable Grand Total - All Sectors heterogeneity between Sub Total ICT & Services Other Services and within sectors in Education Business Services terms of output per Financial Services Other IT & Computer Services person employed. Computer Facilities Management Computer Consultancy Assessing the relative Computer Programming Publishing, Broadcasting & Telecommunications output of foreign firms Energy, Water, Waste & Construction Sub Total Manufacturing relative to Irish firms Other Misc. Manufacturing Medical Device Manufacturing shows the differential is Transport Equipment Machinery & Equipment five times larger in Electrical equipment Computer, Electronic & Optical Products manufacturing than Basic & Fabricated Metal Products Non-Metalic Minerals services where output is Rubber & Plastics Chemicals three times as high per Paper & Printing Wood & Wood Products person employed. Textiles, Clothing, Footware & Leather Food, Drink & Tobacco Rank: n/a Agriculture, Fishing, Forestry, Mining & Quarrying 0 100 200 300 400 500 600 700 800 Value Added (€K, per person employed)

Source: DJEI

61 July 2017 Figure 3.5.7 Contributions to labour productivity growth of business sector services, 2009-2015

Trade, hotels and transport Information and communication Finance and insurance Professional services In Ireland, over the 5 period 2009-2015, the relative contribution of 4 ICT to business sector productivity growth 3 (2.3%) is particularly strong. The Professional 2 Services (1.6%) and

rate Financial sectors (0.3%) 1 also made positive contributions to 0 business sector productivity growth. -1 The Trade, Hotels and Transport sector Real grossvalue added hourper worked, percentage point contribution annualat -2 contribution to growth is UK Italy Spain Korea Latvia France Ireland Poland

Finland negative, in contrast to Sweden Hungary Germany Denmark Euro area Euro Switzerland Netherlands the UK and OECD trends Rank: n/a Source: OECD

Figure 3.5.8 Multifactor productivity growth, total economy, percentage change at annual rate, 2001-201428

2009-2015 2001-2007 Multifactor productivity 4 (MFP) reflects the

3.5 overall efficiency with

3 which labour and capital inputs are used together 2.5 in the production 2 process. MFP growth 1.5 decelerated in nearly all 1 countries after the crisis 0.5 compared with the

0 period 2001-2007 Irish

Total economy, percentage change rate at annual change economy, percentage Total -0.5 MFP grew by 0.9% in 2001-2007 and growth -1 US UK increased to 1.3% in the Italy Spain Japan Korea France Ireland Finland Sweden years 2009-2014. Germany Denmark Switzerland Netherlands New Zealand OECD rank: 2nd (↑5) Source: OECD

28 Data for Ireland and Spain correspond to the period 2009-2014.

62 July 2017

Figure 3.5.9 Average percentage point contribution of productivity to GDP growth, 2009-201529

Labour input ICT capital Non-ICT capital Multifactor productivity GDP growth GDP growth can be 4 decomposed into a labour input 3 component, a capital input component and 2 MFP growth. While productivity growth in 1 Ireland (capital, non- capital and MFP) 0 contributes positively to overall growth in recent -1 Percentage point contribution growth GDP contribution to point Percentage years, the effect of this

-2 is offset by the negative US UK contribution of labour as Italy Spain Japan Korea France Ireland Finland Sweden Germany Denmark a result of the recession. Switzerland Netherlands New Zealand Rank: n/a Source: OECD

29 Data for Ireland and Spain correspond to the period 2009-2014.

63 July 2017 3.6 Employment

Figure 3.6.1: Employment, unemployment & long term unemployment (000's), Q4 2007-Q4 2016

In Employment (Full-Time) In Employment (Part-Time) Long-Term Unemployment (right axis) Unemployment (right axis) Figure 3.6.1 shows the continued improvement 2500 350 in the labour market. 300 While employment has 2000

250 not yet returned to peak

1500 pre-recession levels, 200 over 2 million were 150 1000 employed in Q4 2016,

100 an increase of 3.3% over Persons in Employment (000's) Employment in Persons 500 Q4 2015. Headline and 50 long term 0 0 unemployment are on a 2013Q1 2013Q3 2015Q1 2015Q3 2012Q1 2012Q3 2013Q2 2014Q1 2013Q4 2014Q3 2016Q1 2016Q3 2015Q2 2015Q4 2012Q2 2012Q4 2014Q2 2014Q4 2016Q2 2016Q4 steady downward trajectory. Rank: n/a Source: Central Statistics Office

Figure 3.6.2: Employment Growth Rate, 2015

As a consequence of the 2015/16 2010/11 recession, employment 4% growth collapsed in 3% Ireland in 2009-2011. 2% The job rich nature of the Irish economic 1% recovery in employment 0% terms is evident in -1% Figure 3.6.2. At 2.9%, -2% the Irish employment growth rate in 2015 was

Annual Change in Employment (%) Employment in Change Annual -3% well above the Euro area UK average 0.9% and was EU28 Spain th Ireland Poland Finland Sweden

Hungary the 4 highest in the Germany Euro area. Netherlands Euro area 19 area Euro Euro area-19 rank: th 4 (↑12) Source: Eurostat

64 July 2017 Figure 3.6.3: Change in employment in Ireland by sector and gender, Q4 2010-Q4 2016

The majority of sectors Change in male employment (left axis) Change in female employment (left axis) Percentage change (right axis) in Ireland have 50 40% experienced growth in 40 30% employment between 30 2011 and 2016 as the 20% 20 recovery strengthens. 10% 10 Growth in construction 0 0% employment is -10 -10% particularly noteworthy (given the previously extensive job losses in ICT (J)

Change in employment (000) employment in Change that sector), as is the Health (Q) (H) (G) increase in Public (K,L) Education (P) Agriculture (A)

Percentage change in employment in change Percentage accommodation and Industry (B to E) Construction (F) Construction Professional (M) Professional administration (O) administration Administrative (N)

Accomm & food (I) & food Accomm food and agricultural Finance Finance & insurance Transport Transport & storage Wholesale and retail employment. Rank: n/a Source: CSO

Figure 3.6.4: Self-employed (proportion as a percentage of total employment), 2016

Figure 3.6.4 examines Self-employed with employees 2016 Self-employed without employees 2016 2011 the number of self- 1.2% employed persons and those self-employed 1.0% who also have 0.8% employees (a proxy for 0.6% entrepreneurship). The proportion of self- 0.4% employed in Ireland has 0.2% risen since 2011 (from 0.75% to 0.85% in 2016), 0.0% remains above the Euro UK

Italy area-19 average (0.33%). Percentage of Total Employment EU28 Spain Ireland

Sweden EU 28 rank: Germany Denmark th Netherlands Euro area 19 area Euro With Employees 4

Without Employees 5th Source: Eurostat

65 July 2017 Figure 3.6.5: Unemployment rate (seasonally adjusted, standardised rate)30, Q1 2006-Q4 2016

This indicator measures Ireland USA EU28 OECD the number of 16 unemployed people as a 14 percentage of the labour 12 force. The rapid 10 deterioration in Ireland’s 8 labour market upon the 6 onset of recession and 4 its subsequent rapid 2 improvement is evident. The US labour market Harmonised Unemployment (%) Unemployment Harmonised 0 has proven more resilient than its 2011-Q1 2011-Q3 2013-Q1 2013-Q3 2015-Q1 2015-Q3 2011-Q2 2012-Q1 2012-Q3 2013-Q2 2011-Q4 2014-Q1 2013-Q4 2014-Q3 2016-Q1 2016-Q3 2015-Q2 2015-Q4 2012-Q2 2012-Q4 2014-Q2 2014-Q4 2016-Q2 2016-Q4 European counterpart. Rank: n/a Source: OECD

Figure 3.6.6: Dispersion of regional unemployment rates by NUTS 3 regions (%)

The lower the dispersion 2014 2009 rate the greater the level 80 of cohesion between 70 regions. The differential 60 in unemployment rates 50 across Ireland’s 8 40 regions (12.5%) is the 30 lowest in the Euro area. 20 While this is virtually 10 0 unchanged compared

Unemployment dispresion (%) rate dispresion Unemployment with 2009, it did UK Italy EU28 Spain increase for a time in Ireland Poland Finland Sweden Hungary Germany Denmark 2010 to 2013. Netherlands Euro area-14 Euro Euro area-14 rank: st 1 (↑2) Source: Eurostat

30 Harmonised unemployment rates define the unemployed as people of working age who are without work, are available for work, and have taken specific steps to find work. The uniform application of this definition results in estimates of unemployment rates that are more internationally comparable than estimates based on national definitions of unemployment. Euro area-15 excludes Cyprus, Latvia, Lithuania and Malta. Change in rankings compares Q4 2010 with Q4 2015.

66 July 2017 Figure 3.6.7: Youth unemployment rate, 2016

Unemployment 2016 2011 amongst those aged 15- 50 24 years in Ireland (17.2%) is now below the 40 Euro area average 30 (20.9%). Ireland’s high proportion of youth 20 neither in employment, Percentage

10 education or trainingand long term youth 0 unemployment remains

UK a serious challenge Italy EU28 Spain Latvia France Ireland Poland Finland

Sweden EU 28 rank: Hungary Germany Denmark th Netherlands Euro area 19 area Euro Youth: 12 (↓7)

Source: Eurostat

Figure 3.6.8: Neither in Employment, Education or Training (NEET), 2016

Ireland also has a high

2016 2011 proportion of youth neither in employment, 50 education or training 40 (NEET). Out of the total age cohort 15-24, 7.4% 30 were classified as NEET 20 in 2016, compared with Percentage the EU28 and Euro area 10 19 averages of 3.8% and 0 3.7% respectively. The

UK comparable rate in 2016 Italy EU28 Spain Latvia France Ireland Poland

Finland in the UK was 3.3% Sweden Hungary Germany Denmark th EU28 Rank: 26 (↓1) Netherlands Euro area 19 area Euro Source: Eurostat

67 July 2017 Figure 3.6.9: Net replacement rates for long term unemployed31, 2014

One-earner married couple, 2 children (2014) For a long term Single person (2014) unemployed, one earner One-earner married couple, 2 children (2009) married couple with 2 90 children earning 100% of 80 the average wage, the 70 Irish replacement rate 60 (80%) exceeds the 50 OECD average (54.4%). 40 The rate for single 30 20 individuals (50.6%) also Replacement rate (%) 10 exceeds the OECD 0 average (31.5%). Rates US UK are higher for lower Italy Spain Japan France Ireland Poland

Finland income families. Sweden Hungary OECD-31 Germany Denmark

Switzerland OECD rank: Netherlands South Korea New Zealand st Married: 31 (↓3)

th Single: 30 (-) Source: OECD

Figure 3.6.10: Job Vacancy Rate, Q4 2016

Figure 3.3.10 shows that EU28 Euro area 19 Ireland UK at 1 per cent, the Irish 3 job vacancy rate in Q4 2016 was half the equivalent EU28 rate. 2 Over the two years, Irish job vacancy levels have been stationary at 1

Job Vacancy (%) around 1 per cent. The comparable level in the 0 UK has oscillated around 2.5% over the corresponding period. 2015Q1 2015Q3 2014Q3 2016Q1 2016Q3 2015Q2 2015Q4 2014Q2 2014Q4 2016Q2 2016Q4 EU24 rank: 8th Source: Eurostat

31 OECD-31 excludes Chile, Mexico and Turkey.

68 July 2017

Chapter 4 Competitiveness Inputs

69 July 2017 Competitiveness Inputs The third tier of the pyramid focuses on “competitiveness policy inputs”. Four categories of inputs are examined - the business environment, physical infrastructure, clusters and firm sophistication and knowledge and talent. These represent the drivers of current and future competitiveness. It is within these particular areas that policymakers can have the greatest impact on competitiveness. . Business Environment: The business environment indicators examine the conditions within which enterprise must operate. Benchmarked themes include the cost and availability of credit and the taxation system. While access to and affordability of credit has improved, Irish firms continue to face higher interest rates and greater volatility in those rates than their competitors abroad. Irish interest rates on business loans have been consistently higher than equivalent Euro area rates. Figure 4.1.8 shows that in April 2017, the interest rate in Ireland on loans of up to €1 million was more than 74 per cent higher than the Euro area average rate for new business; the rate on loans of up to €1 million was more than 79 per cent more expensive in Ireland.

o In Ireland and across the Euro area the volume of credit supplied to non-financial corporation’s (NFC’s) has been low in the wake of the economic and financial crisis as a result of low economic growth, structural adjustments in the banking system and weak demand. In addition, many firms, particularly SMEs, micro-enterprises and start-ups had encountered difficulties accessing credit and working capital. Using Q1 2012 as the base, the outstanding amount of credit lent to various SME sectors analysed contracted considerably. The total loans outstanding to SMEs in the Construction sector in Q4 2016 were 30 per cent of what they were some 5 years previously (Figure 4.1.3).

o While bank financing will continue to be crucial for enterprise, broadening the finance options available and accessible to SMEs and micro-enterprises remains a challenge. The CSO’s Access to Finance survey shows how relatively few SMEs (particularly, non-exporting SMEs) seek funding from non-bank sources: for example only 4.7 per cent of medium sized enterprises looked for equity finance compared to 39.8 per cent of similar sized enterprises who looked for bank finance. Increasing levels of private equity, crowdfunding and venture capital funding remains a challenge. Figure 4.1.4 shows the intensity of total venture capital investment is marginally below the OECD average with the greater portion of venture capital in Ireland attributed to early stage investments. Private equity accounts for 0.16 per cent of GDP in Ireland (down from 0.28 per cent in 2007). This is well below the levels in the best performing Euro area countries and significantly below the level seen in the UK (0.72%).

o Figure 4.1.7 shows Non-performing loans (this includes all lending, not just business lending) at the end of 2016 made up 9 per cent of gross loans, down from 16.1 per cent in 2011, in Ireland and continue to hinder recovery in the banking sector. This compares to an OECD High Income average of 3.5 per cent.

o Maintaining a growth-friendly taxation system while simultaneously broadening the tax base, is critical to maintaining existing levels of employment and creating new jobs in Ireland. In terms of the tax base, income tax receipts - reflecting the growth in the labour market - have increased by €5.3bn (40%) in the past five years. Between 2011 and 2016 Capital Gains Tax and corporation tax receipts increased by 101 per cent and 124 per cent respectively (Figure 4.2.1). Ireland’s corporation tax rate remains internationally competitive at 12.5 per cent. While Ireland’s rate has remained consistent over recent years, many of our key competitors have reduced their rates (e.g. the UK). Figure 4.2.2 highlights central statutory rates – effective rates in many counties, however, can be significantly lower.

70 July 2017 o Ireland remains competitive in terms of the levels of income tax and social security contributions as a proportion of total labour costs. For a married couple with 2 children on a combined income of 167 per cent of the average wage (i.e. a 2 earner family), the rate including social security contributions is lower than the OECD average. Figure 4.2.6 shows marginal rates are particularly high for individuals in Ireland earning the average wage or above. Social security contributions in Ireland are lower than is the case in other OECD countries. The Irish Standard VAT rate (23%) is higher than the OECD average (19.2%), however, there are a number of lower VAT rates and exemptions for certain activities. In 2014 Ireland had the third highest headline Capital Gains Tax rate in the OCED, and fell 5 places since 2011 (Figure 4.2.11). . Physical Infrastructure: The availability of competitively priced world-class infrastructure (e.g. energy; telecoms; transport - road, public transport, airport, seaports; waste and water) and related services is critical to support competitiveness. Well-developed infrastructure can increase mobility of workers and goods reduce traffic congestion and increase productivity. As well as the immediate impact on labour mobility, for instance, physical infrastructure also plays an important role in determining quality of life and the attractiveness of place (a key factor in terms of attracting high skilled, internationally mobile workers).  Over the medium term, capital investment as a percentage of GDP is projected to increase but will remain low relative to pre-crisis levels. Developing our infrastructure base, while complying with the EU’s fiscal rules, is a fundamental challenge to enhancing competitiveness relative to countries such as the UK.  The relatively low levels of net investment projected over the medium term represent a significant challenge in light of demographic pressure, EU budgetary commitments and clear infrastructure deficits in housing, health, education, innovation, transport and water. Figure 3.1.1 shows public investment (2.4%) in Ireland has increased since 2010 but remains below the Euro area average (2.7%). Figure 4.3.2 shows that as a percentage of GDP, Ireland’s inland infrastructure expenditure declined from 0.8 per cent in 2009 t0 0.3 per cent in 2014 and was well below the OECD average (0.8%). Diminished investment in infrastructure is reflected in our low scores in relation to the perception of overall infrastructure quality. Reflecting a period of sustained capital investment by the State, there was a strong improvement in perceptions up until 2010. Ireland’s score fell over the five years to 2016 and remains below the OECD average (Figure 4.3.3).  In terms of capital stock, net capital stock grew by 0.6 per cent per annum in the period 2005 to 2015. Gross Fixed Capital Expenditure continues to recover and grew by 11 per cent in 2015. Intangible fixed assets (9.5%) and transport equipment (7.6%) have grown most rapidly over the ten year period. . Clusters and Firm Sophistication: Firm sophistication concerns two elements that are intricately linked: the quality of a country’s overall business networks, and the quality of individual firms’ operations and strategies. Clusters are diverse and varied in terms of development; some originate out of the third level sector or Government research centres, others are loose networks of SMEs, some orbit around anchor firms. Despite Ireland’s small size it has a large number of cities/towns that have proven ability to attract FDI and develop new enterprises.  The European Commission’s Cluster Mapping tool indicates that Ireland has a relatively high degree of specialisation and cluster presence in biopharma, digital, medical devices and business services sectors. Figure 4.4.1 uses the Commission’s Regional Ecosystem Scoreboard to show the regions ranking in the top 10 per cent of all of the EU28 regions are found in the UK (median score (0.546), NI (0.521). In Ireland, the South East (0.511) scores ahead of the BMW region (0.496). Figure 4.4.2 presents WEF data provided on the basis of personal assessment of managers in surveyed companies

71 July 2017 about cluster development in their country. In Ireland the weighted average score in 2015/16 was 4.9. This was above the Euro area-19 average score of 4.3.  Competitive economies require sufficient and effective investment in knowledge based capital, especially by firms; the presence of high-quality scientific research institutions; extensive collaboration in research between universities and industry; and sophisticated business practices and effective clusters. Results from the 2012–2014 Community Innovation Survey (published by the CSO as Innovation in Irish Enterprises) show that total spending on innovation activities in Industry and Selected Services sectors was almost €3.8bn in 2014, a 4 per cent increase on the 2012 spend of €3.65bn.  The EU Innovation Scoreboard classifies Ireland as behind the EU average in the finance and firm investments dimensions of innovation. European Commission/Eurostat data shows Business R&D expenditures as percentage of GDP (BERD) has been relatively flat in Ireland over the period 2010- 2015. BERD is reported at 1.1 per cent for 2015, below the EU average of 1.3 per cent (Figure 4.4.5). CSO data shows foreign owned companies in Ireland account for 61 per cent of business expenditure on R&D.  Figure 4.4.7 shows firms in Ireland were more likely to be innovative (61%) compared to the EU average (49%) with relative performance strong across all firm sizes. However, small firms are less likely to be innovation active than larger firms. Figure 4.4.8 shows 36 per cent of SMEs in Ireland are reported as having introduced a product or process innovation in 2015. This is above the EU average (31%), however Ireland’s performance is down on an annual basis (41%) and since 2010 (43%).  Ireland has a higher proportion of innovative enterprises than both the EU28 and Euro area-19 averages in product, process and marketing but performance is relatively weak in terms of organisational innovation. Creating, exploiting and commercialising new technologies are vital for competitiveness. The proportion of sales of new to market and new to firm innovations as a percentage of turnover has fallen in recent years and at 9.3 per cent is below the EU average of 12.4 per cent (Figure 4.4.10). Technological innovation, as measured by the introduction of new products (goods or services) and processes, is a key ingredient to growth. In Ireland 52 per cent of product exports are classified as medium/high tech compared with an EU average of 55 per cent (Figure 4.4.11).  Innovative businesses need affordable fast broadband coverage and this is a challenge throughout the EU. The percentage of Irish businesses with a fixed fast broadband connection grew from 26 per cent to 42 per cent between 2014 and 2016. The compares favourably with the OECD average of 35 per cent (Figure 4.4.12). As is the case with Ireland, many countries have improved their telecommunications infrastructure in recent years and basic broadband is now widespread in the EU. However, concerns persist around the issues of quality (speed) and the regional availability of high speed services fast broadband which is still more concentrated in areas of high population density and its extension to other areas, particularly rural areas, is needed. . Knowledge and Talent: The availability of knowledge, talent and skills are one of the main differentiators between countries. The global war for talent has never been more intense. Ireland’s education system has long represented a competitive advantage in this regard. This section examines the quality of our formal education system at all levels.  The EU Innovation Scoreboard provides a comparative assessment of the research and innovation performance of EU Member States. The 2016 Scoreboard shows that year on year Ireland moved up two places from 8th to 6th in the overall ranking. Ireland is classed as an innovation follower with an above average performance. Performance across the framework of the Innovation Scoreboard relative to the best performing countries is mixed (Figure 4.4.4). Ireland is strong in the innovators

72 July 2017 and economic effects dimensions. Ireland is behind the EU average in the finance, firm investments and intellectual assets dimensions. Figure 4.4.5 shows there is considerable heterogeneity in R&D expenditure as percentage of GDP in the EU. In 2015, Irish expenditure on R&D accounted for 1.51 per cent of GDP, below the EU average (2.02%).  Ireland ranks 8th in the EU’s Digital Economy and Society Index 2017. Ireland ranks very high when it comes to the integration of digital technologies by businesses, mostly because many SMEs embraced e-commerce. Internet users increasingly take advantage of high-speed infrastructures and also make good use of online public services. Ireland's main challenge is to equip more than half of the population with at least basic digital skills (Figures 4.5.12 & 4.5.13).  Set in an international context, the IMD’s 2016 Competitiveness Yearbook 2017 ranks Ireland 1st for attracting and retaining talent. Ireland’s other strengths are in relation to the availability of skilled labour (5th), financial skills (6th) and the ability to attract foreign talent (10th). Relative weaknesses include the pupil-teacher ratio in secondary education (43rd) and language skills (44th).  GDP per capita expenditure on education (primary to higher education) was amongst the lowest among OECD countries. In recent years Ireland’s ranking has improved for this measure, most significantly for expenditure at second-level education. However, Ireland’s overall ranking remains slightly below the OECD average and the gap is most pronounced at tertiary level. Figure 4.5.2 shows Ireland performs better in terms of spend when measured per student spending more at secondary levels per student. Expenditure levels per student at tertiary levels are marginally below the OECD average but significantly below the UK and US, where a higher proportion of expenditure is privately funded.  At all levels, average educational attainment in Ireland has improved in recent years (Figure 4.5.1). There is a significant inverse correlation in Ireland between educational attainment and age; while a lower proportion of 45-54 and 55-64 year olds have attained tertiary education than the OECD average, a greater proportion of the remaining cohorts have a third level qualification than is the case in the OECD. Ireland has made significant progress in reducing the proportion of the population aged 18-24 that are early school leavers and is now well below the EU and Euro-area averages. (Figure 4.5.6). This reflects higher retention rates in secondary education. Some 80 per cent of 25-64 year olds had attained at least upper secondary education in Ireland in 2015 compared with 91 per cent of the 25-34 year old cohort. The most recent OECD data shows Irish PISA scores in 2015 for maths, reading and science have improved since 2012. On average, Irish students score above the OECD in all 3 categories (Figure 4.5.7).  As a percentage of total undergraduates, Irish higher education and further education institutes provide more Science & maths and ICT graduates that the EU28 average (Figure 4.5.10). However, the number of engineering graduates Ireland produced is significantly below the EU28 average.  Eurostat data shows that at 1 per cent, the Irish job vacancy rate in Q4 2016 was half the EU28 rate. (Figure 3.3.10) On a sectoral level there is evidence of higher than average job vacancy rates in a number of sectors32. Recent research by the Expert Group on Future Skills Needs (EGFSN) anticipates job opportunities arising from both expansion and replacement demand for a range of occupational roles including in ICT, data analytics, manufacturing, medical devices, pharmaceuticals, food and beverages, international sales and marketing, project management, freight transport, hospitality, distribution and logistics .

32 In Q1 2017 there were high vacancy rates recorded in the Professional, Scientific & Technical (2.7%), Financial, Insurance and Real Estate (2.1%) and ICT (1.6%) sectors according to the CSO.

73 July 2017  Participation in life-long learning has fallen since 2011 and stood at 11.9 per cent in 2016. The percentage of people in Ireland aged 25-64 in receipt of education (both formal and non-formal) ranks below the Euro area 19 (17.2%) and EU-28 (16.6%) averages (Figure 4.5.11). Of continuing concern is the high proportion of the labour force with relatively low levels of formal education.

74 July 2017 4.1 Finance for Business

Figure 4.1.1 Annual growth rate in outstanding credit, 2017

Growth rates in the Ireland Euro area stock of credit in Ireland 40.00 have been negative 30.00 since December 2010, 20.00 reflecting in part the 10.00 scale of debt repayment and consolidation since 0.00 the onset of the -10.00 economic downturn.

Annual Growth (%) Rate Growth Annual -20.00 Since 2014 the stock of -30.00 credit continues to shrink more quickly than the Euro area average. Jan-12 Jan-10 Jan-14 Jan-16 Jan-08 Jan-06 Sep-12 Sep-10 Sep-14 Sep-16 Sep-08 Sep-06 May-11 May-13 May-15 May-07 May-09 Rank: n/a Source: ECB

Figure 4.1.2 Gross new lending to SMEs by sector, 2017

Construction ICT Figure 4.1.2 presents new lending trends for Manufacturing Transport & Storage various sectors. The 12 Total (Right Hand Axis months to March 2017 €140 €1,600 have seen large €1,400 €120 increases in new €100 €1,200 €1,000 Manufacturing and €80 €800 Construction lending. €60 (millions) €600 (millions) Annualised lending in € € €40 €400 Q3 2016 totalled 3bn. €20 €200 € €0 €0 New lending was 28% higher in Q3 2016 than Jul-13 Jul-15 Jul-12 Jul-14 Jul-16 two years previously. Mar-17 Mar-13 Mar-15 Nov-13 Mar-12 Mar-14 Mar-16 Nov-15 Nov-12 Nov-14 Nov-16 Rank: n/a Source: Central Bank of Ireland

75 July 2017 4.1.3 Outstanding Credit lending to SMEs by sector, 2012-2017

Primary Industries Construction Information and Communication Using Q1 2012 as the base, the outstanding Total Manufacturing Transportation and Storage amount of credit lent to 120% the SME sector analysed

100% shrunk considerably. The total loans 80% outstanding to SMEs in the Construction sector 60% in Q4 2016 were 30% of what they were some 5 40% years previously. Total credit afforded to 20%

Growth in NewGrowth Lending (Q1 in2012=100) Primary Industries fell by Jul-13 Jul-15 Jul-12 Jul-14 Jul-16 25% over the Jan-13 Jan-15 Jan-14 Jan-16 Sep-13 Sep-15 Sep-12 Sep-14 Mar-13 Sep-16 Mar-15 Nov-13 Mar-12 Mar-14 Mar-16 Nov-15 Nov-12 Nov-14 Nov-16 May-13 May-15 May-12 May-14 May-16 corresponding period. Rank: n/a Source: Central Bank of Ireland

74 Figure 4.1.4 Venture capital investment as a % of GDP , 2015

Seed/start-up/early stage Later stage venture Figure 4.1.4 shows the intensity of total 0.35 Venture Capital (VC) 0.30 investment as a 0.25 percentage of GDP in Ireland is marginally 0.20 below the OECD 0.15 average. The greater 0.10 portion of VC in Ireland 0.05 is attributed to early stage investments. 0.00 OECD rank: US UK Venture Capital Investments (% of GDP) Italy th Spain Korea France Ireland Poland Japan* Finland GDP: 7 Sweden Hungary OECD 29 Germany Denmark Switzerland Netherlands Euro Area 15 Area Euro New Zealand Source: OECD

76 July 2017

Figure 4.1.5 Private equity33 investment (as a % of GDP), 2015

2014 2012 Private equity investment decreased in 0.80 Ireland between 2012 and 2014, as it did across 0.60 all benchmarked countries during the 0.40 period. Private equity now accounts for 0.16% 0.20 of GDP (down from 0.28% in 2007) and is

0.00 below the best EU

Private Equity Investmentof GDP) (% performers and the UK. UK Italy France Ireland Poland

Finland Rank (out of 12 Sweden Hungary Germany Denmark countries): Euro area-6 Euro Switzerland Netherlands th GDP: 11 (↓2) Source: European Private Equity & Venture Capital Association

73 Figure 4.1.6 Demand and Success in accessing credit , 2016

Figure 4.1.6 shows in Success Rate Demand 2016, some 17% of Irish 40% firms surveyed applied for bank credit. Of these 30% applicants 10% were

20% fully successful in their application. The 10% corresponding Euro area average is 19% showing

SuccessAccessing in Credit 0% tighter lending conditions for SMEs in UK Italy EU28 Spain Latvia France Ireland Ireland. Finland Sweden Germany Denmark Euro area-19 rank: Netherlands Euro area 19 area Euro Demand (19th) Success (15th) Source: ECB SAFE

33 Private equity, which comprises all stages of financing (seed, start-up, expansion, replacement capital and buyouts)

77 July 2017

Figure 4.1.7: Ratio of non-performing loans to total gross loans, 201534

2016 2011 Non-performing loans

40 (this includes all lending,

35 not just business lending) at the end of 30 2016 made up 9% of 25 gross loans in Ireland, 20 down from over 16% 15 five years previously. 10 This compares to an 5

Performing Loans (% Total of Loans) OECD High Income - 0 average of 3.5%. Non UK*

Italy* OECD Rank: Latvia France Ireland Poland Greece Sweden Hungary OECD 33 Denmark th 29 (↑1) Netherlands Switzerland* New Zealand Source: World Bank

Figure 4.1.8 Interest rates for non-financial corporations by loan size (new business), 2017

Irish interest rates on Apr-17 Apr-12 business loans have 4.50 been consistently higher than equivalent Euro area rates. In 3.00 April 2017, the interest rate in Ireland on loans of up to €1 million was more than 74% higher 1.50

Interest Rate Rate (%) Interest than the Euro area average rate for new business; the rate on 0.00 loans of up to €1 million Ire > €1m Euro area > €1m Ire ≤ €1m Euro area ≤ €1m was more than 79% more expensive in Ireland. Rank: n/a Source: ECB

34 Figures are 2015 for Italy, UK and Switzerland.

78 July 2017

4.2 Taxation

Figure 4.2.1: Tax revenue in Ireland by category, 2016

Figure 4.2.1 compares 2016 2011 Irish tax revenues in €20,000 2016 with 2011. Overall, revenues have increased €16,000 by €14bn (41%). Income

) tax receipts -reflecting € €12,000 labour market recovery

€8,000 and a broadening of the Millions ( base- have increased by €4,000 €5.3bn. Between 2011 and 2016 Capital Gains €0 Tax and corporation tax receipts rose by 101% CAT VAT CGT (€7.5bn in 2016) and Customs

Corpo Tax 201% (€695m in 2016) Income Tax Income Excise Duty Excise respectively.

Local Local Property Tax Rank: n/a Source: Department of Finance

Figure 4.2.2: Central government corporate income tax rate (%), 2017

Ireland’s corporation tax 2017 2012 rate remains 40 internationally 35 competitive at 30 12.5%.While Ireland’s 25 rate has remained 20 consistent over recent 15 years, many of our key 10 competitors have 5 reduced their rates (e.g. Corporate Tax Rate (%) Rate Tax Corporate 0 the UK). This chart reflects central statutory US UK

Italy rates – effective rates in Spain Japan Korea OECD France Ireland Poland Finland

Sweden many counties can be Hungary Germany Denmark significantly lower. Switzerland Netherlands New Zealand rd OECD rank: 3 (↓1) Source: OECD

79 July 2017 Figure 4.2.3: Corporation tax receipts (% GDP), 2015

Corporation tax receipts 2015 2010 in Ireland accounted for 5 2.5% of GDP (2.2% of 4 GNP) in 2015, compared with an OECD-31 (2013) 3 average of 2.8%. In the five years to 2015 the 2 OECD-31 average 1 Percentage of GDP corporation tax receipts as a percentage of GDP 0 grew by 6%. US UK Italy Spain Japan

Korea OECD rank: Latvia OECD France Ireland Finland Sweden th Germany Denmark GDP: 13 (↑2) Switzerland Netherlands New Zealand Source: OECD

Figure 4.2.4: Income tax plus employee contributions (% of gross wage earnings) Single, 100% & 167% AW), 2016

For a single person with Single 100% Single 167% no children on either 45 100% or 167% of the 40 average wage, the 35 difference between 30 what the employer pays 25 and what the employee 20 receives has increased 15 10 since 2013. At 167% of % Labour of Costs 5 average wages, the 0 difference in 2016 was 31.4% down from 38.2% US UK Italy Italy Spain

Japan in 2012. OECD rank: Korea Latvia OECD France Ireland Poland Finland

Sweden th Hungary Germany Denmark Single,0 ch, 100%: 28

Switzerland th New Zealand Single,0 ch, 167%: 18 Source: OECD

80 July 2017 Figure 4.2.5: Income tax plus employee contributions (% of gross wage earnings) (Married, 2 children, 100% & 167% AW), 2016

Ireland remains Married 100% Married 167% relatively competitive in 40 terms of the levels of 35 income tax and social 30 security contributions as 25 a proportion of total 20 labour costs. For a 15 married couple with 2 children on a combined 10 income of 167% of the 5 average wage (i.e. a 2

Percentage of Labour Costs 0 earner family), the rate US UK

Italy is below the OECD Spain Japan Korea Latvia OECD France Ireland Poland

Finland average. OECD rank: Sweden Hungary Germany Denmark Married, 2 ch, 100%: 2nd; Switzerland Netherlands th New Zealand Married, 2 ch,167%: 4 Source: OECD

Figure 4.2.6: Marginal rate35 of income tax plus employee contributions less cash benefits (% of gross wage earnings) , 2016

Marginal rates in Ireland Ireland OECD Euro Area 16 are particularly high for 60 individuals earning the 50 average wage or above. 40 Conversely, marginal rates for married 30 couples, regardless of 20 income are lower than 10 Marginal (%) Rate Tax Marginal OECD and Euro area 0 averages. Single, 67% Single, Single, Married, Married, Married, OECD rank: Avg 100% Avg 167% Avg 100% Avg 133% Avg 167% Avg earnings (0 earnings (0 earnings (0 earnings (2 earnings (2 earnings (2 Single, no ch, 100%: child) child) child) children) Children) children) 26th

Married, 2 ch, 100%: 4th Source: OECD

35 The marginal rate refers to the percentage of tax and social contributions paid on each additional unit of income

81 July 2017 Figure 4.2.7: Value added tax gap (% GDP)36, 2014

In 2014 the estimated 2014 2013 VAT gap within the Euro 35 area ranged from the 30 low of 1.24% in Sweden 25 to the high of 37% in 20 Lithuania. As a result of 15 the rate in Ireland falling 10 from 12.9% in 2013 to 5 8.4% in 2014, our EU-22 VAT Gap Gap VAT as a % of GDP to 0 ranking improved th

UK 6 during this period. Italy EU22 Spain Latvia France Ireland Poland Finland Estonia EU22 rank: Sweden Germany Denmark th

Netherlands 6 (↑4)

Source: Eurostat

Figure 4.2.8: Income from Property Taxes37, 2015

2015 2010 Revenues from immovable properties in 4.5 4 Ireland are below the EU 3.5 average. Such revenues 3 amounted to 1.5 per 2.5 cent of GDP in 2015, 2 1.5 below the OECD 1 average of about 1.9 per 0.5 cent of GDP in the

Tax Revenue as%a of GDP 0 corresponding year. In US UK Italy Spain Japan Korea both the UK and France Latvia OECD France Ireland Finland Norway Sweden Hungary Germany Denmark the tax income from Switzerland Netherlands New Zealand property in 2015 equated to 4.1% of GDP. th OECD Rank: 17 (↑1) Source: OECD

36 The VAT Gap is an indicator of the effectiveness of VAT enforcement and compliance measures, as it provides an estimate of revenue loss due to fraud and evasion, tax avoidance, bankruptcies, financial insolvencies as well as miscalculations. The VAT Gap is defined as the difference between the amount of VAT actually collected and the VAT Total Tax Liability (VTTL), in absolute or percentage terms. 37 Tax on property is defined as recurrent and non-recurrent taxes on the use, ownership or transfer of property. These include taxes on immovable property or net wealth, taxes on the change of ownership of property through inheritance or gift and taxes on financial and capital transactions. Empirical work by the OECD suggests a tax and economic growth hierarchy with recurrent taxes on immovable property being the least distortive tax instrument in terms of reducing long-run GDP per capita, followed by consumption taxes and other property taxes as well as environmentally-related taxes, personal income taxes and corporate income taxes.

82 July 2017 Figure 4.2.9: Social security contributions (% GDP), 2015

Social security is 2015 2010 comprised of employee 18 contributions, employer 16 contributions, self- 14 employed, non- 12 employed contributions 10 and some “unallocable” 8 6 contributions. 4 Significantly less 2 revenue was generated Contributions GDO)of (% 0 through social security contributions in Ireland US UK Italy Spain

OECD (3.9% of GDP) than is France Ireland Finland Sweden Hungary Germany Denmark the case across the Switzerland Netherlands South Korea OECD (9.1% of GDP). New Zealand OECD rank: th 26 (↓1) Source: OECD

Figure 4.2.10: Tax rate on low wage earners (Unemployment Trap38), 2015

Figure 4.2.10 shows the 2015 2010 implicit tax rate of 100 taking up employment. 90 80 The Irish tax system has 70 reformed over the 5 60 years to 2015 and now 50 40 provides more 30 incentives for job (%) 20 seekers. The tax rate on 10 0 low wage earners is 71.6% in Ireland UK Italy Spain EU 28

Latvia compared with the Euro France Ireland Poland Finland Sweden Germany Denmark

Implicit TaxRate on Returning to Work area rate 76.5%. Netherlands Euro area 19 area Euro th EU28 rank: 9 (↑5)

Source: Eurostat

38 The unemployment trap measures the percentage of gross earnings lost to taxes when a person becomes employed. This occurs through the loss of unemployment benefits combined with higher tax and social security contributions.

83 July 2017 Figure 4.2.11: Capital Gains Tax, 2014

Figure 4.2.11 2014 2011 benchmarks Capital 50% Gains Taxes across the 40% OECD. In 2014 Ireland had the third highest 30% headline CGT rate in the 20% OCED, and fell 5 places since 2011. The OECD 10% average rate in 2014 was Capital Gains Tax (%) Tax Gains Capital just over 18% - the Irish 0% figure was almost US UK double this at 33%. Spain OECD France Ireland Finland Sweden Hungary Germany Denmark OECD rank:

Netherlands nd New Zealand 32 (↓5) Source: Tax Foundation

84 July 2017 4.3 Physical Infrastructure

Figure 4.3.1: Average annual growth in net capital stock, 2005-201539

Figure 4.3.1 illustrates 0.85 the average annual growth rate in the value 0.55 of Ireland’s fixed assets between 2005 and 2015. 0.25 Overall, net capital stock grew by 0.6% per -0.05 annum. Computer software assets (0.84%) Total Roads Annual Average Growth (%) Rate Growth Average Annual and Office Machinery & Hardware (0.8%) have land hardware structures equipment grown most rapidly over Cultivated assets Cultivated

Other machinery & the ten year period. Office machinery & Computer software Computer Other buildings and buildings Other Dwellings, excluding Dwellings, Rank: n/a Source: Central Statistics Office

Figure 4.3.2: Total inland infrastructure investment as a percentage of GDP40, 2009-2014.

As a percentage of GDP, 2014 2009 Ireland’s inland 2.5 infrastructure 2 expenditure (transport infrastructure) declined 1.5 from 0.8 per cent in 1 2009 t0 0.3 per cent in 2014 and since 2011 has 0.5 been well below the Expenditure (% of GDP) 0 OECD and UK’s level of US UK investment in 2014. Italy Spain Japan Korea Latvia OECD France Ireland Poland Finland Sweden

Hungary OECD rank: Denmark

Switzerland nd Netherlands

New Zealand 32 (↓11 )

Source: OECD

39 The CSO defines ‘Cultivated assets as livestock for breeding such as dairy cattle etc. 40 Infrastructure investment covers spending on new transport construction and the improvement of the existing network. Inland infrastructure includes road, rail, inland waterways, maritime ports and airports and takes account of all sources of financing.

85 July 2017 Figure 4.3.3: Perception of overall infrastructure quality (Scale 1-7), 2016

2016 2011 Despite a strong

7 improvement in perception up until 6 2010, perceptions 5 regarding the overall

7 High Quality7 quality of infrastructure - 4 in the economy remain 3 low in Ireland. 2 Ireland’s score fell over

1 the five years to 2015

Poor Quality Scale 1 and remains below the 0 OECD average. US UK Italy Spain Japan Latvia OECD France Ireland Poland Finland OECD Rank: Sweden Hungary Denmark Germany Korea Rep rd Netherlands

New Zealand 23 (↓3)

Source: World Economic Forum

86 July 2017 4.4 Clusters and Firm Sophistication

Figure 4.4.1 Regional Ecosystem Scoreboard, Median Country Scores, 2016

0.6 The Regional Ecosystem Scoreboard presents a 0.5 composite index to rate the quality of the 0.4 regional entrepreneurial and innovation 0.3 ecosystem that can support cluster 0.2 highest score) development. The most

0.1 recent results indicate the regions ranking in 0 the top 10% of all of the NI UK

Composite Indicator , median national score (0 lowest, 1 EU28 regions are found Spain Latvia France Ireland Poland Finland Sweden

Hungary in the UK (median score Germany Denmark Netherlands

Ireland BMW Ireland (0.546), NI (0.521). In Ireland, the South East Ireland South South Ireland East (0.511) scores ahead of the BMW region (0.496). Rank: n/a Source: European Commission Regional Ecosystem Scoreboard

Figure 4.4.2 Perceived State of Cluster Development, 2015/2016

2015/2016 2010/2011 Figure 4.4.2 presents 7 WEF data provided on

6 the basis of personal assessment of managers 5 in surveyed companies 4 about cluster

3 development in their

existent (1)Well Developed (7) country. In Ireland the - 2

Non weighted average score 1 in 2015/16 was 4.9. This US UK Italy Spain China Japan Korea Latvia France Ireland Poland Finland was above the Euro Sweden Hungary Germany Denmark Singapore Switzerland Netherlands

New Zealand area-19 average score of 4.3. Euro area (average) area Euro Euro area-19 rank: 5th (↑3) Source: World Economic Forum (WEF)

87 July 2017 Figure 4.4.3 European Innovation Scoreboard, Overall ranking, 2016

2015 2010 The EU Innovation

0.90 Scoreboard provides a comparative assessment 0.80 of the research and 0.70 innovation performance 0.60 of EU Member States. 1) - 0.50 The 2016 Scoreboard 0.40 shows that year on year Index (0 0.30 Ireland moved up two 0.20 places from 8th to 6th in

0.10 the overall ranking of EU

0.00 Member States. Ireland EU

UK is classed as an Italy Spain Latvia France Ireland Poland Finland

Sweden innovation follower with Hungary Germany Denmark Switzerland Netherlands an above average performance. EU 28 rank: 6th (-) Source: European Commission

Figure 4.4.4 European Innovation Scoreboard, Performance, Ireland, EU , UK Switzerland, 2016

Ireland EU UK Switzerland Figure 4.4.4 shows 1.00 Ireland’s performance 0.90 across the Measurement

0.80 framework of the

0.70 Innovation Scoreboard relative to the best 0.60 1) - performing country 0.50 Switzerland and the UK Index (0 0.40 and EU. Ireland is strong 0.30 in the innovators and 0.20 economic effects

0.10 dimensions. Ireland is

0.00 behind the EU average in the finance, firm

Innovators investments and Economic effects Firm investments Firm Human resources Human intellectual assets Intellectual assetsIntellectual Research systems Finance and support and Finance dimensions.

Linkages & entrepreneurship & Linkages EU 28 rank: 6th (-) Source: European Commission

88 July 2017 Figure 4.4.5 Public and Business Expenditure on Research and Development as a percentage of GDP, 2015

Business Expenditure Public Expenditure Total Expenditure (2010) There is considerable 4.0 heterogeneity in R&D

3.5 expenditure as percentage of GDP in 3.0 the EU. In 2015, Irish

2.5 expenditure on R&D accounted for 1.51% of 2.0 GDP, below the EU 1.5 average (2.02%). Expenditure asExpenditure a % GDP 1.0 Business expenditure on R&D (BERD) accounted 0.5 for 1.1%, with public 0.0 expenditure accounting EU UK Italy Spain

Latvia for 0.4%. France Ireland Poland Finland Sweden Hungary Germany Denmark Switzerland Netherlands EU 28 rank: Business 10th (-) Public 23rd (↓6) Source: European Commission/Eurostat

Figure 4.4.6 Business sector R&D expenditure by firm type, 2014

Foreign owned All (€M) Foreign-owned (€M) Irish-owned (€M) companies in Ireland €2,500 spent over €1.32 billion on R&D in Ireland in €2,000 2013, accounting for 65% of business €1,500 expenditure on R&D. By comparison, indigenous (Millions) €1,000 € firms spent €703 million on R&D in the same €500 year. The majority of research expenditure €0 occurred in the services 2005 2007 2009 2011 2013 2014 sector (57.3%). Rank: n/a Source: CSO

89 July 2017 Figure 4.4.7 Percentage of Innovative Enterprises, by Size, 2014

All firms Small firms SMEs Large Firms Firms in Ireland were

100 more likely to be

90 innovative (61%)

80 compared to the EU

70 average (49%). Relative

60 performance is strong

50 across all firm sizes.

40 Reflecting the trend at

30 EU level, larger firms

Percentage of all Enterprises 20 tend to be more

10 innovation active. In Ireland the proportions 0

UK are: Small firms (57%), Italy Spain EU 28 Latvia France Ireland Poland Finland

Sweden SMEs (71%), Large Firms Hungary Germany Denmark Switzerland Netherlands (85%). Rank: Euro area All firms (4th) Source: Eurostat

Figure 4.4.8 SMEs introducing product or process innovations as a percentage of all SMEs, 2015

2015 2010 Technological 60 innovation, as measured by the introduction of

50 new products (goods or services) and processes, is a key ingredient to 40 growth. 36% of SMEs in Ireland are reported as 30 having introduced a product or process 20 innovation in 2015. This is above the EU average

10 (31%), however Ireland’s

SMEs introducing product or process innovations as% SMEs of performance is down on an annual basis (41%) 0 EU UK and since 2010 (43%) Italy Spain Latvia France Ireland Poland Finland

Sweden th Hungary Germany Denmark EU 28 rank: 10 (↓3) Switzerland Netherlands Source: European Commission/Eurostat

90 July 2017 Figure 4.4.9 SMEs introducing marketing or organisational innovations as a percentage of SMEs, 2015

2015 2010 Figure 4.4.9 shows the 80 proportion of SMEs in Ireland who introduced 70 a marketing or

60 organisational innovation is high (50%) 50 in an EU context. The EU average is 36%. Previous 40 iterations of the

30 Community Innovation Survey suggest the 20 proportion of SMEs engaging in marketing 10 innovations is greater SMEs introducing marketing or organisational innovations as of %SMEs than organisational 0 EU UK innovation. Italy Spain Latvia France Ireland Poland Finland Sweden

Hungary nd Germany Denmark EU 28 rank: 2 (↑8) Netherlands Source: European Commission/Eurostat

Figure 4.4.10 Sales of new to market and new to firm innovations as a percentage of turnover, 2015

2015 2010 Figure 4.4.10 shows 30 sales as a percentage of turnover attributed to of 25 new/ significantly improved products and 20 includes both products which are 15 only new to the firm and products which are also 10 new to the market. The latest Irish data (from 5 2013) was 9.3%, down

Sales of new to market and new to firm innovations as% of turnover from 12.6% in 2008. 0

EU The EU average in 2015 UK Italy Spain Latvia France Ireland Poland Finland Sweden

Hungary was 12.4% also slightly Germany Denmark Switzerland Netherlands down on 2010 (13.1%). EU 28 rank: 20th (↓4) Source: European Commission/Eurostat

91 July 2017 Figure 4.4.11 Medium and high-tech product exports as a percentage of total product exports,2015

2015 2010 Creating, exploiting and 80 commercialising new technologies are vital for 70 competitiveness. 60 Medium and high technology products 50 exports are key drivers

40 for economic growth and are generally a 30 source of high value tech product exports as % of total product exports product of total as % exports tech product - 20 added and well-paid employment. In Ireland 10 52% of product exports Medium and high 0 are classified as EU UK

Italy medium/high tech Spain Latvia France Ireland Poland Finland Sweden Hungary Germany Denmark compared with an EU Switzerland Netherlands average of 55%. EU 28 rank: 14th (↑4) Source: European Commission/Eurostat

Figure 4.4.12: Enterprises with Fast Fixed Broadband as % of total Enterprises, 2015

Figure 4.4.12 shows the 2016 2014 percentage of 70 businesses with a fixed 60 fast broadband 50 connection. Between 40 2014 and 2016 the percentage of Irish 30 businesses with such a 20 (%) connection increased 10 from 26% to 42%. The 0 OECD-29 average in EU UK 2016 was 35% Italy

Spain th Latvia France Ireland Poland Finland Estonia OECD rank: 10 (↑4) Sweden Enterprises with Fast Fixed Broadband Broadband Fixed Fast with Enterprises Germany Denmark OECD-29

Netherlands Source: OECD

92 July 2017 4.5 Knowledge and Talent

Figure 4.5.1: Educational attainment of population aged 25-64 by highest level of education (%), 2015

Pre-Primary, Primary and Lower Secondary Upper Secondary and Non-Tertiary Tertiary Figure 4.5.1 shows the

100% proportion of the working age population 80% with tertiary (third level) 64 - level education has 60% increased from 36% in 2009 and to 43% in 40% 2015. The OECD average is 36%. The % Population of aged 25 20% proportion with just pre- primary, primary or 0% lower secondary is US UK Spain

Japan below the OECD Korea OECD France Ireland Poland Finland Sweden Hungary Portugal Germany Denmark Euro Area Euro average. OECD rank: Switzerland Netherlands New Zealand Upper-secondary (24th), Tertiary (7th) Source: OECD

Figure 4.5.2: Annual expenditure on educational institutions, per student ($US PPP),2013

Primary Secondary Tertiary Ireland spends more per

$30,000 student at secondary level than the OECD 32

$25,000 average but 6.5% and 14% less at both primary and tertiary level. The $20,000 gap between Ireland and Euro area and US/UK $15,000 expenditure is particularly pronounced $10,000 at tertiary level. US$PPP per Student per Annum OECD rank: $5,000 th Primary: 19 (↓6) th $0 Secondary: 14 (↓6) Ireland OECD Euro Area 14 United Kingdom United States th Tertiary: 19 (↓3) Source: OECD

93 July 2017 Figure 4.5.3: Breakdown of tertiary educational expenditure,2013

Figure 4.5.3 highlights Public Private how tertiary education 100% in Ireland and the Euro area is primarily funded 80% by the public sector. In Ireland In 2013, the breakdown of total 60% tertiary expenditure on education in Ireland was 40% 78% public: 22% private. The corresponding

Percentage of Expenditure 20% breakdown for the UK was 57% public: 43% private. 0% OECD rank: Public:14th US UK OECD Ireland Euro Area (↓3 on 2012) Private:18th (↑2 on 2012) Source: OECD

Figure 4.5.4: Average annual hours of tuition by subject at Primary Education, 2016

Reading, writing and literature Mathematics Natural sciences Other In 2015, Irish primary school students received France more hours of tuition in Hungary maths than the average Norway

Euro Area 13 student across the

Germany OECD countries. Despite

Japan the limited time spent

Spain on science tuition, Irish

Finland students spent more

OECD 26 compulsory time in the

Korea classroom than the

Denmark OECD average.

Ireland OECD rank: Maths Poland hours: 9th (↑6 on 2015) 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Science hours: 25th (- on % of Total Tuition Hours 2015)

Source: OECD

94 July 2017 Figure 4.5.5: Percentage of population aged 25-64 that has at least upper secondary education, 2015

Some 80% of 25-64 year 25-64 year-olds 25-34 year-olds olds had attained at 100 least upper secondary education in Ireland in 80 2015 compared with 91% of 25-34 year old 60 cohort. Ireland surpasses the OECD 40 average attainment for 20 both cohorts. In all countries, more females Percentage of the Population 0 complete secondary

US education than males. UK Italy Spain Korea OECD France Ireland Poland

Finland OECD rank: Sweden Hungary Germany Denmark th 25-34 yr. olds: 8 Switzerland Netherlands New Zealand Euroa area 16 area Euroa 25-64 yr. olds: 18th Source: OECD

Figure 4.5.6: Early school leavers as a percentage of population aged 18-24, 2016

Figure 4.5.6 measures 2016 2011 the percentage of the 30 population aged 24 - 25 between 18 and 24 who have attained, at most, 20 lower secondary 15 education. Ireland has made significant 10 progress in this area. In 5 2016, 6.3% of this age 0 cohort was classified as early school-leavers, Italy EU28

Spain down from 10.8% in France Ireland Poland Finland Sweden Percentage of Population Aged 18 Hungary 2011, reflecting higher Germany Denmark Switzerland Netherlands Euro area 19 area Euro retention rates in

secondary education. EU 28 rank: 7th (↑7) Source: Eurostat

95 July 2017 Figure 4.5.7: Scientific, mathematical and reading literacy of 15 year olds, 2016

Irish PISA scores for Maths Reading Science maths, reading and 540 science have improved since 2009. On average, 520 Irish students score 500 above the OECD-32 in all 3 categories. Scores 480 in maths in particular, 460 however, lag leading

Index of Literacy performers. Males 440 outperformed females in maths and science but 420 Irish females performed US UK

Italy better in terms of Spain Japan Korea Latvia OECD France Ireland Poland Finland Sweden

Hungary reading. OECD rank: Germany Denmark th Switzerland Netherlands Euro area 16 area Euro Maths:12 (↑1 on 2012) New Zealand rd Reading:3 (↑1 on 2012) th Science:13 (↓5 on 2012) Source: OECD

Figure 4.5.8: Average annual hours of tuition in lower secondary, by subject, 2016

More time is dedicated Reading, writing and literature Mathematics Natural sciences Other to science tuition (15%) Finland than to maths (12%) in Japan Irish Lower Secondary Ireland education. The Korea percentage of tuition Hungary time in Ireland for Maths Germany is in line with the OECD EU22 OECD average but for Science Poland it exceeds this average Latvia by 35%. France OECD rank: Spain th Denmark Maths hours:18 (↑8 on

2015) 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% rd Reading hours: 23 (↑5 % of Total Tuition Time on 2015)

Source: OECD

96 July 2017 87 Figure 4.5.9: Population by age cohort that has at least third level education , 2014

There is significant 55-64 45-54 35-44 25-34 inverse correlation in Ireland between Germany educational attainment and age; while a lower Euro Area 15 proportion of 45-54 and 55-64 year olds have OECD attained third level US education than the OECD average, a UK greater proportion of younger cohorts have Ireland third level qualifications than is the case in the 0 10 20 30 40 50 60 OECD. OECD rank: th Percentage of the Population 55-64 yrs:15 (↑4 on th 2013) ; 25-34 yrs:4 (↑5 on 2013) Source: OECD

Figure 4.5.10: STEM graduates (% of Total Bachelor Graduates), 2015

As a percentage of total Science & maths ICT Engineering & manufacturing undergraduates, Irish 40 higher education and 35 further education 30 institutes provide more Science & maths and ICT 25 graduates than the EU27 20 average. However, the 15 number of engineering 10 graduates Ireland 5 produced is significantly % Total of Bachelor Grads 0 below the EU27 average. EU27 rank: Science & UK

Italy th

Spain Maths:4 (↑2 on 2014); Latvia EU 27 Ireland Poland Finland

Sweden th Hungary

Denmark ICT:4 ( 1 on 2014) Germany ↑

Switzerland th Netherlands Engineering: 18 (↑1 on 2014) Source: Eurostat

97 July 2017 Figure 4.5.11: Lifelong learning (as a percentage of 25-64 year olds), 2016

2016 2011 Figure 5.4.11 shows the percentage of people 40 aged 25-64 in receipt of 64 - 35 education (both formal 30 and non-formal). Ireland 25 (11.5%) ranks below the 20 Euro area 19 (16.5%) and 15 EU-28 (16.3%) averages. 10 However, participation has increased modestly 5 since 2009. 0 EU 28 rank: UK Percentage o the Population Aged 25 Italy

EU28 nd Spain Latvia France Ireland Poland 22 (↓5) Finland Sweden Hungary Germany Denmark Switzerland Netherlands Euro area 19 area Euro Source: Eurostat

Figure 4.5.12: European Digital Economy and Society Index, 2017

Connectivity Human Capital Ireland ranks 8th in the Use of Internet Integration of Digital Technology EU DESI 2017. Ireland Digital Public Services performs well in 80 integration of digital 70 technologies by 60 businesses, mostly

50 because many SMEs

40 embraced e-commerce. Internet users use high- 30 Weighted Score Weighted speed infrastructures 20 and make good use of 10 online public services. 0 Ireland's main challenge UK Italy Spain EU 28 Latvia is to equip more than France Ireland Poland Finland Sweden Hungary Germany Denmark half of the population Netherlands with at least basic digital skills. EU 28 rank: 8th (-) Source: Eurostat

98 July 2017 Figure 4.5.13: European Digital Economy and Society Index, 2017

Individuals who have no overall digital skills 44% of persons in Individuals who have low overall digital skills Ireland report as having Individuals who have basic overall digital skills advanced (25%) or basic Individuals who have above basic overall digital skills (19%) digital skills. This 100 90 is below the Euro area 80 average (57%). The 70 proportion of the 60 population in Ireland 50 40 who report to having 30 low overall digital skills 20 (37%) is the highest in 10 0 the EU and above the

UK Euro area average Italy Spain Latvia France Ireland Poland Finland Sweden Hungary % the of total number of individuals aged 16 to 74 Germany Denmark (24%). Euro area Euro Netherlands EU 28 rank: Individuals who have low overall digital skills (28th) Source: Eurostat

99 July 2017

Chapter 5 Essential Conditions

100 July 2017 Essential Conditions A range of factors which are either beyond the immediate reach of policy makers (such as demographic effects) or which are determined by institutional effectiveness or other exogenous factors (e.g. the global economic climate) but which have a significant impact upon relative competitiveness are considered in this chapter. . Institutions: The quality of institutions has a strong bearing on competitiveness and growth. Institutions influence investment decisions and play a key role in the ways in which societies distribute the benefits and bear the costs of development strategies and policies. While difficult to benchmark internationally, indicators in this section address government and public sector effectiveness and ease of tax compliance. . The World Bank's Doing Business index assesses regulations affecting SMEs and measures regulations applying to companies throughout their life cycle. In 2017, Ireland is ranked 18th overall and 5th in the Euro area, a decline of 1 place from last year. Figure 5.1.1 shows that while Ireland has a comparatively good enterprise environment conductive to doing business, the country falls behind the UK in a number of areas, such as dealing with construction permits, getting electricity and trading across borders. There is significant room for improvement in the area of enforcing contracts. . Figure 5.1.3 shows that Ireland is ranked in the top ten in terms of perceptions of judicial independence, protection of minority shareholders, strength of investor protection and property rights. Ireland's ranking has improved since 2011 and is above the OECD average. Ireland’s performance in terms of perceptions of government effectiveness has also improved since 2010 (Figure 5.1.4). The perceptions of Ireland’s quality of public services, quality and independence of the civil service, quality of policy formulation and implementation are above the OECD average. Figure 5.1.5 shows Ireland continues to perform strongly in terms of time to prepare and file tax returns and pay taxes. . Ireland's trade in services is relatively open. This is measured by the Services Trade Restrictiveness Index (Figure 5.1.6) which helps identify which policy measures restrict trade across 19 major services sectors. Ireland's index is lower than the OECD average in all sectors. . Macroeconomic sustainability: It is important to note that this pillar evaluates the stability of the macroeconomic environment; it does not directly take into account the way in which public accounts are managed by the government. A range of indicators are monitored under this heading, including the components of growth, government finances (debt, deficit,) and overall debt to income ratios.

o Following annual GDP growth of 8.5 per cent and 26.3 per cent in 2014 and 2015 respectively, Eurostat estimates that in 2016 the Irish economy is the fastest growing economy for the third year in a row with a GDP growth rate of 5.2 per cent. The European economy continued to expand at a steady pace in 2016 and initial estimates indicate that GDP grew by 1.8 per cent in the Euro area and by 1.9 per cent in the EU in 2016. In terms of our main trading partners outside of the Euro area, GDP growth in both the UK and US declined year-on-year in 2016 to 1.8per cent in the UK (-0.4%) and 1.6 per cent in the US (-0.8%). Since both countries are major export destinations for Irish products and services, their economic performance remains particularly important. Ireland’s GDP per capita remains substantially above the euro area average (+44.4%) and is the second highest in the EU after Luxembourg.

o Preliminary national accounts data indicates that in 2016 the principle contribution to economic growth came from domestic demand (investment and consumer spending) (Figure 5.2.1). Increasing level of investment in intangible assets, particularly intellectual property services of multinationals, and building and construction investment have been the main drivers of

101 July 2017 investment growth (+9.1%). The strong improvement in the labour market has helped drive the increase in consumer spending (+1.7%). o There is a shift from the trend during the recession period, where net exports were the main component of economic growth. The weaker value of the sterling had a negative impact on export growth. In addition, the activities of multinationals have distorted the impact of net exports somewhat. The decline in contract manufacturing and increased imports of intangible assets by multinational companies undermined the impact of net export as a factor for economic growth (-6.4%). In terms of output, Figure 5.2.11 shows that all sectors enjoyed increases in their gross value added, with the biggest increase of 87 per cent recorded in the industry sector. o As shown in Figure 5.2.1, in the years preceding the economic crash, growth was driven by unsustainable increases in consumer expenditure and investment. During the recession, exports were the key driver of growth. Exports in Ireland increased from 103 per cent of GDP in 2010 to 124 per cent in 2015. Ireland has the second highest level of exports as a percentage of GDP in the OECD after Luxembourg. While Ireland’s current account was in deficit in the fourth quarter of 2016 (largely due to an increase in research and development service imports), the annual current account is in surplus, indicating that Ireland is paying its way in the world. Ireland’s balance of payments current account expressed as a percentage of GDP 3 year average (5.5%) is above the euro area of 2.2 per cent (Figure 5.2.4). o Stable and sustainable public finances are a prerequisite for competitiveness. The focus of policy in reducing the general government deficit has been effective and the general government deficit continued to fall in 2016 to 0.6 per cent of GDP down from 2 per cent in 2015 and below the threshold of 3 per cent of GDP set out in the Stability and Growth Pact. The euro area recorded a deficit of 1.5 per cent with 8 States recording surpluses (Figure 5.2.5). o The Fiscal Stability Treaty requires that the general government budget must be balanced or in surplus. As a result, the new fiscal anchor is the achievement of a structural deficit of 0.5 per cent of GDP. The Department of Finance’s estimates indicate that the structural balance in 2016 was - 1.9 per cent of GDP, and that based on current trajectory and assumptions within Budget 2017, Ireland is on track to reach the target of 0.5 per cent in 2018. o Economic growth has contributed to improvements in the debt-to-GDP ratio in 2016. While the debt–to GDP ratio remains high, Figure 5.2.10 shows it has decreased substantially from its peak of 119.5 per cent in 2012-2013 to 75.4 per cent in 2016. Recognising that metrics derived with respect to ratios-to-GDP may be skewed due to on-shoring of intellectual property, and in order to ensure that public finances are in a position to withstand Brexit related shocks, the Department of Finance has set an additional mid-term goal of achieving debt-to-GDP ratio of 45 per cent of GDP. o Reflecting improved economic and fiscal positions, Irish bond yield movements are continuing to trade in line with core European sovereign yields but remain low from a historical perspective (Figure 5.2.6). The yield on a ten year Irish government bond was trading at around 1 per cent in 2016, close to the French and German bond yield movements. o In 2016, Irish Government revenue represented 27.5 per cent of GDP. Expenditure amounted to 28% of GDP. Figure 5.2.7 shows that across the EU, 'Social Protection' accounts for the major share of Government spending, followed by 'Health', 'General Public Services', and 'Education'. In line with EU rules, future increases in public expenditure will be based on the potential growth rate of the economy and safeguarded from dependence on cyclical revenues. o Moving beyond the public finances, Figure 5.2.12 shows Irish households continued to reduce debt as a proportion of income in 2016. Notwithstanding this positive trend, they are still the

102 July 2017 fourth most indebted households in the EU. The indebtedness of the business sector (non- financial corporations) also remains evident with the Irish level the third highest in the EU (Figure 5.2.13) . Endowments The productivity-based view of competitiveness emphasises the importance of endowments - that is natural resources, geographic location, demographics and size, as key dimensions in determining national competitive performance. Every country has a range of natural endowments pre-determined by geography (e.g. natural resources). While such factors cannot easily be impacted by policy, it is important to be cognisant of their impact on competitiveness. Factors such as demographic trends (i.e. population growth), labour force participation, migration and population density are examined here.

o The evolution of the dependency ratio is a crucial element in determining the long-term funding and sustainability of Ireland’s healthcare and pension systems. OECD population projections indicate that the age profile of the population across the OECD countries, including Ireland is increasing. While Ireland’s birth rate decreased in the period 2010 – 2015, Figure 5.3.2 shows the Irish rate is considerably higher than the birth rate in the Euro area. In 2016 Ireland continued to have the youngest population in the EU. The Irish median age of 36.6 is increasing, but remains well below the median in the EU of 42.6 years (Figure 5.3.1). Over the period 2011-2016, the median age of the Irish population has increased by 2 years. Ireland had the fourth highest percentage increase in population (3.4%) between 2011 and 2016 in the EU (Figure 5.3.6), behind Luxembourg and Cyprus. The combined effect of natural increase and positive net migration resulted in an overall increase in the population of 38,400 bringing the population estimate to 4.67 million in April 2016.

o As Figure 5.3.3 shows, at 21.2 per cent Ireland has the 7th lowest old age dependency ratio in the OECD, and the 2nd lowest in Europe. Ireland's dependency ratio is increasing steadily but is still expected to be below the OECD average in 2025. Ireland’s rising dependency ratio increases the importance of expanding labour force participation and employment. Despite the substantial percentage increase in the population (12%) between 2006 and 2016, and the improvement in Ireland’s labour market, the labour force growth (active population, 15 years and over) for the same period is only 2.57 per cent, below the EU average of 4.19 per cent.

o Apart from social loss associated with emigration, outward migration of skilled labour causes loss of talent which is important for achieving sustainable competitiveness). Total emigration from Ireland continues to decline and in 2016 is estimated at 76,200 (Figure 5.3. 4). The number of immigrants increased to 79,300, resulting in total net inward migration of 3,100. CSO data shows that while in the period 2011-2015 more third level qualified people left Ireland than arrived in the country, in 2016 this trend is reversed, which represents a gain of skills for the Irish economy (Figure 5.3.5). Notwithstanding this positive trend, the figure of the emigrants with third level qualifications remains high (45% of all emigrants).

o Population density has a direct impact on competitiveness – particularly through its impact on infrastructure networks and service delivery costs. Ireland is one of the most sparsely populated countries in Europe. In 2015 Ireland's population density was 67.9 persons per km2, up from 60.8 persons per km2 recorded in 2005 (Figure 5.3.7). There is significant divergence across regions with density in Dublin estimated at 1427.6 persons per km2 compared to 32.1 persons per km2 in the West. Ireland’s rate of urbanisation, while increasing, is relatively low. In 2016, 62.7 per cent of the Irish population lived in urban areas, a marginal increase of 0.7 per cent compared to 2011. The rural population constitutes 37.3 per cent of the total population. The fact, that 44 per cent of

103 July 2017 the urban population lives in Dublin is an important consideration from a planning and development perspective.

104 July 2017 5.1 Institutions

Figure 5.1.1 Ease of doing business rankings41, 2017

01 The World Bank's Doing Business accesses 10 regulations affecting

20 SMEs, and measures regulations applying to 30 companies throughout

40 their life cycle. In 2017, Ireland is ranked 18th, a 50 fall of 1 place from last year. Ireland is 5th in the 60

World Bank Doing Business rank (1 to 219) Euro area behind US UK Italy Spain Latvia OECD

Japan Estonia, Finland, Latvia France Ireland Poland Finland Sweden Hungary Germany Denmark

Singapore and Germany but ahead Switzerland Netherlands South Korea New Zealand of Netherlands and Spain. OECD rank: 13th Source: World Bank

Figure 5.1.2 Ease of doing business Ireland and the UK, 2017

UK Ireland Our top 20 ranking indicates that Ireland 10 10 has a comparatively 20 good enterprise 30 40 environment in which to 50 do business. However, 60 70 Ireland falls behind the 80 UK in terms of dealing 90

World Bank DoingBusiness rank 100 with construction permits, getting electricity and trading

Paying taxes Paying across borders. There is Getting credit investors permits

Getting electricity a significant room for Starting a business Enforcing contractsEnforcing Protecting minority Registering property Resolving insolvency Trading across borders Ease of Doing Business improvement in the area Dealing with construction Dealing with of enforcing contracts. OECD rank: 13th

Source: World Bank

41 Due to changes in methodology, it is not possible to accurately compare performance over time.

105 July 2017 Figure 5.1.3 Perception of institutional effectiveness, 2016

2016 2011 According to WEF a 6.5 country's institutional environment (legal and 6 administrative 5.5 framework) is a major

7) driver of

- 5 competitiveness. Ireland 4.5 Score (0 Score is ranked in the top ten

4 in terms of perceptions of judicial 3.5 independence, 3 protection of minority US UK Italy Brazil Spain China Japan Latvia OECD shareholders, strength France Ireland Poland Finland Sweden Hungary Germany Denmark Singapore of investor protection Korea, Rep. Switzerland Netherlands New Zealand and property rights. Ireland's performance has improved since 2011 and is above the OECD average. OECD rank: 7th (↑7) Source: World Economic Forum

Figure 5.1.4 Perception of Government effectiveness, 2015

2015 2010 Figure 5.1.4 shows 100 perceptions of the quality of public 90 services, the quality and 80 independence of the

70 civil service, the quality of policy formulation 60 and implementation. (lowest) to 100 (highest) 50 Ireland's performance has improved since 2010 40 Percentile rankamong all countries (ranges from 0 and while behind a US UK Italy Brazil Spain Japan Latvia OECD China France Ireland Poland

Finland number of countries is Sweden Hungary Germany Denmark Singapore Switzerland Netherlands South Korea above the OECD New Zealand average. OECD Rank: 14th (↑5) Source: World Bank, Worldwide Governance indicators

106 July 2017 Figure 5.1.5 Time to prepare and pay tax, 2016

Figure 5.1.5 shows the 2016 2011 time required for tax 350 compliance. Compliance 300 250 activities relating to 200 corporate, labour and 150 consumption taxes are 100 considered - these

Hours per per Hours annum 50 include time taken to 0 prepare tax figures, US UK

Italy complete and file tax Israel Spain OECD Japan France Ireland Poland Finland Sweden

Hungary returns, and paying Germany Denmark Switzerland South Korea

Netherlands taxes. Ireland continues New Zealand to perform strongly in this indicator. OECD rank: 3rd (-) Source: World Bank/PWC

Figure 5.1.6 Services Trade Restrictiveness Index, 2016

OECD Ireland The Services Trade Construction Restrictiveness Index Computer helps identify which Insurance policy measures restrict Commercial banking trade across 19 major Distribution services sectors. The Courier index quantifies Rail freight transport restrictions on foreign Road freight transport entry, restrictions to Maritime transport Air transport movement of people, Telecom barriers to competition Legal and regulatory Engineering transparency. Ireland's Architecture index is lower than the Accounting OECD average in all Logistics cargo-handling sectors, indicating that 0 0.1 0.2 0.3 0.4 0.5 Ireland's trade in STRI (0=open, 1=closed) services is relatively open. Rank: n/a Source: OECD

107 July 2017 5.2 Macroeconomic Sustainability

Figure 5.2.1 Components of Irish economic growth, 1999-2016

Consumption Government Investment Net Exports Prior to the economic 20% crash, growth was 18% 16% driven by unsustainable 14% increases in consumer 12% expenditure and 10% investment. During the 8% 6% recession, exports were 4% a key driver of growth 2% (+4.6% in 2010). Growth 0% in 2016 is being driven Percentage of GDP growth of Percentage -2% -4% mainly by significant -6% increases in investment -8% (+9.1%) and consumer -10% -12% spending (+1.7%), while the contribution of 2011 2013 2015 2007 2012 2001 2010 2014 2003 2016 2005 1999 2002 2000 2008 2004 2006 2009 export had declined

(-6.4%). Rank: n/a Source: CSO

Figure 5.2.2 Exports of goods and services as a percentage of GDP, 2015

140.00 Y2015 Y2010 The Irish economy is 120.00 very open with high levels of trade in both 100.00 goods and services. 80.00 Exports in Ireland increased from 103% of 60.00 GDP in 2010 to 124% in

Percentage of GDP 40.00 2015. Ireland has the

20.00 second highest level of exports as a percentage 0.00 of GDP in the OECD US UK

Italy after Luxembourg. Spain China Japan OECD France Ireland Poland Finland Sweden

Hungary nd Germany Denmark Euro area Euro OECD rank: 2 (-) Switzerland Netherlands South Korea New Zealand

Source: OECD

108 July 2017

Figure 5.2.3: Harmonised competitiveness indicator (HCI) for Ireland, Jan 2005-Jan 2017

Nominal HCI Real HCI From March 2014 to January 2015, renewed 130 euro depreciation provided a boost to Irish 120 cost competitiveness. The latest data up to January 2017 show that 110 the nominal HCI decreased marginally by 100 1 per cent, primarily as a result of exchange rate

90 movements, whereas real HCI improved by 1

Improvement Jan 2005=100 Disimprovement 2005=100 Jan Improvement percent over the 80 previous 12 months. Jul-11 Jul-13 Jul-15 Jul-07 Jul-12 Jul-10 Jul-14 Jul-16 Jul-05 Jul-08 Jul-09 Jul-06 Rank: N/a Jan-17 Jan-11 Jan-13 Jan-15 Jan-07 Jan-12 Jan-10 Jan-14 Jan-16 Jan-05 Jan-08 Jan-06 Jan-09 Source: European Central Bank

Figure 5.2.4 Balance of payments, current account (€millions), 2010-2016

€30,000 The balance of payments current €25,000 account is a measure of Ireland's financial flows €20,000 with the rest of the

€15,000 world. Ireland’s current )

€ account was in deficit in €10,000 the fourth quarter of

Millions ( 2016 (-€11,132m). This is €5,000 largely related to an

€0 increase in research and development service -€5,000 imports in the quarter. For the year 2016, the -€10,000 2010 2011 2012 2013 2014 2015 2016 current account surplus is €12,544m, a decrease of €13,613m on 2015. Rank: n/a Source:CSO

109 July 2017 Figure 5.2.5 Balance of Payments Current Account as percentage of GDP 3 year average

2016 2011 The balance of payments current 10 account provides 8 information about the 6 transactions of the EU 4 States with the rest of 2 the world. Figure5.2.5

0 indicates that since 2011 Ireland's current account -2 % of GDP 3 year average has moved from deficit -4 to surplus. The figure is -6 significantly above the UK Italy

Spain EU average and Ireland Latvia EU -28 France Poland Ireland Finland Euro-19 Sweden th Hungary Denmark Germany is currently ranked 6 in Netherlands the EU. Euro area-19 rank: th 5 (↑14) Source: Eurostat

Figure 5.2.6 Ten-year government bonds (Interest Rates), 2010 -201742

Germany Spain France Greece Ireland Portugal Reflecting improved

35 economic and fiscal positions, Irish bond 30 yield movements are continuing to trade in 25 line with core European ) sovereign yields. The 20 yield on a ten year Irish

15 government bond peaked at 12% in 2011; it 10 has been trading at Interest rate (percentage rate Interest around 1% in 2016 and 5 the first quarter of 2017.

0 Rank: n/a Jul-11 Jul-13 Jul-15 Jul-12 Jul-10 Jul-14 Jul-16 Jan-17 Jan-11 Jan-13 Jan-15 Jan-12 Jan-10 Jan-14 Jan-16 Apr-17 Apr-11 Apr-13 Oct-11 Oct-13 Apr-15 Oct-15 Apr-12 Apr-10 Apr-14 Apr-16 Oct-12 Oct-10 Oct-14 Oct-16 -5 Source: ECB

42 Owing to market closure in Greece no data are available for July 2015.

110 July 2017

Figure 5.2.7 General Government expenditure by function, 2015

Ireland Euro area-19 Across the EU, 'Social

45.0 Protection' accounts for 40.0 the major share of 35.0 30.0 Government spending, 25.0 20.0 followed by 'Health', 15.0 'General Public 10.0 5.0 Services', and 0.0 'Education'. As a percentage of total Health

Defence Government Education safety Culture Percentage of totalGovt expenditure services protection community Environment Housing and Housing expenditure, Ireland General public Recreation and Recreation Public order and order Public Economic affairs Economic Social protection spends more on health (19.3%), economic affairs (11.5%) and education (12.4%). Rank: n/a Source: Eurostat

Figure 5.2.8 Total government revenue, expenditure and deficit, 2016

Total income Total Expenditure Net lending/borrowing In 2016, Irish Government revenue 60 represents 27.5% of 50 GDP, a decline from 33.3% recorded in 2011. 40 Expenditure also decreased from 46% in 30 2011 to 28% of GDP in 20 2016. Ireland's deficit declined significantly in Percentage of GDP 10 recent years and in 2016 amounts to -0.6% of 0 GDP (down from -12.6% -10 in 2011). UK

Italy Euro area-19 rank: EU28 Spain Latvia France Poland Ireland Finland Sweden Hungary Denmark Germany Deficit: 10th Netherlands Euro-area-19 Source: Eurostat

111 July 2017

Figure 5.2.9 General government deficit/surplus (as a percentage of GDP), 2016

2016 2011 Figure 5.2.9 shows the general government 2 deficit in Ireland 0 continued to fall in 2016 -2 to 0.6% of GDP, down -4 from 2% in 2015 and -6 significantly below the

(% GDP) -8 deficit level of 12.6 in 2011. The Euro-area19 -10 recorded a deficit of -12

General government deficit/surplus 1.5% with 8 States -14 recording surpluses. UK Italy EU28

Spain Euro area-19 rank: Latvia France Ireland Poland Finland Sweden Hungary Germany Denmark 10th (↑9) Netherlands Euro-area-19 Source: Eurostat

Figure 5.2.10 General government gross debt (as a percentage of GDP), 2016

Ireland's debt as a 2016 2010 140 percentage of GDP increased significantly in 120 the period 2009-2012

100 partly as a result of the cost of the capital 80 support provided by the 60 State to several financial institutions, and partly Percentage of GDP 40 due to the Exchequer 20 running large deficits.

0 Ireland's debt level

UK peaked at 119.5% in Italy Spain Latvia EU-28 France Ireland Poland Finland 2012-2013 but has Sweden Hungary Germany Denmark decreased substantially. Netherlands Euro area-19 Euro At 75.4% in 2016, it is below the UK 89.3% and the euro area 89.2%. Euro area-19 rank: 10th (↑5) Source: Eurostat

112 July 2017

Figure 5.2.11 Gross value added at constant factor cost by sector, Ireland, 2010-2015

In the period 2010 - Agriculture, forestry and fishing Industry 2014, the gross value Building and construction Distribution, transport, software and communication added contributed by the sectors, as shown in Software and communications Other services (including rent) 90,000 Figure 5.2.11, is relatively stable. In 2015 80,000

) all sectors experienced

€ 70,000 positive growth. The 60,000 industry sector recorded 50,000 a growth of 97%, while 40,000 the other main sectors 30,000 had annual increases 20,000 Grossvalue added millions ( ranging from 5.7% to 10,000 10.4%. 0 Rank n/a 2010 2011 2012 2013 2014 2015 Source: CSO

Figure 5.2.12 Gross debt-to-income ratio of households, 201543

2015 2010 Between 2010 and 2015, 300 Irish households reduced their debt as a 250 proportion of disposable 200 income by 53% to

150 153.01%- the largest reduction in the EU. 100 Aggregate household Gross debt to income (%) 50 indebtedness has declined in Ireland in 0

UK recent years in nominal Italy Spain Latvia France Ireland Poland Finland Sweden Hungary Germany Denmark terms, and as a share of Netherlands Euro area-19 Euro household income. Euroarea-16 rank: 14th(↑1) Source: Eurostat

43 Euro area-16 excludes Greece, Luxembourg and Malta. Information for France is provisional

113 July 2017

Figure 5.2.13 Non financial corporations debt-to GDP ratio, 2011-2016

Ireland Euro area 19 High indebtedness has a

300 negative impact on companies' performance and renders them 250 vulnerable to revenue and interest rate shocks. 200 The Irish business sector (NFC) is the third most 150 indebted in the EU and euro area. Ireland’s 100 NFC’s debt is largely affected by the activities 50 of the multinationals; a proportion of the debt is 0 associated with non- 2011Q3 2012Q3 2013Q3 2014Q3 2015Q3 2016Q3 residential loans. Euro area-19 rank44: (-) Source: European Central Bank

44 Due to lack of data in 2011 and 2012, the ranking is based on Q32013.

114 July 2017 5.3 Endowments

Figure 5.3.1 Median population age, 201645

2016 2011 Due to ageing and

50 changes in family 48 formation, the median 46 age of the Irish and EU 44 population has steadily 42 increased in the last 40 decades. In 2016 Ireland

Age (years) 38 continues to have the 36 youngest population in 34 the EU (median age 32 36.6). The median age of 30 the EU population was UK Italy EU28 Spain 42.6. Latvia France Ireland Poland Finland Sweden

Hungary st Denmark Germany Euro area-19 rank: 1 (-) Switzerland Netherlands Euro area-19 Euro Source: Eurostat

Figure 5.3.2 Crude Birth Rate, 201546

2015 2005 2010 The crude birth rate is 18.0 the ratio of the number

16.0 of live births during the

14.0 year to the average

12.0 population in that year.

10.0 Ireland has consistently topped the EU rankings. 8.0 The birth rate in 2015 is 6.0 14, considerably higher 4.0 Crude birth rate per 1000 persons 1000 per rate birth Crude than the birth rate in the 2.0 EU area-19 (9.7). 0.0 However, Ireland’s birth UK Italy Spain Latvia EU-28 France Ireland Poland rate figure has Finland Sweden Hungary Germany Denmark

Netherlands decreased in the period Euro area-19 Euro 2010 – 2017. Euro area-19 rank: 1st (-) Source: Eurostat

45 Data for EU-28, EU-19 and France is provisional. Data for Portugal and UK is estimated 46 Data for Ireland and EU-19 is provisional, for UK - estimated and for EU28 - estimated provisional.

115 July 2017

Figure 5.3.3 Old age dependency ratio, 2015

2015 2000 2025 The age dependency 60.0 ratio shows the ratio of persons older than 64 to 50.0 the working-age

age population (%) population. At 21.2%, - 40.0 Ireland has the 7th

30.0 lowest ratio in the the working - to - OECD, and the 2nd 20.0 lowest in Europe. Our dependency ratio is 10.0 increasing steadily but is

Ratio of older Ratio dependentsof expected to be below 0.0 the OECD average in US UK Italy Brazil Spain China Japan OECD France Ireland Poland Finland Sweden

Hungary 2025. Germany Denmark Switzerland Netherlands South Korea New Zealand OECD rank: 7th (-)

Source: OECD

Figure 5.3.4 Net migration (000s), 2001 - 201647

Immigrants Emigrants Net migration Total emigration from

200 Ireland continues to decline and in 2016 is 150 estimated at 76,200.

100 The number of immigrants increased to 50 79,300, resulting in total

0 net inward migration of

Migration (000's) 3,100. This is the first -50 record of positive net -100 migration since 2009. Rank n/a -150 2011 2013 2015 2007 2012 2001 2010 2014 2003 2016 2005 2002 2008 2004 2006 2009 Source:CSO

47 Data for 2016 is preliminary

116 July 2017 Figure 5.3.5 Net migration 15 years and over by educational attainment, 2011-201648

Higher secondary and below Post leaving cert Third level Not stated Figure 5.3.5 shows the

10 estimated net migration 5 by education 0 attainment. While in the -5 period 2011-2015 more -10 -15 third level qualified -20 people have left Ireland -25 than arrived in the Net Migration (000's) -30 country, in 2016 this -35 trend is reversed. -40 2011 2012 2013 2014 2015 2016 However, the proportion

of emigrants with third level qualifications remains high (45% of all emigrants). Rank n/a Source: CSO

Figure 5.3.6 Population and labour force growth, 2011 - 2016

Percentage change population Percentage change labour force In the period 2006-2011, 10 Ireland's population 8 increased at a faster rate 6 (8.6%) than in the period

4 2011-2016 (3.4%). In 2016 Ireland was fourth 2 in the euro area in terms 0 Percentage Change of percentage increase -2 in population. Ireland's

-4 labour force growth (≥ 15 years) has also -6

UK slowed from 1% in 2006- Italy EU28 Spain Latvia France Poland Ireland Finland Sweden Hungary Denmark Germany 2011, to 0.3% in 2011- Switzerland Netherlands Euro area-19 2016.

Euro area-19 rank: th Population: 4 (↓1) Labour Force: 10th (↓1) Source: Eurostat and CSO

48 The information for 2011, 2012, 2013, 2014 and 2016 is preliminary.

117 July 2017 Figure 5.3.7 Labour Force Activity Rate49, 2007-2016

Euro area male Euro area 19 total Euro area Female Activity rates in Ireland Ireland Male Ireland Total Ireland female declined during 2008- 85 2012 and have been slowly recovering since. 80 In 2016 the total rate 64)

- (70.5%) was behind the 75 Euro area average (72.9%). At 63.7% the 70 female rate is now

65 above pre-crisis levels but below the Euro area

60 average (67.4%) and the

Actvity Rateof (% Persons aged 15 best performing Euro 55 area country, Netherlands (75%) and 50 UK (72.3%). Euro area 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 rank 2016: Total 14th , Male 11th , Female 15th Source: Eurostat

Figure 5.3.8 Population density, 2005-201550

2015 2005 In 2015 Ireland's population density was 600 67.9 persons per km2, up 500 from 60.8 persons in 400 2005. Ireland is one of the most sparsely 300 populated countries in 200 Europe. There is

Persons per square km 100 significant divergence across regions with 0 density in Dublin UK Italy

Spain estimated at 1427.6 Latvia EU-28 France Ireland Poland Sweden Hungary Germany Denmark persons per

Switzerland 2 Netherlands km compared to 32.1 per km2 in the West. EU-28 rank: 22nd (-) Source: Eurostat

49 The active population (labour force) is defined as the sum of employed and unemployed persons. 50 Data for EU-28 for 2015 is estimated

118 July 2017 Annex 1: Methodology

Competitiveness performance reflects the interaction of a wide range of factors that combined; determine a firm’s ability to compete successfully in international markets. Levels of enterprise productivity, innovation, investment, employment and profitability are the key determinants of their ability to compete and grow. The ability of the enterprise sector to compete is also determined by the stability of the macroeconomic environment, demographics, and the efficiency and effectiveness of public services and institutions. The Council has approached its work by, inter alia, examining the essential conditions for competitiveness (such as business performance, productivity, prices and costs, and labour supply) alongside the key policy inputs (such as the business environment, physical infrastructure, clusters and firm sophistication and knowledge infrastructure), to plot a path to improve Ireland’s overall competitive environment. The Council has long promoted the idea that a co-ordinated, cross-government, and public-private approach is required to enhance national competitiveness. The Council uses a bespoke competitiveness framework (“the Competitiveness Pyramid”) to illustrate and describe the multifaceted and interlinked dimensions of national competitiveness. In particular, the Council’s approach is cognisant of Ireland’s status as a small open economy, dependant on trade, and the important impact that our international competitiveness has on our overall economic wellbeing. At the top of the Pyramid is sustainable growth in living standards – this reflects the fruits of competitiveness success. The competitiveness outputs and enablers of competitiveness are represented in the second tier of the pyramid framework. These can be seen as the metrics of current competitiveness. A range of national performance indicators in business performance, costs, productivity and employment are examined and assessed relative to international competitors to provide an overall macroeconomic view of Irish competitiveness. These indicators are defined as “output” indicators and are not directly within the control of policymakers. Ireland’s performance in these areas is directly related to the quality of previous policies instituted at the input level and the ability to build a strong intermediate stage of competitiveness.

Figure A.1 The NCC Competitiveness Framework

119 July 2017

The third tier of the pyramid focuses on policy inputs and includes four broad pillars of future competitiveness, namely the business environment (taxation, regulation, finance and social capital), physical infrastructure, clusters and firm sophistication, and knowledge and talent. These represent the foundation stones of the economy and are the primary drivers of current and future competitiveness performance. The Council believe that it is within these particular areas that policymakers can have the greatest impact on competitiveness. It is crucially important to measure Ireland’s competitiveness at the input level and then benchmark it vis-à-vis best international practise. This allows policy makers to identify policy weaknesses and thus design specific policies to address these concerns. The bottom tier of the pyramid is a new addition to the Council’s framework. Described as essential conditions, this tier reflects the impact that a number of largely exogenous factors (exogenous, at least from the perspective of competitiveness policy) have on national competitiveness. These factors include the institutional make-up of a country, its macroeconomic stability, and a range of natural endowments (such as demographics, for example). The Council’s framework and definitions attempt to strike a pragmatic balance shorter term concerns relating to costs (reflected in metrics around market share, macro imbalances, etc.) with more medium term concerns around productivity performance: for instance, the Council’s focus on sustainable growth (economic growth, environmental quality, and the standard of living) is clearly anchored in the productivity-based definition of competitiveness. At the same time, the Council also focuses on the cost environment for enterprise, and the resulting cost competitiveness of goods and services produced here.

120 July 2017 Interpretation of the charts We have endeavoured to ensure that all charts are as clear as possible. However, with reference to the sample chart that follows, the following points may be of value when interpreting the charts:

Figure 2.2.1 GDP per capita current prices, 201651

2016 2011 Over the course of the

80000 recession, Ireland's GDP 70000 per capita declined but )

€ 60000 remained relatively 50000 high. As a result of 40000 exceptionally strong 30000 economic growth in

GDP per capita ( capita per GDP 20000 recent years, at €56,800, 10000 Ireland's GDP per capita 0 is the second highest in UK Italy EU28 Spain Latvia France Ireland the Euro area. Finland Sweden Hungary Germany Denmark nd Switzerland

Netherlands Euro area-19 rank: 2 Euro area-19 Euro (↑1)

Source: Eurostat

. Rankings are provided where appropriate, but in a number of charts, it is not possible to designate a best performer. In charts with both GDP and GNP performance for Ireland, where feasible rankings are provided for both sets of data. st . In interpreting the ranking for each indicator, a low ranking (i.e. close to 1 ) implies a healthy competitiveness position, while a high ranking implies an uncompetitive position. . Changes in rankings refer to the change in Ireland’s position since either the previous year, or in the case of charts displaying more than one year of data, since the oldest data displayed. Exceptions to this are highlighted in endnotes. (↑) refers to an improvement in Ireland’s competitive position in the time period set out in the chart, so 1 means an improvement of one place in Ireland’s ranking. (-) means that there has been no change in Ireland’s ranking, while (↓) refers to a fall in ranking.

51 No data available for Switzerland for 2016, provisional data for 2015 used instead. Data for Netherlands, Greece, Cyprus, Spain and France is provisional, data for Poland and Portugal is estimated.

121 July 2017

122 July 2017

National Competitiveness Council c/o Department of Jobs, Enterprise and Innovation 23 Kildare Street, Dublin 2, D02 TD30 Tel: 01 6312121 Email: [email protected] Web: www.competitiveness.ie