NCC’s Annual Competitiveness Report 2008

The Annual Competitiveness Report 2008 from the National Competitiveness Council was released today. Lots of interesting facts and figures, especially those relating to benchmarking Ireland’s competitiveness. A link to the report can be found here .

I am struck by the high energy costs in this country relative to our trading partners. The electricity bill at some large manufacturing plants here must be eye-popping.

Also, there is a welcome call for reform in sheltered services sectors such as the professions, where costs are high compared with those abroad. This is an issue that probably deserves more attention.

Ireland’s painful adjustment

After the benefits of EMU, now come the costs. I discuss economic adjustment mechanisms in EMU and what they mean for the near-term outlook for the Irish economy in a new EMU Monitor piece. You can find it here.

The main point is that recovery here depends on the so-called “competitiveness channel” working. For this mechanism to work properly, two things must happen. First, wage and price inflation have to ease to rates below those in our largest trading partners. That probably implies deflation in this country. Second, the improvement in competitiveness must affect trade performance.

The problem is that recovery will be complicated by the depressing effects of the “interest rate channel” of adjustment. Deflation implies high real interest rates, which will further depress domestic demand, assets prices, and the property market.

Contagion across Irish banks

The Financial Times this morning carries the story of Sean FitzPatrick’s departure from Anglo Irish Bank. The article provides links to the “AIB Statement” and “AIB Chairman’s Statement.” There’s a reason the media in this country use Anglo as shorthand for Anglo Irish Bank.

VAT Cut Won’t Halt Cross-Border Shopping

This website got a plug today in Alan Ahearne’s “Short View” column in the Sunday Independent. The article asked whether the Government should heed calls for a fiscal stimulus plan for this country. Ahearne concludes that the answer is an unambiguous no.

Cuts in VAT rates, along the lines introduced in the UK, would do little to bolster economic activity in this country. Part of the tax cut may not be passed on to consumers. Moreover, a substantial chunk of Irish households’ spending is on imported goods. Increased spending on imports provides only limited support to our economy. The bang for the buck from a VAT cut is small in an open economy like ours because much of the impulse leaks out through higher imports.

A stimulus proposal might be effective at boosting transactions if it were huge. But the country can’t afford such a plan. Claims that a VAT cut could be self-financing are baseless. The Dept. of Finance estimate that the 0.5 percentage point hike in the standard VAT rate in Budget 2009 will raise €220 million. A crude extrapolation would suggest that slashing VAT to the UK rate of 15 per cent would add another €3 billion to the State’s already enormous borrowing requirement. As argued previously on this website under the post “On Deficits and Debts” (3 December), there’s a limit as to how much the Government can comfortably borrow on international markets.

A cut in VAT would also likely do little to stem the flow of shoppers across the border with Northern Ireland. Price differentials between the Republic and the North largely reflect the weakness of sterling and differences in business costs.  A fiscal stimulus won’t solve these problems. A focus on improved competitiveness and realistic wage-setting would be much more valuable. Meanwhile, budgetary policy should aim at avoiding national bankruptcy.