Danny McCoy: Protect competitiveness

The Irish economy performed well in 2016, supported by a benign external backdrop of weak inflation, strong UK and US economies and low oil prices.

Growth has remained strong as national debt ratios continue to drop and, crucially, unemployment stays on its downward trajectory.

Domestically, Ireland in 2017 is set to be a story of uncertainty. The economy looks set to grow by nearly 3% in output. While this is not as impressive as recent years, it is still twice the European average.

The numbers at work are also expected to grow by around 2.5%, bringing total employment back to the peak levels of 2006. Unprecedented international political upheaval in 2016 means we face new risks in the coming years.

Brexit has heaped pressure on the sterling-euro exchange rate and has called into question our future trading relationship with the UK.

The US appears to be retreating from its liberal globalised outlook, and political uncertainty hangs over much of the rest of Europe. These uncertainties mean that many of the positive external drivers of growth in recent years are no longer reliable foundations on which to base future success.

If the positive economic trends of 2016 are to continue, sensible, pro-business domestic policies are essential. This is a significant challenge for a minority Government still coming to terms with the legislative hurdles that the current Dáil arithmetic presents, particularly at a time when additional domestic pressures have emerged.

February’s general election seems like a distant memory, but the outcome has undoubtedly affected the capacity of Government to take decisive action across a range of key areas.

It has afforded much greater power to independents and opposition parties, and has left the political environment increasingly prone to grandstanding, to the detriment of the long-term governance needs of the country. This makes taking necessary but unpopular decisions all the more difficult.

Of particular concern, is a number of populist, but short-sighted legislative initiatives, coming from both the Government and opposition benches, aimed at further regulating the labour market.

These include proposals to put excessive, onerous new obligations on employers around how contracts and working hours are determined. If enacted, these measures would significantly add to business costs and have a very damaging impact on the ability of Irish business to create jobs and compete internationally.

Ireland has benefitted enormously from a flexible labour market, which also affords very strong rights and employment protections to workers. We play politics with this at our peril.

In addition to legislative moves on employers, recent weeks have also seen intense pressure coming from trade unions, both in the public and private sectors, for significant pay rises. Unless these claims are managed in an orderly, sensible manner, we risk further industrial discord over the coming months.

For the sake of stability and the competitiveness of the wider economy, it is vital we maintain a centralised public sector pay agreement. If this mechanism fails, it will lead to a free-for-all by public sector unions.

The call by the private sector unions of Ictu for an across-the-board 4% pay increase is opportunistic and utterly at odds with the current economic reality and what is reasonably affordable. In 2017, the majority of companies will be in a position to award pay rises, but not all are growing at the same rate and some parts of the country are lagging behind.

This needs to be reflected in wage expectations. We must not lose the hard-fought competitive gains of recent years. The focus must remain on job creation.

With this in mind, enterprise level bargaining continues to be the most appropriate mechanism for the private sector to set pay, reflecting firm-level productivity and market conditions.

The task of Government is to firmly address the source of what is driving these pay demands, such as housing availability and punitive childcare costs. It must avoid a return to the ‘bubble years’, when unsustainable pay increases left companies unable to compete effectively, and the economy vulnerable to painful adjustments.

At the same time, it needs to best position the economy to weather potential turbulence over the coming months, or indeed years. As the fallout of the Brexit decision continues, the indigenous exporting side of the economy is particularly exposed.

Much greater effort is needed to help viable companies come through the Brexit transition, retain UK market share and diversify. Ireland must make a strong case to the EU to provide a state-aid framework which recognises our particular Brexit risks.

As sterling fluctuates and economic pressures intensify, we need to be vigilant against excessive increases in labour costs and take strategic decisions to improve cost competitiveness in areas such as tax, energy, regulatory and insurance costs.

But we also need to plan ambitiously for the future, and invest accordingly. Yes, there are plenty of risks, which must be navigated, but the strong recovery and the availability of cheap credit means that over the coming months, we have a real opportunity to lay the foundations for a new and prosperous phase in our country’s social and economic development.

With the right decisions at home, and a deft reaction to external events, this can be a phase characterised by world-class infrastructure and public services, productive investment and a tax code that supports growth and rewards work.

Danny McCoy is chief executive at business group Ibec.