Supporting enterprise and saving jobs are key

 

WHAT IS TO BE DONE?Cutbacks are essential and living standards will fall, but it would be wrong to accept the view that cutbacks alone are the answer

FACED WITH global turbulence on an unprecedented scale, we in Ireland need to move beyond being caught in the moment and consider how, in the very short term, we leverage the resources that are at our disposal to kick-start our recovery.

The planned capital investment of more than 5 per cent of our national output per annum in the National Development Plan, albeit borrowed, provides scope on a significant scale to direct resources towards the enterprise sector, to help bolster economic activity and maintain employment. The challenges facing enterprises are immense, and are compounded by the weakness of the sterling exchange rate; uneven access to credit; difficulty with obtaining trade credit insurance; and a substantial and unsustainably high domestic cost base.

There is no disputing that the public finances have to be corrected. This is necessary, but not sufficient. The €2 billion current expenditure reductions in 2009, primarily in public sector pay bill reductions, are the minimum necessary to show intent to begin restoring sustainability. The arguments have been well rehearsed in this column throughout the week.

However, it would be wrong to accept the view that seems to have gained credence in the public domain that cutbacks alone are the answer. We must recognise that living standards will fall.

With falling consumer prices, incomes must fall by similar proportions. By not accepting this, we delude ourselves that we can get out of this economic crisis with living standards actually rising.

We also continue to delude ourselves if we believe that the burden of taxes will not have to rise over the medium term, as it will in most other countries. The large fiscal expansions currently in progress must eventually be financed. Only a sustainable economic base will make the public finance trajectory credible to international lenders and to the significant levels of domestic savers that are already within the economy. Understandably, to date, much of the focus of national energies and considerable financial resources have been directed to the financial sector to restore its role as intermediary to businesses and consumers.

It is now vital, however, to prioritise a response to the very adverse impact that this crisis is having on the real economy, which is resulting in declining output and a huge loss in employment.

Over the last decade and a half, Ireland has expanded output and employment at an exceptionally rapid rate. There is a risk that much of this progress is under threat if businesses cannot compete with a devalued sterling exchange rate; cannot obtain export credit insurance; cannot get access to finance for working capital or investment funds; or has to pay the highest prices for energy across the EU.

Failure to sustain employment will destroy so much of the human capital that has been built up over the years.

At present, viable and sustainable enterprises and employment are being lost due to the extreme nature of credit conditions and the exceptional weakness of sterling. Ireland is particularly vulnerable to the recent brutal exchange rate movements. Significant labour-intensive indigenous sectors, such as food, drink, retail and tourism, are exposed.

Almost all other EU countries have introduced a suite of measures to support enterprise, with new measures announced almost on a daily basis.

The lack of comparable measures in Ireland has put firms here at a considerable competitive disadvantage.

Doing nothing to stop the flow of job losses in Irish enterprise is simply no longer an option. The Government must at least level the playing field with other member states, and indeed other countries outside the EU, which are helping their struggling business sectors.

It is true that the Government’s budget deficit situation is more precarious than in most other EU countries. The introduction of measures to support enterprises could involve substantial costs to the exchequer at a time when tax revenues are declining. However, the ultimate cost to the exchequer of not taking action to support enterprises under severe financial pressure would be much greater than the cost of the interventions.

Ireland urgently needs a new two-year Enterprise Development and Sustainability Programme. The total proposed investment under the National Development Plan amounts to some €26 billion per year, with €9 billion spent on capital. Of this expenditure, €1.7 billion in both 2009 and 2010 should be reallocated to help otherwise viable businesses survive this extraordinary crisis.

It may even prove necessary to redirect some of the capital spend; infrastructure is redundant if the demand for it has ceased to exist. Ireland cannot afford to watch its enterprise base shredded.

The Government must immediately take account of the temporary relaxation of the EU’s state aid regulations and the increase in maximum allowable grant aid. In addition, the Government should seek temporary suspension of regional aid limits.

An option for the Government to support sectors exposed to the sterling currency crisis is to suspend employers’ PRSI payments for a period of two years. This should be subject to a six-monthly review and would apply to any company whose exports to the UK represent a significant proportion of its total business. In addition, a special marketing compensation grant should be available to companies to overcome exceptional market distortions, where they can demonstrate that loss of market share, or loss of income due to exchange rate fluctuations, is threatening their viability.

Measures that Government can take to alleviate the increase in the cost of credit for companies, as well as a decline in the availability of working capital, include: a loan guarantee scheme to support working capital for firms of any size through which the Government provides a guarantee covering 50 per cent of the risk; a dedicated loan guarantee and subsidy scheme for SMEs; firms experiencing liquidity difficulties to be allowed to postpone payment of three months’ worth of PRSI and income taxes to Revenue, for a period of up to two years (a similar scheme is under way in Sweden); and a new risk capital investment programme to be developed for SMEs to provide investment of up to €2.5 million per enterprise.

In the medium term, the Government strategy Creating Ireland’s Smart Economy, with its emphasis on growth based on innovation and green technologies, is in itself sound. It has a few new initiatives, such as transforming the role of venture capital. For Ireland to truly transform to a smart economy, however, change must be bottom up rather than top down.

The Government must create conditions to enable individuals and private sector enterprises to take the lead. A culture of enthusiasm for science and innovation can only be fostered over time. Educational institutions have a huge role to play in this. Ultimately, to increase the take-up of science and technology courses at college will require more than lip service, as well as funding.

Finland’s emergence from an economic depression in the early 1990s to an information technology society is often cited as an example of how a country can recover from an economic abyss. What is little mentioned, however, is that the emergence of the technology sector was the result of long-term developments, as well as a culture based on co-operation. This co-operation is what is most needed now for our economic recovery. There must be a national effort and there must be burden-sharing by all in a way that is equitable.

Our destiny is still in our own hands, but not for long. We must present a credible path back to sustainable public finances but, as importantly, a path back to a sustainable, vibrant economy.

Enterprise is the quintessential element to deliver on both counts. We will ultimately have to do the right thing by restoring competitiveness, but let us get there quickly rather than first exploring every other avenue.


Danny McCoy is director of policy at Ibec, the employers’ body. Tomorrow: Paul Sweeney of Ictu, the Irish Congress of Trade Unions