By Business & Finance 
Ireland has been rattled by the UK’s decision to leave the EU and rightly so.
To add to the anguish the British Chancellor of the Exchequer announced plans to cut the UK’s corporation tax rate to below 15% with what looks like on the surface, a desperate knee-jerk reaction to the fallout from the vote to leave the single market rather than any long term strategy.
Nevertheless it brings it close to the Irish rate of 12.5% – the low rate that has up to now attracted foreign companies and inward investment and has been heralded as a cornerstone of Ireland’s (ROI) economic growth.
With hindsight it was very naïve to think that the introduction of such a low rate in the first place was always going to be sustainable and its competitive value looks clearly on the line. The fact that low corporation tax could be copied by our neighbours means it should never have come as a surprise anyway.
Some politicians in Northern Ireland and Scotland have even suggested going as low as 10%. Constant promotion of its value by successive ROI Government bodies almost regarding it as core national competency have only themselves to blame. As every salesman is taught anyone can sell on lowering prices and competitor countries have been observing the ROI’s economic progress with some disquiet at the use of this once national USP.
Establishing programmes for real cost savings in a pragmatic way to identify productivity improvements will require organisations to invest in technology, new innovative systems and products and their workforces
However, it now appears Ireland has over-sold its benefits when compared with many of its other USPs and unwittingly started the race to the bottom ultimately culminating in lower tax revenue by this means. With Britain being a much larger economy with a stronger domestic market, firms who need to get access will likely be attracted by those lower corporation tax rates.
With investment and consumer demand likely to fall, indeed economic growth forecasts are already slashed for each side of the Irish Sea; lower GDP means the servicing of British and Irish national debts returns as a bigger problem too and with job creation declining among a raft of other economic value-adding activities just adds to the overall gloom.
Trade between ROI and UK is worth over €1bn a week and as sterling continues to fall Irish exports will be more expensive in the UK, while cheaper British imports will potentially undercut Irish firms at home. That’s before any potential tariffs are applied by the EU therefore Irish companies relying on the British market will need new price points for their products to compete.
DRIVING FORCES
Productivity is the main determinant of national income per person because over the long term a nation can consume only what it produces or is able to trade for. If most industries (even low productivity ones) increase productivity this causes the ‘growth effect’ whilst the ‘shift effect’ occurs when an economy shifts resources from less productive industries (e.g., call centres) to more productive ones (e.g., software). The latter being a much bigger challenge so most productivity gains comes from the ‘growth effect’, i.e., industries, boosting their productivity.
Productivity is commonly defined as a ratio of a volume measure of output to a volume measure of input use and the direct correlation between productivity improvement and economic growth which occurs when productivity increases to allow for such growth.
When productivity decreases without a corresponding decrease in demand, prices rise and fewer people are able to afford what they want or need, so economic growth does not occur. In simple terms productivity growth is the most important driver of prosperity therefore any future economic strategies needs to prioritise productivity over other key performance indicators.
Identifying various driving forces behind labour productivity growth, one of which is the rate of change is widely used as an international comparator. Since the economic downturn in 2008, the UK has been struggling with a productivity crisis when compared to other large economies. Ireland (ROI) on the other hand has seen the gap in productivity growth positively widen against its main competitor.
In simple terms productivity growth is the most important driver of prosperity therefore any future economic strategies needs to prioritise productivity over other key performance indicators
The ROI productivity growth has even outperformed that of Germany since 2004 with the UK well behind. Despite that Ireland now has the most to lose from the new post-Brexit era and organisations in Ireland exposed to the fallout must respond with urgency by setting new more bold productivity improvement strategies to achieve the effects of “growth” or “shift.” Being in this new era means shifting the emphasis from encouraging FDI by low corporation tax on profits (a business output after all the input costs are extracted) to value added qualitative measures of business inputs.
Not only will this benefit Ireland against British competition but help entry into new markets as well. The productivity measures of labour and capital can be based on value-added concepts or in the form of capital-labour-energy-materials based on a concept of gross output. Among those measures, value-added based labour productivity is the single most frequently used productivity statistic very commonly used throughout Europe and particularly Germany.
For individual industries, productivity gains can occur in three different ways:
- Organisations increasing their productivity by innovating products or systems
- Adopting new technologies
- Less productive firms dying and being replaced by new, more productive firms or by more productive firms gaining market share from less productive ones.
REAL IMPROVEMENTS
Establishing programmes for real cost savings in a pragmatic way to identify productivity improvements will require organisations to invest in technology, new innovative systems and products and their workforces. It’s a very complex area in which to prioritise and organisations’ productivity strategies can be seriously flawed by failing to make the right real cost-saving investment decisions.
At the same time businesses must act immediately to offset the fall in sterling and not only rethink their plans for the coming months but how they can make use of productivity partners to deliver their aspirations. Real productivity improvements pay for the investments made and the support of specialists can smooth the transition to lower cost competitive positions.
About the blogger
David Harkin is a managing partner with Tecknic Performance Leaders based in Dublin.
He is qualified MBA senior manager, mechanical engineer and managing consultant with almost 30 years’ manufacturing experience at executive level in international companies.
Presently he advices business leaders on productivity improvement sustainability and manages organisational change.
The completion of international research into productivity benchmarking led to the development of a unique operations excellence assessment and continuous improvement model entitled iP3.
