I thank the committee for its invitation to meet it this afternoon. Reflecting on the current business environment of our 7,500 member companies, there are three main issues which businesses are concerned about. The first of these is Brexit. The second is the challenges with regard to international tax reform from both a US and European perspective. The third, and perhaps the most significant in the context of policy priorities and decisions for budget 2018, is the current absorptive capacity of the Irish economy. By that I mean there is a very strong momentum from a business and employment perspective. We are seeing record levels of job creation and new investment in business. The single biggest challenge that most businesses across all sectors of the economy have at the moment is we are struggling for capacity in the economy to adapt and absorb the demand and activity that is coming through.
To address these issues in my opening remarks, I will cover five main topics. First is the fiscal space decisions we can still make in this budget to support that investment and improve absorption capacity. Second is how we can deliver a budget that will be Brexit-proofed. Third will be the challenge of getting and retaining the right skills and business now that we are returning to an almost full employment economy.
Fourth comprises the challenges to our foreign direct investment sector. Fifth, on which I will speak in more detail, comprises the issues surrounding investment, particularly as we move beyond the budget towards the ten-year capital plan and the publication of the national planning framework towards the end of the year, which we consider a once-in-a-generation opportunity to address the challenges of spatial imbalance across the economy.
First, I will address the fiscal space in the budget. Given the capacity constraints we envisage from a business perspective due to the strength of demographics and employment growth, we are concerned there will be insufficient fiscal room or space in the budget. We are anticipating discretionary measures in the region of €400 million, but given the demand for services and the need for a rapid increase in public capital investment, this is entirely insufficient for the needs of the economy. It is quite unusual for a business group to take a position in support of a more expansive fiscal policy, but we do it from the perspective of trying to promote the growth of the productive base of the economy.
I will comment briefly on the technical issues around the fiscal space. It is important to recognise that the 2015 GDP growth number of 26% in volume terms has afforded us, from a technical perspective, an additional €7 billion in potential investment capacity between 2018 and 2021 if we were to apply the fiscal rules in their correct form. In our view, maintaining the decision to forgo this additional fiscal space by excluding the 2015 GDP figure from the fiscal space calculations is a mistake. We could use the additional space for investment to help solve the most pressing problems while also running a significant surplus in day-to-day spending over the next four years. Of course it would be a mistake to bed that additional fiscal space into the day-to-day spending and running of the country. That would not be a sustainable or prudent decision. However, by applying the fiscal rules to the letter in terms of using the 26% growth in GDP, there is now a flexibility to give us more room for investment in the physical infrastructure we desperately need and, as we move beyond 2018, to give us room for manoeuvre if the challenges of Brexit become extreme and we are going to be constrained by the fiscal rules as a result of choosing to exclude - and this is a domestic policy choice - the actual recorded GDP number for 2015.
Second, I will offer some comments on Brexit. Although approximately 12% of our physical exports go to the UK, the importance of the UK to the business community is much greater than that. At present, the multinational sector accounts for 90% of our exports, with the indigenous sector accounting for 10%. However, that 10% of exports from the indigenous sector provides the same amount of employment across the economy as the 90% of exports from the multinational sector. Accordingly, Brexit will have a far bigger impact on employment in the economy than on the overall value of the exports we sell abroad. It will impact on certain sectors and regions of the economy in particular. For example, some of the analysis we have done shows that some regions of the economy will be six times more exposed to the impacts of Brexit than the Dublin economy. We see significant risks over the coming years.
It is vital we take decisive steps in budget 2018 to offset these risks. We are seeking a multi-annual framework for funding Brexit mitigation measures to support the businesses that will be worst affected. The funds should be targeted at supporting innovation, market diversification, upskilling and capital expenditure on equipment and machinery. The Government cannot offset the full impact of the weakness of sterling and the currency challenges that businesses face, but it can do much more to ensure those businesses are competitive to cope with the challenges of both the currency issues and the long-term impact of a new trading relationship after the UK's exit from the EU. The resources that would be required for such a Brexit mitigation fund should be approximately 5% of the value of annual exports to the UK from indigenous firms.
That would equate to approximately €400 million a year over a three-year period. This should be funded from both Government and EU sources.
In addition to those specific mitigation measures, we also urge that some of the long-standing differentials in the tax treatment of Irish indigenous companies - as compared with the regime in the UK - must be addressed if we are to remain a location of choice for indigenous companies. We are already getting significant feedback from a number of companies to the effect that if they are to successfully continue to the serve the UK market, they are looking at establishing operations within the UK. That is already a reality in terms of the contingency plans and the decisions that businesses are making. We need to ensure that post the UK exit - and even prior to that because decisions are already being taken - Ireland is as attractive as possible for SMEs. We have always looked at the mobile sector of the Irish economy as being the multinational sector when we talk about mobile investment but, increasingly, our indigenous companies are going to be equally mobile if they want to remain competitive within the UK market.
I will make some remarks on the challenges of skills in the economy now that we are returning to close to full employment. While we have a significant opportunity in that we have one of the youngest populations in Europe, we also face a challenge in that our labour force participation is particularly low. The employment rate in Ireland is in the region of ten percentage points below that in the UK. As we reach full employment, therefore, we need to see much more targeted measures at growing the employment rate and increasing labour force participation.
In terms of the specifics of what those suggestions are, they are around prioritising education and lifelong training resources away from what had been support for the unemployed during the crisis years and to shift that into in-work measures as we return to full employment. We also need to be conscious that talent is increasingly mobile so we need to reform our tax system. Our specific recommendation is that we increase the entry point to the top rate of tax, that we cut the top rate of tax and that we reform share options to make them more competitive in an international context. The other very significant issues in terms of what business is experiencing in attracting and retaining talent in the Irish economy are child care and housing. As we all appreciate, housing is a very significant social issue but it has also become a very limiting business and economic constraint in terms of attracting the right talent for the economy.
On international taxation trends and the foreign direct investment sector of the economy, in recent years IBEC has been very supportive of the work that is being done through the OECD in the context of the base erosion and profit-shifting process. This has been one of the most fundamental reforms of global taxation that we have seen in a generation but, ultimately, it is a reform that is positive for the Irish economy. It will continue to be positive for us in the context of our globalised and international business model. Looking at tax proposals from the European perspective – we saw that the committee was discussing the European proposals for the common consolidated corporate tax base last week – we see that as a significant challenge for the Irish business model and the Irish economy. More significantly, we see recent proposals around the taxation of digital activity as probably a more imminent threat for our business model. Despite those challenges, however, Ireland’s model of a small business-friendly, open economy within Europe has continued to demonstrate serious substance. We see accelerating investment and employment in our highly globalised industries. While Ireland's corporation tax strategy is not the sole reason for this success, it is very much a major part of it. Therefore, it is crucial that we defend that strategy on all fronts and that our tax sovereignty is protected in full.
In the context of immediate measures that can be looked at in this budget, we have some specific recommendations around cost-neutral changes to our research and development tax credit. The latter is a crucial part of the enterprise offering, particularly for innovative and mobile business activity, and could be used to build on what is already a very successful scheme that makes very significant economic and employment contributions to the economy.
The final issue I will address is that of infrastructure. As already stated, the single biggest issue for business now is coping with the challenges of success and absorption capacity across the economy. Housing is clearly the canary in the mine in terms of signalling the impact of years of underinvestment in our infrastructure, but it is not just confined to housing. Right across our transport infrastructure and our education system, we can now see the impact of that decade of underinvestment becoming a constraining factor on the economy. We see a significant opportunity in the context of the ten-year capital investment plan - published in line with the national planning framework - being a game-changer for the momentum of investment in the economy. We again urge this committee to ensure that the budgetary allocations are made available in order to make the ambitions and aspirations relating to the national planning framework a reality. We also urge the committee to support political decisions relating to the national planning framework, which will probably be tough, to ensure that those resources are targeted at the right geographical areas for development. Hopefully, we will see a move away from this reliance on a Dublin economy and a much more balanced regional spread of economic activity.
We also urge that more be done to explore the opportunities of non-Exchequer investment. We believe that there is a resistance to the use of public private partnerships, PPPs, in our public capital programme. We continue to miss out on the opportunity of the cheapest money in history by not putting European Investment Bank resources, private resources through PPPs or other funding options to work to deliver this much-needed infrastructure.
We also believe that there is an opportunity to look at some of the physical assets of the State. We own physical State assets worth approximately €100 billion. Some of that could be used to fund new and additional infrastructure projects as we continue to be constrained from a budgetary perspective.
We will leave our opening remarks at that. I again thank the Chair for the opportunity and I am very happy to hear comments and questions from the committee.