Solving the inflation equation

The rapid rise in inflation has resulted in increased costs right along the value chain and is placing severe upward pressure on wages and salaries. Does this pose risks to Ireland’s competitiveness as a location for FDI and indigenous industry? And if so, what steps can be taken to protect Ireland’s current position, which is the envy of many competitor locations?

Recent statistics from the EU show inflation across the area reached up to 10.7% by October 2022. Ireland’s response to the cost-of-living and inflationary pressures encountered by both individuals and companies will be critical to ensuring strong FDI and indigenous growth in the coming years.

Mick Murray, head of AIB international corporate banking, agrees that increased costs and uncertainty always pose risks.

“However, the level of inflation is not unique to Ireland, Irish inflation is running below that of the Eurozone and the UK. The USA is also experiencing high inflation,” he says.

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Lorraine Griffin, head of tax at Deloitte, is monitoring the situation. She says government supports such as the Temporary Business Energy Support Scheme bring a measure of relief in short term but argues that what will be more critical in the medium to long term is whether the tax and business environment is adequately prepared to support sustainable business growth.

“Companies encounter many challenges throughout their life cycle, and during times of volatility and uncertainty, engaging early is key to weathering the storm,” says Griffin. “Every business is unique and it’s critical for companies to understand at what stage in their growth life cycle it requires support; this will determine the right blend of expertise and engagement.

“Tax reliefs and incentives represent an effective way not only to manage a business’s cash flow but to achieve strategic goals such as hiring, talent retention and sustainability targets. As businesses may be looking to expand their workforce, they may face cash constraints in terms of the total remuneration package they can offer to prospective hires. The Key Employee Engagement Programme (KEEP) from Irish Revenue may therefore play a feature in a company’s hiring strategy. The aim of KEEP is to help smaller firms who cannot compete with larger firms in cash remuneration terms to attract and retain talent in a challenging labour market. While we will see changes to KEEP included as a committee stage amendment, it is critical going forward that the tax regime remains available to companies in meeting their talent retention goals, particularly when many taxpayers continue to feel the pressure from cost-of-living increases.”

Adrian McGuinness, CEO of Sigmar Recruitment, points to the added value of Ireland Inc’s proposal.

“It’s not just price, we can offer really talented people with important skill sets to support FDI operations, so we have some wiggle room with inflation,” he says. “However, we probably need to tone down the wage inflation which, over time, will make Ireland uncompetitive, skills or no skills.”

In addition, access to capital for growth is likely to prove vital. Based on a recent SME credit demand survey published by the Department of Finance, only 16% of SMEs applied for bank credit in the period from October 2021 to March 2022, with insufficient internal funds being cited by 76% of respondents as the reason for not seeking credit.

Griffin argues: “Going forward, consideration should be given to providing greater access to financing for smaller and medium-sized companies who may not otherwise be able to expand their business in the face of rising borrowing costs.”

Murray agrees it is imperative to address competitiveness factors that are within Ireland’s control.

“Key FDI destinations are in a war for talent and Ireland has been selected because of the strong available, English-speaking talent, access to the EU and lifestyle opportunities. But housing, transport and education are also key to attracting and retaining talent,” he says.

John Lowe, who is known as The Money Doctor, remains bullish. “Ireland is currently the blue-eyed boy of Europe: lowest for inflation, best for growth and for prospects. We do have a lot going for us apart from the 12.5% corporation tax.

“That and Ireland continually rates in the top 10 best countries in which to live.”