The National Competitiveness Council's annual report underscores the need to contain costs and boost productivity, writes Paul Tansey.

Competitive costs and prices allied to rapid productivity growth powered by foreign direct investment were the cornerstones of the Irish boom. The boom has created a society where living standards are among the highest in the world. But now, the forces that drove the boom are waning.

Ireland's share of world trade has been declining since 2002. As a result, net exports - exports less imports - have contributed little or nothing to national economic growth since 2003.

The economy has been shielded from the impact of a deteriorating foreign trade performance by a transitory, housing-led domestic boom. Now that too is running out of steam.

To secure advances in living standards in the future, the economy must rediscover its capacity to export. Essentially, this requires both the containment of cost increases and the fostering of faster productivity growth. The 2007 annual report of the National Competitiveness Council (NCC), published yesterday, demonstrates the scale of both tasks.

Irish price and cost competitiveness has been eroded by the twin forces of excessive domestic inflation and the appreciation of the euro against the dollar and sterling. The level of Irish consumer prices is now 20 per cent higher than the euro-area average. Since 2000, Irish inflation has been half as high again as the rate of price increases in the EU15 (the EU states prior to the accession of 10 new members in 2004). And higher prices are mirrored in higher business costs in Ireland.

The NCC says: "Ireland's relative labour cost competitiveness has deteriorated significantly since 2000." It points out that projected pay increases in Ireland this year will outstrip the rate of pay growth in all other EU15 countries except the UK and Greece. However, cost competitiveness problems are not confined to pay trends.

Competitiveness is being compromised by non-pay costs in many areas. Property purchase and rental costs; the costs of Government-administered services; utility costs, from electricity to waste disposal; and the costs of professional services, notably accountancy, legal services and information technology, are all making it more difficult for Irish firms to win new business on internationally traded markets.

In the sphere of productivity growth, Ireland has lost its place as an international frontrunner and now lags the field. Between 2003 and 2006, annual productivity growth in Ireland averaged 1.4 per cent compared to an annual average of 1.7 per cent for the 28 members of the Organisation for Economic Co-Operation and Development. The pace of productivity growth in the modern multinational industry segment has slowed, while many non-traded services sectors continue to perform poorly in productivity terms.

To meet the competitive challenge and to address the productivity problem, the NCC produces an array of sensible, if sometimes insufficiently specific, policy recommendations.

But the principal difficulty resides not in the range or quality of the recommendations. Instead, it lies in the political will to implement them in the face of stern opposition from sectional interests.