Leading with optimism

More than seven in ten (71 percent) expect to increase staff salaries in the next year, compared to over half (52 percent) in 2023, indicating a belief in their own growth ambitions and the potential for job creation.

The average expected increase in salaries is just under 5%. Despite this optimism and ambitious growth plans, an overwhelming majority (85 percent) said increased labour costs are their most significant business challenge this year, doubling from 43 percent in 2023. 

This sentiment was echoed in January 2024, when Ibec, the business representative group, flagged the impact of various new labour-related costs. The increase in the minimum wage to €12.70, increases to employer PRSI, changes to statutory sick pay, the introduction of pension auto-enrolment, increases in salary thresholds for work permits and enhanced protective leave entitlements could add €4 billion annually to the wage bill of Irish employers. According to Ibec, this could result in labour cost increases of between 25% and 30% in the most impacted firms. 

Other business challenges faced by our survey respondents that could impede growth and profitability include staff recruitment and retention issues (68%) and rising inflation (64%). Retaining staff is of significant concern, particularly for companies with over 50 employees.

Commenting on the survey findings, KPMG’s Head of Private Enterprise Alan Bromell acknowledges the resilience of indigenous businesses and entrepreneurs but says “there is a need for more proactive measures like reducing employers’ PRSI and increasing energy efficiency grants for businesses. Such measures would support domestic entrepreneurship grappling with the cost pressures on business operations.” 

Our research highlights mixed opinions regarding Ireland’s economic outlook. Over two-fifths of respondents (44 percent) said it would improve slightly, in line with 43 percent last year. Nearly two-fifths (38 percent) think there will be no change while 18 percent are more pessimistic with their outlook of the Irish economy in 2024.

Such sentiment reflects research from the likes of the Economic and Social Research Institute (ESRI), which forecast Ireland’s domestic economy to grow over the next two years as inflation falls and wages increase. It expects the Irish economy to grow by 2.5 per cent in gross domestic product (GDP) terms in 2024 and by 2.3 per cent in 2025. 

According to KPMG’s Alan Bromell, “Domestic businesses will continue to be a driving force. By leveraging opportunities, innovation and resilience, they can position themselves for long-term success in an increasingly dynamic and competitive business environment.”

Notwithstanding challenges, expansion remains a priority for businesses, with almost three in five respondents (58 percent) planning to scale up their operations. Nearly seven in ten (69 percent) intend to finance their expansion primarily through their own balance sheets or internally generated funds.

Other popular sources of finance to fund expansion include state support or grants (27 percent), senior debt finance (23 percent) and private equity (21 percent). 

Exploring alternative funding sources can provide various benefits for example, considering private equity investment can provide funds for expansion, industry knowledge, strategic guidance, and access to networks of contacts, potential partners, and industry connections. These open doors to new opportunities, customers, and markets.

The perceived ease of access to funding has improved following 2023, as over two-fifths (41 percent) said it was easy to access funding, a positive increase from 26 percent in 2023. For almost half (49 percent), the cost of funds remains the essential consideration for external fundraising, followed by speed to access funds (22 percent) and flexibility of the funding partner (19 percent).

Research and development (R&D) tax credits are a crucial source of additional funding for businesses engaged in R&D activities, but our findings indicate a low uptake of tax incentives to promote R&D and knowledge development box (KDB).

For example, one-third (34 percent) said the R&D tax credit available in Ireland is relevant to their business. Yet, only a quarter (26 percent) said their company has claimed R&D tax credits and only 4 percent have utilised the KDB tax incentive since its introduction. 

Ireland’s R&D Tax Credit is now 20 years old, having come into being on January 1st, 2004, and it continues to incentivise billions of euros worth of R&D activity every year. Regrettably, in the Global Innovation Index 2023, Ireland has fallen out of the world’s top 20 most innovative countries and is now ranked 22. 

However, it’s imperative that changes are made to the R&D Tax Credit legislation to provide certainty around eligible expenditure, increase the cap on outsourced expenditure, and the provision of an enhanced super credit for companies in sectors of national importance. Businesses should claim such incentives to drive innovation and ultimately help Ireland become the knowledge island it aspires to be.