COMMISSION STAFF WORKING DOCUMENT Country Report Ireland 2015 Including an In-Depth Review on the prevention and correction of macroeconomic imbalances - Hoofdinhoud

Council of the European Union

Brussels, 3 March 2015 (OR. en)

6632/15 ADD 8

ECOFIN 154 UEM 59 SOC 120 COMPET 79 EMPL 66 ENV 115 EDUC 55 RECH 49 ENER 64 JAI 127

COVER NOTE

From: Secretary-General of the European Commission, signed by Mr Jordi AYET PUIGARNAU, Director

date of receipt: 26 February 2015

To: Mr Uwe CORSEPIUS, Secretary-General of the Council of the European Union

No. Cion doc.: SWD(2015) 27 final

Subject: COMMISSION STAFF WORKING DOCUMENT Country Report Ireland 2015 Including an In-Depth Review on the prevention and correction of macroeconomic imbalances

Delegations will find attached document SWD(2015) 27 final.

Encl.: SWD(2015) 27 final

6632/15 ADD 8 MLG/sr

EUROPEAN COMMISSION

Brussels, 26.2.2015 SWD(2015) 27 final

COMMISSION STAFF WORKING DOCUMENT

Country Report Ireland 2015

Including an In-Depth Review on the prevention and correction of macroeconomic

imbalances

{COM(2015) 85 final i}

This document is a European Commission staff working document . It does not constitute the official position of the Commission, nor does it prejudge any such position.

• 1. 

  Scene setter - economic situation and outlook 3

• 2. 

  Imbalances, risks and adjustment 10

2.1. Indebtedness and deleveraging 11

2.2. Financial sector challenges 20

2.3. Competitiveness and external sustainability 25

2.4. Structural challenges in the labour market and skills mismatches 33

• 3. 

  Other structural issues 40

3.1. Healthcare system 41

3.2. Improving access to finance and SME development 43

3.3. Taxation and fiscal framework 50

3.4. Legal services and justice reforms 54

3.5. Infrastructure and climate 56

3.6. Social policies 59

AA. Overview Table 62

AB. Standard Tables 70

LIST OF TABLES

1.1. Key economic, financial and social indicators - Ireland 8

1.2. Macroeconomic Imbalance Procedure: Scoreboard - Ireland 9

2.1.1. Government contingent liabilities 19

2.2.1. Results of the comprehensive assessment 21

3.2.1. Overview of SME credit policy initiatives 49 AB.1. Macroeconomic indicators 70

AB.2. Financial market indicators 71

AB.3. Taxation indicators 71

AB.4. Labour market and social indicators 72

AB.5. Expenditure on social protection benefits (% of GDP) 73

AB.6. Product market performance and policy indicators 74

AB.7. Green Growth 75

LIST OF GRAPHS

1.1. Real GDP, Ireland vs euro area 3

1.2. Contributions to GDP growth 4

1.3. Retail sales in Ireland 4

1.4. HICP inflation 4

1.5. Real estate prices 5

1.6. Unemployment rates, employment growth 5

1.7. Bank profitability 6

1.8. Ten-year spreads over German bonds 7

2.1.1. Private sector debt 11

2.1.2. Debt build-up and deleveraging trends 11

2.1.3. Corporate leverage indicators 12

2.1.4. Components of the household deleveraging process 13

2.1.5. Household debt sustainability 14

2.1.6. Household net worth 14

2.1.7. Contribution to change in gross government debt 15

2.1.8. Breakdown of gross government debt (end of December 2014) 16

2.1.9. Average effective interest rates on government debt (2014) 16

2.1.10. Maturity profile of Ireland’s long-term marketable and official debt (end of December 2014)

17

2.1.11. Gross government debt projections 18

2.1.12. General government balance and real GDP growth 18

2.2.1. Loan-to-deposit ratio (LDR) 20

2.2.2. Eurosystem borrowing 20

2.2.3. Components of domestic bank profitability 21

2.2.4. Domestic bank capital positions 21

2.2.5. Mortgage arrears 23

2.2.6. Mortgage restructuring 24

2.3.1. Current account balances 25

2.3.2. Exports of goods and services 25

2.3.3. Real effective exchange rate, 2005=100 26

2.3.4. Demand composition of GDP and GDP growth 26

2.3.5. Exports of pharmaceutical products 27

2.3.6. Difference in net exports (balance of payments vs. customs) 27

2.3.7. Services exports, imports and balance 28

2.3.8. International Financial Services Centre and non-International Financial Services Centre trade in

services, primary and secondary income flows 28 2.3.9. Current account balance 29

2.3.10. Net international investment position by institutional sector 29

2.3.11. Target 2 balances 30

2.3.12. External assets and liabilities of domestic banks 30

2.3.13. International investment position of non-financial companies and non-bank financial

intermediaries (outside the International Financial Services Centre) 31

2.3.14. International investment position of non-financial companies 31

2.3.15. International investment position of International Financial Services Centre 32

2.3.16. International investment position of non-International Financial Services Centre sectors 32

2.4.1. Unemployment rate, long-term unemployment rate and youth unemployment rate 33

2.4.2. Working-age population, active and employed people 33

2.4.3. Nominal unit labour costs, total economy 34

2.4.4. Labour market participation rates (ages 15-64) 35

2.4.5. Employment by educational attainment 35

2.4.6. Unemployment rate by educational attainment (ages 15-64) 36

3.1.1. Public healthcare expenditure, Ireland and EU 41

3.2.1. Outstanding credit to SMEs 43

3.2.2. Bank products requested by SMEs 44

3.2.3. Interest rates on SME loans - comparative overview 44

3.3.1. Tax burden 50

3.3.2. Revenues from property taxes (2012) 52

3.3.3. Expenditure ceiling reconciliation for 2015 53

3.5.1. Public sector gross fixed capital formation by area 56

LIST OF BOXES

1.1. Economic surveillance process 7

2.4.1. Policy responses to labour market challenges and skills mismatches 38

3.2.1. Regulating loan origination by investment funds 46

EXECUTIVE SUMMARY

The economic outlook has improved markedly. consolidation efforts and sustained economic Exceptionally strong net exports made Ireland the growth. One-off factors accounted for most of fastest growing economy in the EU in 2014. the 12.5 percentage point drop in the debt-to Although the contribution from net exports is GDP ratio to 110.8 % in 2014. Public debt is likely to moderate, strong investment growth and mostly long-term and carries low interest rates the recovery in private consumption should reducing refinancing risks. underpin real GDP growth of about 3.5% in 2015 and 2016. The recovery has been job-rich and • Financial sector challenges are diminishing unemployment fell to 10.6 % at the end of 2014. as domestic banks have been restructured, The better macroeconomic environment has downsized and recapitalised. Profitability is buoyed tax revenue and helped achieve fiscal still a problem, but it continues to improve and targets despite expenditure overruns compared to the banks' strengthened position was reflected budget profiles. It has also helped improve bank in the results of the European Central Bank's performance and ease the deleveraging process. comprehensive assessment. The regulatory and Market perceptions of Ireland have improved supervisory systems have been strengthened. significantly amid a general improvement in However, the high share of non-performing financial market conditions. The spread over 10- loans is falling slowly, in particular in the year German bunds fell to about 80 basis points in mortgages and commercial loans. early 2015, bolstering sovereign debt and banks.

• The external accounts have strengthened This country report assesses Irelandʼs economy considerably over the past few years. The against the background of the Commissionʼs economy has regained competitiveness and the Annual Growth Survey which recommends three rebalancing between the tradable and nonmain pillars for the EUʼs economic and social tradable sectors seems to be nearing policy in 2015: investment, structural reforms, and completion. Irelandʼs external accounts need to fiscal responsibility. In line with the Investment be interpreted with care, however, and although Plan for Europe, it explores ways to maximise the the net international investment position is impact of public resources and unlock private falling, it remains highly negative. investment. Finally, it assesses Ireland in the light of the findings of the Alert Mechanism Report • The labour market situation has improved, 2015, in which the Commission found it useful to but long-term unemployment remains a examine further the persistence of imbalances or problem. While the unemployment rate is now their unwinding. These are the main findings of the below the euro area average, the share of in-depth review in this country report: structural unemployment risks increasing. The

adjustment need is compounded by the skills • Private sector indebtedness declined in 2014 mismatches that have emerged with the

but is still high and well above the EU rebalancing of the economy between the nonaverage.

Corporate debt levels are inflated by tradable and tradable sectors and by the

the presence of multinationals, and SMEs have difficulties in re-skilling or up-skilling workers.

borne the brunt of the deleveraging among

corporates. Deleveraging needs vary This country report also analyses other

significantly among SMEs. High levels of debt macroeconomic and structural issues and the main

are concentrated in a relatively small findings are:

proportion of firms, while the majority are now

either debt-free or able to service their debt. • The healthcare sector is facing sustainability

Debt repayments by households still outpace challenges. Expenditure overruns have been

new borrowing as they continue to actively recurrent in the past few years, which shows

deleverage against a backdrop of resurgent that while efficiency gains have been achieved

economic growth and rising property prices. in recent years, the health system may have

reached a point beyond which containing

• Public sector debt remains above GDP, but expected cost increases would imply deeper

is expected to fall pending continued budget structural reforms.

Executive summary

• SME access to finance remains heavily • Lowering the still high level of nonreliant on bank lending and the use of nonperforming loans would imply further loan bank financing options is yet to develop. arrears resolution. In particular, this would entail a constant monitoring of the

• The high proportion of people living in sustainability of the solutions agreed between households with low work intensity lenders and debtors. Making the credit registry generates social challenges. Limited access to operational in 2016 as planned would be an affordable and quality childcare is a barrier to important step towards enabling lenders to increased female labour market participation. make informed lending decisions.

Ireland has made some progress in addressing • Improving SME access to bank and nonthe country-specific recommendations the bank finance is important for growth and Council issued in 2014. Some progress was made promoting jobs and investment. Accessible in the areas of fiscal consolidation, the labour information about financing options is crucial market, and non-performing loans restructuring. for an increased use of public support schemes. Budget 2015 complies with the Stability and

Growth Pact, but the 2015 and 2016 deficit targets • The labour market will continue to face could have been more ambitious given strong adjustment needs for years to come, even economic growth, and expenditure ceilings still though employment growth has been sustained need to be strengthened. The introduction of lately. Tackling skills mismatches fully would training and activation programmes is progressing. avoid higher structural unemployment, Initiatives have been put in place to improve the contribute to the sustainability of Ireland's financing conditions for SMEs. The restructuring growth model and improve social indicators. of SMEs and household loans in arrears is ongoing. Some progress has been made in the area Other challenges are: of healthcare, including in reducing public spending on pharmaceuticals. Limited progress has • Untapped efficiency gains can be reaped in been made in tackling the low work intensity of the health system to meet future increases in households, with no progress on improving access demand for care. Such gains would enable to affordable and full-time childcare. Limited favourable health outcomes at an affordable progress has been made towards reducing the cost cost to society. of legal services, but some progress has been made

on improving data collection systems in courts. • The proportion of people living in low work

intensity households is high. The improved The country report reveals the policy challenges labour market situation alone is unlikely to stemming from the analysis of macro-economic solve the problem. imbalances:

• The cost of legal services remains high. A • Private and public sector deleveraging has a new regulatory framework is in Parliament. Its

further way to go. Further deleveraging is final design and implementation will determine necessary to ensure that debt levels are its effectiveness. sustainable and do not weigh on the growth prospects. Strict adherence to the planned fiscal • Weaknesses in network industries persist. adjustment under the Excessive Deficit Addressing them in the current environment Procedure and subsequent progress towards could prove challenging, particularly as far as achieving the medium-term budgetary the water sector is concerned. objective would ensure that public finances are firmly set on a sustainable path. Further growth-friendly tax reforms, including broadening the tax base, would support the adjustment process.

1. SCENE SETTER - ECONOMIC SITUATION AND OUTLOOK

Growth and external position on employment and tax revenues in Ireland. The future evolution of this form of production is

Ireland becomes the fastest growing economy in uncertain, because it depends on the evolution of the EU. The Irish economy reached a turning point global value chains. This means that the in the latter part of 2013 and grew strongly in exceptionally strong contribution from net exports 2014, driven primarily by net exports and a strong may not be sustained. recovery in investment (Graph 2.1 below). In the first three quarters of 2014, real GDP was up 4.9 % Sustained growth is expected for 2015–16, albeit year-on-year, with net exports contributing 3.4 more moderate than the previous year. Real percentage points. Ireland’s current account GDP growth is forecast to be resilient in 2015–16

surplus was 5.7 % of GDP in the first nine months at around 3.5 % each year ( 2 ). This will be lower

of 2014, underlining the strength of the country’s than the exceptional growth rate achieved in 2014 competitiveness. The strength of these figures has but still above the EU average. Consumption is taken observers by surprise. Both in bad and good forecast to pick up from 2015, helped by rising times, Irish GDP has exhibited higher amplitude employment, moderate wage growth and big drops than the euro area. In 2015, Irish output could be in energy prices. However, exports and investment back to its peak of 2007, one year earlier than that will remain important drivers of GDP growth over of the euro area as a whole. the period. Ireland will also continue to benefit

from its strong trade links with the more dynamic Graph 1.1: Real GDP, Ireland vs euro area US and UK markets and a weaker euro exchange

rate.

160 Index 2000=100

Investment has picked up sharply as business 150 confidence continues to recover. Real GDP

growth has also been driven by the recovery in

140 gross fixed capital formation. Aircraft purchases 130 and intellectual property transactions by

multinationals generate significant volatility in 120 investment. Excluding these, investment has been

strong across the board (up by 19.7 % year-on-year 110 in the first three quarters of 2014) signalling

100 improved business sentiment among small and medium-sized enterprises (SMEs) and continued

90 IE expansion by multinationals. The purchasing EA-18 managers index (PMI) has been above 55 since

80 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 March 2014.

Consumption has remained subdued so far, in

Source: European Commission the context of ongoing deleveraging. Household

spending, weaker than expected, did not pick up

Some uncertainty underlies net export figures significantly in 2014 as high debt levels continued and their contribution to the local economy. to weigh on the Irish private sector. However, Economic dynamism remains reliant on some of this sluggishness is also explained by multinational companies and connected exports. statistical effects on the split between volumes and Competitiveness gains since the crisis coincided prices. Positive trends in retail sales, tax receipts with a favourable business environment. Some of and employment all point to an underlying the strength in net exports is linked to a surge in recovery in consumption — still limited but contracted production ( 1 ), which has little impact apparent in the nominal figures. Retail sales have

( 1 ) Contracted production refers to goods produced abroad on been increasing since mid-2013 (Graph 2.2 below),

behalf of an entity resident in Ireland. The sale of goods is

recorded as an Irish export and production inputs as Irish (

2 ) European Commission 2015 Winter Forecast.

imports, under the European System of Accounts 2010.

• 1. 

  Scene setter - economic situation and outlook

and consumer confidence improved sharply to a characteristics of the specific projects selected by historic peak in December 2014. the European Fund for Strategic Investments.

Graph 1.2: Contributions to GDP growth Inflation and asset prices

10 y-o-y % Inflation remains subdued. Inflation remained

change

8 lower than in the euro area for the sixth

6 consecutive year in 2014 at 0.3 %, compared to 0.4 % in the euro area. Low energy prices have

4 also put downward pressure on inflation recently

2 and the harmonised index of consumer prices

0 (HICP) fell by 0.3 % year-on-year in December -2 2014 (Graph 2.4 below). The increase in domestic -4 demand and moderate wage increases should -6 dispel inflationary expectations. Core inflation is

-8 forecast to exceed somewhat the euro area average

-10 in 2015–16, marking an end to the process of Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q

3- 4- 1- 2- 3- 4- 1- 2- 3- 4- 1- 2- 3- 4- 1- 2- 3-

10 10 11 11 11 11 12 12 12 12 13 13 13 13 14 14 14 internal devaluation. That said, changes to the expected evolution of oil prices and

Private consumption Government consumption

Investment Inventories unconventional monetary policy measures could

Net exports GDP alter this outlook.

Source: Central Statistics Office of Ireland

Graph 1.4: HICP inflation

Graph 1.3: Retail sales in Ireland

6 y-o-y % change

105 Index

2005=100 5

103 4

101

99 3

97 2

95 1

93

91 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

89 -1

87 Retail sales excl. motor trades Retail sales -2

IE

85 Ap Jun Au O D Jun Au O D Ap Jun Au O D EA-18

r-1 ct ec

Febec -12 gct

ec

Feb Ap -13 gr-1 gct

-3 2 12

-1

2 -12

r-1

13 3 13 -1 3 -13 14 -14 4 14 -1 4 -14 Source: European Commission

Source: Central Statistics Office of Ireland

House prices have increased significantly but

The Investment Plan for Europe should give are still far from pre-crisis levels. In the housing

Ireland additional opportunities. The market, pent-up demand and the low level of new implementation of the Investment Plan for Europe construction have pushed up prices significantly, should provide an additional boost to investment especially in urban areas. Residential property and growth from 2016 onwards. The impact of the prices rose by 16.2 % year-on-year in November plan for Ireland will depend on a number of 2014 (Graph 2.5 below), with greater increases in factors. They include the volume of any Dublin than in the rest of Ireland — although the contributions of Ireland to the Plan, the degree of number of transactions remains small. The national participation by private investors and the property price index remains 37.9 % below its

• 1. 

  Scene setter - economic situation and outlook

2007 peak but if supply constraints persisted, they Graph 1.6: Unemployment rates, employment growth could exert significant upward pressure on residential prices. Commencement notices for new 20 % works and house completions have begun to rise from low levels but are not yet sufficient to satisfy demand. High accommodation prices in Dublin 15 could also ultimately affect Ireland's position as an international business hub.

10

Graph 1.5: Real estate prices

5 Unemployment rate (as % of labour force) 30 y-o-y % change Long-term unemployment rate

Annual employment growth

20 0

10 -5

Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q 3- 4- 1- 2- 3- 4- 1- 2- 3- 4- 1- 2- 3- 4- 1- 2- 3- 10 10 11 11 11 11 12 12 12 12 13 13 13 13 14 14 14

0

Source: Central Statistics Office of Ireland

-10

Social protection has helped to alleviate the rise

Dublin

-20 in poverty that followed the crisis. Ireland is one

ex-Dublin of the countries where net social expenditure

National

-30 increased the most (as a share of the aggregate M Ju N M Ju N M Ju N M Ju N

ar-1 l-1 ov ar-1 l-1 ov ar-1 l-1 ov ar-1 l-1 ov level of economic activity) following the 2007

-13 1 1

-11 -12 2 2 3 3 4 4

-14 crisis. In 2011, it amounted to nearly 22 % of Source: Central Statistics Office of Ireland GDP, according to the latest available data. As a

result, the country did not experience the rise in inequality some other Member States did.

Labour market and social inclusion Nevertheless, deprivation rates have continued to

Growth has been rich in jobs although the rise in the year to 2013, driven by sharp rises in unemployment rate remains high. The rural areas. This suggests that improving labour standardised unemployment rate has fallen steadily market conditions in Dublin and other urban areas to 10.6 % in December 2014 from a peak of have yet to spread to the rest of the country. The 15.1 % in February 2012. Long-term risk of social exclusion is heightened by the high unemployment has also fallen significantly but proportion of people living in households with low remains very high at 46 % of all unemployment work intensity, which remains the highest in the benefit claimants. Employment increased by 1.7 % EU.

year-on-year in the third quarter of 2014, with nearly 95 % of jobs created being full-time Fiscal developments and taxation positions. This trend is expected to persist, albeit at

a more moderate pace, given skills mismatches. Buoyant tax revenues have helped Ireland

SMEs and construction are expected to provide job reach its fiscal targets despite expenditure opportunities for people with less sophisticated overruns. The general government deficit is skills. Average unemployment is forecast to fall forecast to drop to 4.0 % of GDP in 2014, below further to around 9.5 % in 2015 and remain above the Excessive Deficit Procedure target for that year 8 % in 2016, putting a lid on wage inflation despite and down from 5.7 % in 2013. This reflects the

rising wage demands. effects of remarkable economic growth in 2014, additional windfall revenues and lower interest

expenditure. Tax revenues increased by 9.2 % in 2014. Receipts from personal income tax and VAT also increased, mirroring improvements in the

• 1. 

  Scene setter - economic situation and outlook

labour market and consumer confidence. While Graph 1.7: Bank profitability total government expenditure increased only very moderately in 2013, spending pressures intensified % (RoE) % (RoA)

further at the end of 2014, mainly in healthcare, 20

2

compared to the budget profile. Unlike in previous

years, healthcare budget overruns were not offset 10

1

by savings in other areas. 0 0

The fiscal position is expected to improve -10 -1 further in 2015, but some risks remain. Taking

into account tax cuts and expenditure increases of -20 -2

around 0.5 % of GDP, the general government

deficit is projected to bet 2.9 % of GDP in 2015. In -30

-3

2016, it is forecast to be 3.1 % under a no-policy-40 RoE (lhs) -4

change assumption. Risks associated with the

deficit projections for 2015 and 2016 mainly relate RoA (rhs) -50 -5

to the sustainability of the favourable economic 2006 2007 2008 2009 2010 2011 2012 2013 2014

outlook and to persisting spending pressures linked

to demographics and the public service payroll. (1) RoE: Return on Equity, RoA: Return on Assets Source: IMF (refers to the whole banking sector in Ireland)

The structural deficit is expected to decrease to

around 2.4 % of GDP in 2016, from 3.5 % in 2013. Net lending to the private sector remains weak,

Public debt is high but falling. Gross general given mostly low demand for credit. Lending to government debt is projected to fall to 106.6 % of businesses (non-financial corporations) declined GDP in 2016, down from 123.3 % in 2013. This by 8.1 % year-on-year in October 2014. Lending to marked improvement largely reflects the households, for consumption and house purchases, liquidation of the Irish Banking Resolution also fell by 3.3 % year-on-year in the third quarter Corporation, along with ongoing economic of 2014. Demand for credit remains subdued as growth. Starting in 2014, small primary surpluses deleveraging by the private sector continues. should also help maintain the debt trajectory on a Though still at very high levels, private sector nonconsistent downward path. Nonetheless, the high consolidated debt fell by 3.9 percentage points in level of public debt continues to be one of the main the first quarter of 2014, to 298.3 % of GDP. In

vulnerabilities of the Irish economy. addition to demand issues, there might also be credit supply constraints, as lending rates are

higher in Ireland than in the rest of the euro area.

Financial sector and credit supply

Bank performance has continued to improve The number of non-performing loans remains but there are still considerable difficulties high but is gradually decreasing. In the three (Graph 2.7 below). Almost all of the participating main domestic banks, it fell to 24.9 % of total Irish banks passed the asset quality review and the loans in the third quarter of 2014, from a high of stress tests of the ECB’s comprehensive 27.1 % at the end of 2013. The number and value assessment. Only Permanent TSB (PTSB) had a of mortgage accounts in arrears for over 90 days EUR 855 million capital shortfall in the adverse decreased by 4.5 % and 3.8 % respectively quarterscenario of the test, which it is expected to fill with on-quarter. However, mortgage arrears stood at private capital. The results of the comprehensive 19 % of total mortgage loan balances in Q3-2014. assessment were in line with expectations and The increase in the build-up of longest-term PTSB remains now the only loss-making domestic arrears persisted, up to 9.6 % of total loan balances bank. The reliance of domestic banks on central in Q3, from 9.2 % at the end of June.

bank funding has continued to decline, down to

3.9 % in September 2014, near the euro area Positive market conditions have bolstered the

average. sovereign and the banks. Bank of Ireland successfully tapped the markets and raised EUR

750 million of tier 2 capital in June 2014. In

• 1. 

  Scene setter - economic situation and outlook

January 2015, the yield on 10-year Irish Graph 1.8: Ten-year spreads over German bonds government bonds hit new lows of 1.03 % and the spread over German bonds fell to 63 bps (Graph 2500 b

2.8 below). In early November 2014, the sovereign issued EUR 3.75 billion of 15-year bonds, the first such issuance since 2009. The yield of 2.49 % was 2000 a record low for this issuance. Also in December IE 2Y

2014, Standard & Poor’s upgraded Ireland’s long IE 10Y

term sovereign credit rating to A (from A-). The 1500 ES 10Y

rating agency also confirmed its ratings of the Irish PT 10Y banks, upgrading Bank of Ireland’s outlook to 1000 positive. In January 2015, amid strong demand,

Allied Irish Banks issued EUR 750 million of a 7- year covered bond at a yield of 0.75 %, as funding 500 costs for Irish banks continue to improve.

0 Jan M M Ju S N S ar-1 ay ep N ov Jan M M Ju S ar-1 ay

-12 l-1

epov Jan M M Ju ar-1 ay l-1 l-1 ep N ov Jan

-12 -13 2 -12 2 12 3 -13 3 13

-13 -14 -15 4 -14 4 14

-14

Source: iBoxx

Box 1.1: Economic surveillance process

The Commission’s Annual Growth Survey, adopted in November 2014, started the 2015 European Semester, proposing that the EU pursue an integrated approach to economic policy built around three main pillars: boosting investment, accelerating structural reforms and pursuing responsible growth-friendly fiscal consolidation. The Annual Growth Survey also presented the process of streamlining the European Semester to increase the effectiveness of economic policy coordination at the EU level through greater accountability and by encouraging greater ownership by all actors.

In line with streamlining efforts this Country Report includes an In-Depth Review — as per Article 5 of Regulation No 1176/2011 i — to determine whether macroeconomic imbalances still exist, as announced in the Commission’s Alert Mechanism Report published on November 2014.

Based on the 2014 in-depth review for Ireland published in March 2014, the Commission concluded that Ireland was experiencing macroeconomic imbalances requiring specific monitoring and decisive policy action. In particular financial sector developments, private and public sector indebtedness and, linked to that, the high gross and net external liabilities and the situation of the labour market meant that risks were still present.

This country report includes an assessment of progress towards the implementation of the 2014 Country Specific Recommendations adopted by the Council in July 2014. The Country-Specific Recommendations for Ireland concerned public finances and taxation, healthcare, the labour market, welfare, access to finance, the financial sector and the legal sector.

• 1. 

  Scene setter - economic situation and outlook

Table 1.1: Key economic, financial and social indicators - Ireland

Forecast 2008 2009 2010 2011 2012 2013 2014 2015 2016 Real GDP (y-o-y) -2.6 -6.4 -0.3 2.8 -0.3 0.2 4.8 3.5 3.6 Private consumption (y-o-y) -0.2 -5.8 0.4 -1.1 -1.4 -0.4 0.5 2.4 1.8 Public consumption (y-o-y) 1.2 -2.6 -4.8 -2.2 -1.3 0.0 1.6 -0.1 2.9 Gross fixed capital formation (y-o-y) -9.1 -18.9 -17.6 -2.2 5.2 -2.8 8.6 9.7 8.9 Exports of goods and services (y-o-y) -0.9 -4.0 6.2 5.5 4.7 1.1 12.7 5.3 5.5 Imports of goods and services (y-o-y) -2.6 -9.2 3.0 -0.6 6.9 0.6 12.2 5.6 6.0 Output gap 1.0 -4.6 -4.2 -1.3 -1.8 -2.5 -0.1 0.7 0.7

Contribution to GDP growth: Domestic demand (y-o-y) -2.4 -7.9 -4.3 -1.3 -0.1 -0.6 1.8 2.6 2.8 Inventories (y-o-y) -0.8 -1.0 0.5 0.7 -0.3 0.4 -0.1 0.0 0.0 Net exports (y-o-y) 1.1 3.4 3.2 5.7 -0.8 0.6 3.0 0.9 0.8

Current account balance (% of GDP), balance of payments -5.64* -2.32* 1.13* 1.23* 1.6 4.4 . . .

Trade balance (% of GDP), balance of payments 8.7 15.5 17.9 20.5 20.5 20.8 . . . Terms of trade of goods and services (y-o-y) -2.3 1.6 -1.4 -2.8 0.4 0.0 -0.7 -0.6 -0.6 Net international investment position (% of GDP) 0.0 0.0 0.0 0.0 -109.6 -102.1 . . . Net external debt (% of GDP) -159.6* -212.2* -294.4* -329.3* -396.7* -425.3* . . .

Gross external debt (% of GDP) 965.92 1045.1 1046.2 1010.8 963.5 936.3 . . .

Export performance vs advanced countries (% change over 5 years) -10.9 3.5 -5.0 -4.8 -5.4 1.9 . . .

Export market share, goods and services (%) 1.1 1.3 1.1 1.0 1.0 1.1 . . .

Savings rate of households (net saving as percentage of net disposable

income) 6.0 11.5 8.5 6.4 5.2 4.3 . . .

Private credit flow, consolidated, (% of GDP) 22.3 -5.0 2.5 16.4 -1.8 -5.8 . . . Private sector debt, consolidated (% of GDP) 237.4 258.5 261.2 277.9 281.5 270.3 . . .

Deflated house price index (y-o-y) -8.4 -12.8 -10.4 -15.4 -11.9 1.3 . . .

Residential investment (% of GDP) 8.3 4.7 3.1 2.4 1.9 2.0 . . .

Total financial sector liabilities, non-consolidated (y-o-y) 5.7 4.0 7.0 -0.6 -1.4 0.4 . . .

Tier 1 ratio 1 . . . . . . . . .

2

Overall solvency ratio . . . . . . . . . Gross total doubtful and non-performing loans (% of total debt

instruments and total loans and advances) 2 . . . . . . . . .

Change in employment (number of people, y-o-y) -0.6 -7.8 -4.1 -1.8 -0.6 2.4 2.0 2.2 1.9 Unemployment rate 6.4 12.0 13.9 14.7 14.7 13.1 11.1 9.6 8.8 Long-term unemployment rate (% of active population) 1.7 3.5 6.8 8.7 9.1 7.9 . . .

Youth unemployment rate (% of active population in the same age group) 13.3 24.0 27.6 29.1 30.4 26.8 23.9 . .

Activity rate (15-64 year-olds) 72.0 70.6 69.4 69.2 69.2 69.8 . . . Young people not in employment, education or training (%) 14.9 18.6 19.2 18.8 18.7 16.1 . . .

People at risk of poverty or social exclusion (% of total population) 23.7 25.7 27.3 29.4 30.0 29.5 . . .

At-risk-of-poverty rate (% of total population) 15.5 15.0 15.2 15.2 15.7 14.1 . . . Severe material deprivation rate (% of total population) 5.5 6.1 5.7 7.8 9.8 9.9 . . . Number of people living in households with very low work-intensity (%

of total population aged below 60) 13.7 20.0 22.9 24.2 23.4 23.9 . . .

GDP deflator (y-o-y) -2.5 -3.9 -1.6 0.9 1.3 1.0 0.4 0.4 0.6 Harmonised index of consumer prices (HICP) (y-o-y) 3.1 -1.7 -1.6 1.2 1.9 0.5 0.3 0.3 1.3 Nominal compensation per employee (y-o-y) 5.2 -1.0 -3.8 1.2 0.8 2.0 -1.3 1.7 1.9 Labour productivity (real, person employed, y-o-y) -2.0 1.6 3.9 4.6 0.3 -2.1 . . . Unit labour costs (ULC) (whole economy, y-o-y) 7.4 -2.6 -7.4 -3.2 0.5 4.2 -3.9 0.4 0.3 Real unit labour costs (y-o-y) 10.1 1.4 -5.9 -4.1 -0.8 3.2 -4.3 0.0 -0.4

REER 3) (ULC, y-o-y) 8.3 -4.9 -10.5 -3.6 -5.1 6.4 -5.0 -4.8 -0.6 REER 3) (HICP, y-o-y) 1.2 -2.1 -7.8 -1.5 -3.6 1.2 0.8 -3.6 -0.3

General government balance (% of GDP) -7.0 -13.9 -32.4 -12.6 -8.0 -5.7 -4.0 -2.9 -3.1 Structural budget balance (% of GDP) . . -8.8 -8.0 -7.1 -4.8 -3.9 -3.4 -3.4 General government gross debt (% of GDP) 42.6 62.2 87.4 111.1 121.7 123.3 110.8 110.3 107.9

(1) Domestic banking groups and stand-alone banks.

(2) Domestic banking groups and stand-alone banks, foreign-controlled (EU and non-EU) subsidiaries and branches.

(3) Real effective exchange rate.

(*) Indicates BPM5 and/or ESA95.

Source: European Commission, 2015 winter forecast, ECB.

• 1. 

  Scene setter - economic situation and outlook

Table 1.2: Macroeconomic Imbalance Procedure: Scoreboard - Ireland

Thresholds 2008 2009 2010 2011 2012 2013

Current Account 3 year average -4%/6% -8.1 -8.4 -6.4 -4.2 -1.5 1.1

Balance (% of GDP) p.m.: level year - -9.4 -6.6 -3.2 -2.7 1.6 4.4

Net international investment position (% of GDP) -35% -75.6 -92.4 -88.0 -112.2 -112.0 -104.9

Real effective exchange % change (3 years) ±5% & ±11% 7.3 5.0 -5.4 -9.6 -12.2 -3.9

rate (REER) External imbalances (42 industrial countries -

and competitiveness HICP deflator) p.m.: % y-o-y change - 3.5 -1.6 -7.1 -1.1 -4.3 1.6

% change (5 years) -6% -21.2 -5.3 -13.0 -13.1 -14.3 -4.9 Export Market shares

p.m.: % y-o-y change - -8.4 16.0 -14.0 -6.2 0.0 1.7

Nominal unit labour % change (3 years) 9% & 12% 17.0 10.1 -3.2 -12.8 -10.0 1.3

costs (ULC) p.m.: % y-o-y change - 7.4 -2.6 -7.4 -3.2 0.5 4.2

Deflated House Prices (% y-o-y change) 6% -8.5 -12.7 -10.4 -15.3 -11.9 0.3

Private Sector Credit Flow as % of GDP, consolidated 14% 22.4 -5.0 2.6 16.3 -1.8 -5.7

Private Sector Debt as % of GDP, consolidated 133% 237.4 258.5 261.1 277.9 281.5 266.3

Internal imbalances General Government Sector Debt as % of GDP 60% 42.6 62.2 87.4 111.1 121.7 123.3

3-year average 10% 5.2 7.7 10.8 13.5 14.4 14.2 Unemployment Rate

p.m.: level year - 6.4 12.0 13.9 14.7 14.7 13.1

Total Financial Sector Liabilities (% y-o-y change) 16.5% 6.2 3.5 6.3 -2.4 -1.5 1.0

Figures highlighted are the ones falling outside the threshold established by EC Alert Mechanism Report. For REER and ULC, the first threshold concerns Euro Area Member States.

(1) Figures in italic are according to the old standards (ESA95/BPM5).

(2) Export market shares data: the total world export is based on the 5th edition of the Balance of Payments Manual (BPM5).

(3) Current account balance has been revised downwards following methodological changes in the treatment of FDI investment income.

Source: European Commission.

2. IMBALANCES, RISKS AND ADJUSTMENT

2.1. INDEBTEDNESS AND DELEVERAGING

Private sector debt and deleveraging household debt had fallen to EUR 171.1 billion, down 19.5 % from its peak in late 2008. In

Private sector debt started to decline but is still contrast, corporate debt amounted to EUR 344.4 considerably higher than the euro area average. billion, down about 11.7 % from its peak in the Private sector non-consolidated debt amounted to second half of 2012. Despite notable EUR 515.3 billion (283.5 % of GDP) in the third improvements, the Irish private sector remains quarter of 2014, down 10.6 % from a peak of EUR highly indebted. The estimated remaining 576.6 billion in mid-2012. The correction begun deleveraging need is above 30 % of GDP, with since 2013 follows the excessive build-up between obvious implications for the speed of recovery of 2002 and 2011, when private indebtedness rose private consumption and investment ( 3 ). from about 120 % of GDP to over 320 % of GDP

(Graph 2.1.1). Most of this increase can be Graph 2.1.2: Debt build-up and deleveraging trends attributed to the corporate sector amid expanding activity of multinationals and a growing number of 50 y-o-y % change

SMEs taking on property-related debt. It grew by NFC almost EUR 300 billion between 2002 and 2012 (a 40 Households

276  % increase), while that of the household Private sector sector increased by about half of that amount (a 30 GDP

218  % increase).

20

Graph 2.1.1: Private sector debt

10

400 % of GDP 0

350 NFC Households -10

300 Private sector MIP threshold

EA18 average -20 Q Q Q Q Q Q Q Q Q Q Q Q

250 3 3 3 3 3 3 3 3 3 3 3 3 03 04 05 06 07 08 09 10 11 12 13 14

200 (1) Quarterly Financial Accounts release on an ESA 2010

basis with reference from Q1 2012 to Q3 2014. 150 Source: Central Bank of Ireland, Central Statistics Office

100 Corporate deleveraging is accelerating but

50 overall debt levels remain high, even excluding multinationals. Since Ireland’s economy has a

0 Q Q Q Q Q Q Q Q Q Q Q Q Q

3 3 3 3 3 3 3 3 3 3 3 3 3 large multinational corporate sector, intra-group

02 03 04 05 06 07 08 09 10 11 12 13 14 cross-border lending inflates corporate debt-to(1)

Quarterly Financial Accounts release on an ESA 2010 GDP levels. The difference between consolidated

basis with reference from Q1 2012 to Q3 2014. Figures for and non-consolidated debt reflects this. In the Non-Financial Corporation (NFC) sector are the sum of Ireland’s case the difference is 26.3 % ( 4 ).

loans and securities other than shares. Figures for

households are the sum of loans and other accounts According to the Commission’s analysis (

5 ),

receivable/payable. Data are non-consolidated. MIP

threshold: threshold of the scoreboard used under the ( 3 ) This based on a combination of methods using in-house Macroeconomic Imbalances Procedure. work on debt sustainability and an IMF analysis of Source: Central Bank of Ireland, Central Statistics Office, historical debt boom/bust episodes. Source: 'Private sector European Commission deleveraging: where do we stand?', Quarterly report on the

euro area, October 2014,Vol 13 (2014), Issue 3.

The deleveraging process started earlier among ( 4 ) Source: Eurostat. In 2013, the consolidated non-financial

private households than in the corporate sector. corporation debt-to-GDP ratio was 173.6 %. The nonconsolidated ratio was 199.9 % .

The household debt-to-GDP ratio started declining ( 5 ) Since there are no comparable aggregate data on crossin early 2010 while corporate indebtedness border inter-company lending, an estimate is constructed

continued to rise for another two years (Graph using sector financial accounts. It is based on the assumption that most consolidated loans held by

2.1.2). By the end of the third quarter of 2014,

2.1. Indebtedness and deleveraging

multinationals account for over 50 % of the Graph 2.1.3: Corporate leverage indicators increase in corporate sector indebtedness. Since

multinationals have access to international capital EUR million 90%

markets, they do not depend on domestic banks for NFC debt

financing. This decreases overall deleveraging 1,000 Total liabilities 80%

pressure amid favourable market conditions and Debt as % of total liabilities 70% reduces economic and financial stability risk. 800 (right-hand side)

However, even taking this into account, Irish 60% corporate debt levels as a percentage of GDP 600 50%

continue to exceed the euro area average by about

80 %. 40%

400 30% Improvements in corporate debt levels were

achieved by reducing nominal debt and 20% 200

increasing the value of company assets. Among 10%

other things, the latter is due to valuation effects 0 Q Q

stemming from the surge in real estate property 1

Q 3 Q 1 Q 3 Q 1 3 Q 1 Q 3 Q 1 Q 3 Q 1 Q 3 Q 1 Q 3 Q 1 0%

07 07 08 08 09 09 10 10 11 11 12 12 13 13 14

prices. Company assets measured by total liabilities ( 6 ) have increased by 20 % over the past (1) Total liabilities are used as a proxy for total assets. two years, while the debt stock, albeit more Source: Central Bank of Ireland volatile, has decreased by 4 % (Graph 2.1.3).

Although falling, debt servicing costs are still SMEs seem to have borne the brunt of the comparatively high compared to the rest of the deleveraging in the corporate sector. This is euro area, making further debt reduction difficult. because SMEs were under greater financial

stability pressure than multinationals. In contrast with the Irish-resident multinationals that maintain their intra-group funding practices and market

       Non-financial corporations are likely to be related to crossborrowing practices, Irish companies, in particular

border lending, the counterparts most likely foreign

       corporates (by virtue of the same assumption as for SMEs, are focusing on loan repayments.

domestic entities).

( 6 ) Due to the limited availability of aggregate data on non Indebtedness levels vary considerably financial assets, the denominator (total liabilities) is used as depending on SME type and exposure to the

a proxy for the total market value of assets in line with

accounting principles. property market. With high levels of debt

concentrated in a relatively small proportion of companies, most do not suffer from excess leverage. According to the Central Bank of Ireland, a third of domestic SMEs have no debt at all and over 80 % can comfortably meet their debt servicing requirements, as their reasonably low debt-to-turnover ratios show. This means that much of the further corporate deleveraging need will have to be undertaken by those SMEs with high levels of debt. These companies are often exposed to property-related risks. This makes them vulnerable and more susceptible to default, especially in cases of negative equity. Even though the main lenders have stepped up their SME loan resolution efforts in line with the country-specific recommendation, this loan portfolio remains heavily impaired. About a quarter of all SME loans are in default (the third highest rate in the euro area). The wholesale and retail sector is the most exposed to loans in terms

2.1. Indebtedness and deleveraging

of balance ( 7 ). Defaults occur most often in the Graph 2.1.4: Components of the household deleveraging construction and hotel/restaurant sectors. SMEs are process now allowed to apply for creditor protection

(“examinership” under Irish law) in the Circuit 25 y-o-y % change

Court rather than the High Court, which lowers

their procedural costs – albeit take-up has been low 20

Credit flow Real GDP growth Inflation Other changes

so far. The proposed Consumer Protection 15 D/GDP, change

(Regulation of Credit Servicing Firms) Bill aims to include SMEs and ensure that their rights as 10 borrowers are protected even in the case of loan

portfolio sales to unregulated entities. 5

0

Investment growth is mainly financed by

corporate foreign borrowing and retained -5

profits, not domestic banks. The diversity of the -10

corporate sector in Ireland means that different companies use different strategies. On one side, -15 Q Q Q Q Q Q Q Q Q Q

national account data show a strong recovery in 1 1 1 1 1 1 1 1 1 1 05 06 07 08 09 10 11 12 13 14

investment over the past few quarters. On the other

side, negative credit flows show that the financing (1) D/GDP, change: change in the debt-to-GDP ratio

is not coming from domestic banks. This means Source: European Commission

that most of the pick-up in investment so far can be

attributed to the multinational sector that borrows The impetus to further reduce household debt abroad. In addition, since the turnaround in the should continue with continued improvement in economy has boosted business revenues, economic growth. Households have increased companies have also used growing profits for their savings to reduce debt. Household liabilities

working capital purposes and to reduce debt. have been decreasing slowly but constantly since the onset of the crisis. At the end of 2014 they

Negative credit flow partly masks a pick-up in were at EUR 176 billion, a 19 % drop since their demand for new credit. In spite of the continued peak at the end of 2008. However, this was not balance sheet repair, deleveraging pressures on the matched by an increase in disposable income: as it Irish non-financial corporate sector remain high remains subdued and consumption is still due to the still elevated indebtedness levels. recovering, overall debt levels remain high (Graph However, some domestic corporates seem to have 2.1.5). This is partly because average earnings stabilised their businesses and could be more likely remain relatively flat. Two thirds of all Irish

to borrow for investment. mortgage holders continue to benefit from favourable ’tracker’ interest rates that keep the cost

Household debt repayments still outpace new of mortgage servicing low.

borrowing as they continue to pay down debt.

Negative credit flows are the single largest contributor to household debt reduction (Graph

2.1.4). In spite of that, the sector remains among the most indebted in the euro area at 91.5 % of

GDP. Survey data show that 56.8 % of Irish households are indebted, and 33.9 % of them have a mortgage on their main residence.

( 7 ) McCann, F. and McIndoe-Calder, T.: 'Property debt overhang: the case of Irish SMEs', Research technical paper, Central Bank of Ireland, 2014.

2.1. Indebtedness and deleveraging

Graph 2.1.5: Household debt sustainability (Graph 2.1.6), rising for the ninth consecutive quarter (an increase of 5 % over the quarter).

240 % of disposable income EUR billion 250 Debt (right Graph 2.1.6: Household net worth

220 hand side)

200 Debt/GDI

200 (left-hand 1,000 EUR billion Financial Assets

side) Liabilities

180 150 Housing Assets 750 Net Worth

160 100

140 500

50 120

250

100 0 1 1 1 1 1 1 1 1 1 1 1 1

0 2003 Q 2004 Q 2005 Q 2006 Q 2007 Q 2008 Q 2009 Q 2010 Q 2011 Q 2012 Q 2013 Q 2014 Q

(1) Debt - to total loans of households. GDI - gross -250 3 1 3 1 3 1 3 1 3 1 3 1 3 1 3 1 3 1 3 1 3

disposable income of households including non-profit institutions serving households.

Source: Central Bank of Ireland, European Central Bank 2004 Q 2005 Q 2005 Q 2006 Q 2006 Q 2007 Q 2007 Q 2008 Q 2008 Q 2009 Q 2009 Q 2010 Q 2010 Q 2011 Q 2011 Q 2012 Q 2012 Q 2013 Q 2013 Q 2014 Q 2014 Q

(1) Net worth is measured as the difference between the

Cooperation between lenders and borrowers on households’ assets (housing and financial) and their liabilities.

debt restructuring improved. Initiatives such as Source: Central Bank of Ireland, Central Statistics Office the Central Bank of Ireland’s Mortgage Arrears

Resolution Targets and the regulatory reforms The recovery in property prices is particularly introduced during the programme helped improve strong in Dublin. Residential property prices in cooperation between banks and debtors. Ambitious Dublin rose 22.3 % in the year to December 2014, targets for concluded restructuring solutions for with sharp price rises in Dublin slowly spreading mortgages in arrears have been set for banks. to the rest of the country. Supply shortages are Agreements continue to be monitored to ensure driving these price rises. Household formation their sustainability. The restructuring solutions that rates suggest an equilibrium level of new house banks have proposed generally offer more construction of approximately 25 000 units a favourable repayment conditions and sometimes year ( 8 ), with demand strongest in Dublin. Only an partial debt write-offs. The debt solutions offered estimated 11 000 units were completed nationally by the Insolvency Service of Ireland represent in 2014. New measures have been introduced by another useful avenue for the most distressed the Central Bank of Ireland to increase the debtors. However, little use is still being made of resilience of the financial and household sectors to personal insolvency procedures and the reformed future credit-fuelled property price rises. Failing a bankruptcy system, possibly on account of stronger supply response however, prices look set enhanced cooperation between debtors and to increase further. This could hamper lenders. competitiveness and make it difficult to afford

housing. In May 2014 the authorities launched The increase in residential property prices Construction 2020, a strategy for the construction increases households’ net worth. Houses make sector. It addresses aspects such as planning, up almost 53 % of the total value of all household financing, taxation, standards and enforcement. assets. In 2014 national house prices, as measured Legislative proposals include a special levy on by the residential property price index, increased by 16.3 % compared to the previous year. This ( 8 ) Duffy, D., Byrne, D. and Fitzgerald, J., 'Alternative

upward trajectory brought household net worth to scenarios for new household formation in Ireland', Special Article in Quarterly Economic Commentary, Spring 2014,

EUR 574 billion in the third quarter of 2014 The Economic and Social Research Institute

https://www.esri.ie/UserFiles/publications/QEC2014SPR_ SA_Duffy.pdf

2.1. Indebtedness and deleveraging

vacant sites in urban areas and ’use it or lose it’ Graph 2.1.7: Contribution to change in gross government planning permissions for developers. The debt government has also released additional funding to increase the supply of social and affordable

housing and committed itself to earmarking EUR 40 pps of GDP % of GDP 140

2.2 billion for this purpose in the next three years. 35 30 120

The introduction of real estate investment trusts ( 9 ) 25

as investment vehicles whose shares can be traded 100 20

freely also seems to have attracted new funds. This 15 80

provides additional liquidity for the commercial 10

real estate sector. 5

60

0 40

-5

General government debt and deleveraging -10 20 06 07 08 09 10 11 12 13 14 15 16

Government gross debt is very high but has started to decline. For the first time since 2007, Stock-flow adjustments gross general government debt is estimated to have Interest-growth differential fallen to 110.8 % of GDP in 2014, down from Primary balance excluding bank support

123.3 % of GDP a year before. The sharp drop is Gross debt ratio (rhs) largely due to the liquidation of the Irish Bank (1) Stock-flow adjustments include Irish Bank Resolution

Resolution Corporation ( 10 ). Based on the Corporation consolidation, banks supports funded by the

European Commission winter 2015 forecast, the National Pension Reserve Fund and bank support measures Source: European Commission

debt-to-GDP ratio is projected to further decrease to around 110.3 % in 2015 and to 107.9 % in 2016

(Graph 2.1.7). This assumes robust economic Gross government debt is largely long-term and growth of more than 3 % and a sizeable primary at low interest rates. Of gross government debt, surplus of around 0.9 % of GDP in 2015 and 0.8 % 89.3 % has a residual maturity of more than one of GDP in 2016. The debt projections are sensitive year. Around 33.4 % of that represents official to variations in economic growth and to the loans from the EU-IMF programme partners expected size of the budgetary adjustment. Interest (Graph 2.1.8). As of the end of 2014, average debt rate risks are low due to prudent debt management maturity was about 12 years (

11 ). The average

and low future refinancing needs. effective interest rate on government debt is estimated to be around 3.5 %. Compared to that of

other EU Member States, this low rate reflects the

( 9 ) These are investment companies that hold rental properties. high share of official debt and the currently very

Their appeal lies in the fact that the income or gains from favourable market conditions in combination with

the trustʼs property rental business are not subject to Irish long-dated government bonds at floating interest

corporation tax.

( 10 ) The Irish Bank Resolution Corporation (IBRC) was set up rates.

in July 2011 to merge and eventually wind down the former Anglo Irish Bank and the Irish Nationwide Building Society. The Irish government owns it. With the transition ( 11 ) Data for the end of December take into account the to ESA 2010 accounting rules it was reclassified as part of repayment of EUR 9 billion of IMF loans, but do not yet the general government sector. This reclassification added reflect the extension of the European Financial EUR 12.6 billion to government debt at the end of 2013. Stabilisation Mechanism loan maturities (see Graph 3.1.9). Including the European Financial Stabilisation Mechanism loan maturity extension, the average maturity of long-term debt is estimated to be around 13 years.

2.1. Indebtedness and deleveraging

Graph 2.1.8: Breakdown of gross government debt (end of Graph 2.1.9: Average effective interest rates on

December 2014) government debt (2014)

6 %

Short-term debt 5

4

Othe EU-IMF government programme

bonds loans 3

Bonds replacing 2

promissory notes

Long-term debt

1

(1) Short-term debt is debt with a residual maturity of less 0 than one year HU HR RO SI LT BG MT PT LV PL IT ES DK IE SK UK AT CZ BE CY DE EL FR FI NL SE LU EE

Source: Irish Department of Finance

Source: European Commission

The maturity profile and the interest burden

are expected to improve further with the The authorities estimate savings on interest refinancing of IMF loans. In 2014, the Irish expenditure to be over EUR 1.5 billion over the authorities requested a waiver of the proportional lifetime of the reimbursed IMF loans, including early repayment clause in its loan agreements with hedging costs. The IMF loans are being replaced the IMF and EU lenders to make an early by government bonds with longer maturities repayment of XDR 15.7 (EUR 19.6 billion) of IMF (Graph 2.1.10). The National Treasury loans. The request was motivated by the fact that Management Agency raised EUR 3.75 billion from market rates had fallen well below the interest a new 15-year bond in November 2014 and EUR 4 costs on existing IMF loans (Graph 2.1.9). The EU billion in 30-year bonds in February 2015, at a lenders granted the waiver in December 2014. yield close to 2 per cent. It plans to issue an Ireland repaid EUR 9 billion of IMF loans in additional EUR 8-11 billion of long-term bonds in December 2014 and EUR 3.5 billion in February 2015, including provisions for the remaining early 2015. The Irish authorities expect to conclude the repayment of IMF loans.

planned reimbursement by the end of 2015.

2.1. Indebtedness and deleveraging

Graph 2.1.10: Maturity profile of Ireland’s long-term decline to around 80 % of GDP by 2025. Though

marketable and official debt (end of

December 2014) still high, this is an improvement on earlier forecasts, mainly because of a stronger growth

30 € bn outlook and higher primary budget balances.

25 Long-term sustainability of public debt implies

20 achieving significant primary surpluses. The Stability and Growth Pact scenario under the debt

15 sustainability analysis is contingent upon Ireland sustaining structural primary surpluses of about

10 3 % of GDP (Graph 3.1.12). A robust fiscal

5 framework would support such a path. While it did much to improve the fiscal framework and the

0 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031- 2041- 2051- quality and timeliness of fiscal data under the EU-

40 50 53 IMF financial assistance programme, multi-annual

EFSM*** EFSF** expenditure ceilings are still open to discretionary Bilateral* IMF changes (Section 4.3).

Floating Rate Bonds Fixed Rate/Amortising Bonds

(1) *Bilateral loans were provided by the United Kingdom,

Sweden and Denmark. **European Financial Stability The sustainability of government debt remains

Facility loans reflect the maturity extensions agreed in June vulnerable to macro-shocks. The European

2013. ***European Financial Stabilisation Mechanism (EFSM)

loans are also subject to a seven year extension. It is not Commission’s debt sustainability analysis also

expected that Ireland will have to refinance any of its EFSM assesses the sensitivity of debt projections to loans before 2027. However, the revised maturity dates of changes in key economic variables. It shows that a

individual EFSM loans will only be determined as they

approach their original maturity dates. The original EFSM negative shock to nominal GDP growth of 0.5

maturities are reflected in the table above. percentage points would increase the public debt

Source: NTMA to-GDP ratio to about 114 % by 2025 under the

no-policy-change assumption. By contrast, the

Sustained economic growth and further sensitivity of government debt to a rise in interest improvement of the budget balance are needed rates on new borrowing is estimated to be low, to keep the debt-to-GDP ratio on a firm given low future refinancing needs.

downward path. The European Commissionʼs latest debt sustainability analysis ( 12 ) shows that in the absence of further consolidation measures in 2016 and beyond, the general government debt-to GDP ratio would stabilise at above 107 % (Graph 2.1.11). Under the Stability and Growth Pact scenario ( 13 ), i.e. assuming that the Irish Government complies with all the requirements of the Pact, gross government debt is projected to

( 12 ) For more information on the Commission's methodology, see

http://ec.europa.eu/economy_finance/publications/occasion al_paper/2014/pdf/ocp200_en.pdf.

( 13 ) The SGP scenario assumes that for countries under excessive deficit procedure such as Ireland, a structural adjustment path in compliance with the fiscal effort recommended by the Council is maintained until the excessive deficit is corrected, and thereafter an annual structural consolidation effort of 0.5 percentage point of GDP or 0.6 percentage point if public debt exceeds 60 % of GDP is maintained until the medium-term objective is reached. The effort of 0.6 percentage point is used for illustrative purposes and does not prejudge the actual effort in excess of the 0.5 percentage point benchmark that will be required until the medium-term objective is achieved.

2.1. Indebtedness and deleveraging

Graph 2.1.11: Gross government debt projections ageing population will be a feature of the next few decades. The proportion of Irish people aged 65 and over is expected to almost double by 2045.

130

% of GDP The combination of higher numbers of older 125 people and falling numbers of people entering the 120 working-age population should result in an 115 increase in the old-age dependency ratio, even 110 though the ratio will be sensitive to migration 105 trends that are difficult to predict in the long 100 +0.5pp perm. shock run (

14

). These projected changes in the

on GDP growth

95 composition of the population could put pressure

on public finances, with increasing demands to

90 finance pensions, healthcare and long-term care

85 needs. Pension reforms ( 15 ) have been 80 implemented since the last age-related expenditure

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 projections carried out jointly by the European Baseline no-policy change scenario Commission and the Economic Policy Committee. Stability and Growth Pact (SGP) institutional scenario They are likely to have a positive impact on the long-term sustainability analysis, which will be

(1) The Stability and Growth Pact scenario assumes a updated later this year.

structural adjustment path in accordance with the fiscal effort recommended by the Council until the excessive

deficit is corrected, and then an annual structural Government contingent liabilities remain consolidation effort of 0.6 percentage points until the significant but are declining. State guarantees

medium-term objective is reached.

Source: European Commission were still substantial at 41.4 % of GDP in 2013,

compared to the EU average of 9.8 % of GDP. Of these guarantees, 31.1 % of GDP in 2013 were

Graph 2.1.12: General government balance and real GDP

growth contingent liabilities of the general government

related to support granted to financial institutions (Table 2.1.1), compared to 6.4 % of GDP in the

6

% of GDP EU as a whole. Nonetheless, the ongoing 4 repayment of the government-guaranteed bonds

the National Asset Management Agency issued 2 means that contingent liabilities are decreasing.

0

( 14 ) The 2015 Commission Ageing Report (underlying

-2 assumptions and projection methodologies) projects the

old-age dependency ratio to increase to 27 % in 2025 from -4 19 % in 2013.

( 15 ) As a result of the pension reforms, the qualifying age for -6 state pensions increased to 66 in 2014. It will increase to 67

in 2021 and then to 68 in 2028 (for more information on

-8 the new Single Public Service Pension Scheme, see the

12 13 14 15 16 17 18 19 20 21 22 23 24 25 Department of Public Expenditure and Reform's web page:

Interest expenditure Structural primary balance http://www.per.gov.ie/pensions/ ). The 2013 public service wage agreement included pension cuts for annual pensions

Structural balance Real GDP growth above EUR 32,500 for new retirees from 31 August 2014.

(1) The Stability and Growth Pact scenario assumes a structural adjustment path in accordance with the fiscal effort recommended by the Council until the excessive deficit is corrected, and then an annual structural consolidation effort of 0.6 percentage point until the medium-term objective is reached.

Source: European Commission

Costs associated with demographic trends will put pressure on public finances. A progressively

2.1. Indebtedness and deleveraging

Table 2.1.1: Government contingent liabilities

% of GDP 2013 2014

Public guarantees 66.9 32.1 of which linked to the financial sector

Eligible Liabilities Guarantee 42.1 11.5

Exceptional Liquidity Assistance 9.3 - National Asset Management Agency 14.7 19.8

other 0.8 0.8

Source: Irish Department of Finance

Overall, while the debt-to-GDP ratio has started to decline there are still challenges to the long-term sustainability of public finances. Based on current information, the Irish Govermentʼs budgetary targets for 2015 and beyond are in line with the Council Recommendation, and would ensure a declining debt-to-GDP ratio. However, debt projections are fairly sensitive to growth shocks and possible deviations from the fiscal adjustment path. An ageing population is also projected to increase health care and long-term care costs.

2.2. FINANCIAL SECTOR CHALLENGES

Banking sector restructuring Graph 2.2.2: Eurosystem borrowing

Ireland has made good progress in

restructuring, downsizing and recapitalising its 450 EUR billion

domestic banks. It has made good progress in 400 PT* DE* EL** addressing the significant imbalances in the

banking sector. Since the end of 2010, two banks 350

IE* IT* ES**

were merged and two others resolved. The 300

European Commission has approved the 250

restructuring plans of the two largest main

domestic banks, Allied Irish Bank (AIB) and Bank 200

of Ireland (BOI). All the domestic banks fulfilled 150

stringent conditions to downsize their balance 100

sheets to sustainable levels under the EU-IMF financial assistance programme which ended at the 50 end of 2013. Their total assets have come down 0

from around 220 % of GDP at the end of 2010 to 7 8 9 0 1 2 3 4 l-0 -08 l-0 -09 l-0 -10 l-1 -11 l-1 -12 l-1 -13 l-1 -14 l-1

about 158 % of GDP in 2014, with a greater focus Ju Jan Ju Jan Ju Jan Ju Jan Ju Jan Ju Jan Ju Jan Ju on the domestic market. Average loan-to-deposit (1) Data up to December 2014 (for ES and EL: data up to

ratios have decreased from 155 % in late 2010 to Nov 2014)

99.5 % in November 2014 (Graph 2.2.1). As a (2) *related to monetary policy operations denominated in EUR **total to domestic monetary financial institutions or

result, banks’ funding profiles have normalised, not further specified

with stable deposits, full access to markets funding Source: National central banks

and less reliance on central bank funding (Graph

2.2.2). The profitability of domestic banks continues to improve. In the first half of 2014, Allied Irish

Graph 2.2.1: Loan-to-deposit ratio (LDR) Banks and Bank of Ireland became profitable, with

post-provision profits of EUR 437 million and

300 EUR 399 million respectively. Over the same % EUR billion period, Permanent TSB reduced its losses before

200 Loans (rhs) one-off exceptional items to EUR 172 million. Deposits (rhs) 250

LDR (lhs) Tracker mortgages (

16

) continue to weigh on the bank’s profitability however. Impairment charges

150 200 have decreased; while operating expenses stayed relatively flat (Graph 3.2.3).

150

100 ( 16 ) Tracker mortgages are low-yielding legacy loans where the interest rate is set at a low fixed margin above European

100 Central Bank or Bank of England policy rates.

50 D Jun Se D 50

ec M ar-1 ec M Jun Se D Jun Se D ar-1 ec M ar-1 ec M Jun Se D ar-1

-10 -11 p

1 11

-11 -12 p-13 p-14 pec

2 12

-12

3 13

-13

4 14

-14

Source: Central Bank of Ireland

2.2. Financial sector challenges

Graph 2.2.3: Components of domestic bank profitability Graph 2.2.4: Domestic bank capital positions

20% CT1 ratio

10 EUR billion

18%

0 16%

14%

-10 12%

10% -20

8% NAMA revaluation adjustment

-30 Other Impairment provisions/charges 6%

AIB Operating expenses

Other income 4% BOI

-40 Net Interest Income PTSB

2006 2007 2008 2009 2010 2011 2012 2013 HY 2%

2014 total (1) 2014 figures are annualised 0%

Source: Annual and semi-annual reports of Irish domestic Dec-10 Aug-11 Apr-12 Dec-12 Aug-13 Apr-14

banks (1) CT1 Ratio: Regulatory Core Tier 1 capital to riskweighted

assets

The results of the ECB’s comprehensive Source: Central Bank of Ireland

assessment reflected the domestic banks’

strengthened position (Graph 2.2.4). All the Irish The restructuring of Permanent TSB continues. banks passed the asset quality review and the To fill the capital gap the comprehensive three-year baseline stress tests scenario of the assessment identified, the bank submitted its assessment (Table 2.2.1). Only Permanent TSB capital plan to the Single Supervisory Mechanism showed a EUR 855 million capital shortfall in the for review. Permanent TSB has nine months from adverse scenario of the stress test. The adjustments the date of publication of the results of the identified in the asset quality review for the Irish comprehensive assessment to implement the banks were modest, since the banks’ balance capital plan. The bank has publically stated that sheets had already been assessed towards the end recapitalisation will draw on private sources. The of the EU-IMF financial assistance programme. Commission is also currently reviewing the bank’s Nevertheless, despite recent declines, the high updated restructuring plan. Permanent TSB, share of non-performing loans and incidence of 99.2 % state-owned, is taking advantage of the mortgage arrears continues to weigh on the Irish existing strong demand for Irish assets to attract

banking sector. private investors. It is improving its lending margins and prospects for write-backs as the Irish

economy continues to recover ( 17 ). Nonetheless,

Table 2.2.1: Results of the comprehensive assessment the bank will have to pay back some of its EUR

AIB* AIB** BOI PTSB 2.3 billion of state aid over the coming years and CET1 ratio (2013) 15.0% 15.0% 12.4% 13.1% its structural balance sheet issues, with a large AQR adjusted CET1 ratio (2013) 14.6% 14.6% 11.8% 12.8% amount of low-yielding tracker mortgages, will be Adjusted CET1, baseline (2016) 12.4% 15.9% 13.2% 8.8% difficult for the bank’s management to deal with.

Adjusted CET1, adverse scenario (2016) 6.9% 10.3% 9.3% 1.0% Overall, it is expected to tap into the private capital

Fully loaded CET1, baseline (2016) 1.7% 7.9% 6.3% markets in the first half of 2015. However, unlike the other large Irish banks, Permanent TSB’s

Fully loaded CET1, adverse scen. (2016) -3.6% 2.9% -2.8% capital structure will not be very much affected by

Non-performing exposures ratio (2013) 22.3% 14.3% 17.9% the gradual phasing out of existing capital Coverage for non-performing exp. (2013) 44.4% 48.2% 41.4% instruments such as preference shares or deferred (1) *Static balance sheet approach **Dynamic balance tax assets.

sheet approach

(2) CET stands for Common Equity Tier

Source: Central Bank of Ireland (

17 ) Permanent TSB still conservatively assumes 55 % peak-totrough house price decline in its mortgage provision models versus an actual decline of about 41 %.

2.2. Financial sector challenges

Banking regulation and supervision has increased to 50 % of new loans issued in 2013.

The regulatory and supervisory systems have Against this background, the Central Bank of been reformed to address imbalances in banks. Ireland introduced proportionate limits on the In addition to many other key regulatory reforms amount of new lending at high loan-to-value and implemented under the EU-IMF financial loan-to-income levels. It did so to make banks and assistance programme, 2013 legislation gave the households more resilient to potential future credit Central Bank of Ireland extensive powers to source induced housing bubbles and reduce the risk of information, conduct on-site inspections, issue borrower default. Following extensive regulations and take direct remedial and consultation, the final set of rules made certain enforcement action. The Central Bank Supervision concessions to first-time buyers (

19 ). In the shortand

Enforcement Act 2013 also gave the Central term these measures may curtail lending volumes

Bank power to request an independent auditor and thus possibly keep bank profitability down. assessment on banks’ financial accounts. Under However, over the medium to long term, the the Single Supervisory Mechanism, joint housing market should adjust and credit risk supervisory teams will do the routine supervision should decline.

of major institutions. The teams will be made up of

staff from the ECB and the Central Bank of The setting up of a central credit register

Ireland. continues and will help supervision and credit decisions. The lack of a statutory central credit

The phasing in of new capital requirements will register in Ireland makes supervision, credit challenge the main domestic banks. This is due underwriting and internal risk management more to their low profitability and the fact that Bank of difficult in the run-up to a crisis, contributing to Ireland, and particularly Allied Irish Banks, have the build-up of severe imbalances. The planned large holdings of deferred tax assets and introduction of a central credit register continues to government preference shares that will gradually progress, albeit slowly. The Credit Reporting Act be deducted from capital ( 18 ). Rapid improvements 2013 was enacted in December 2013. The current in profitability will be crucial to enable banks to timeline envisages the register’s being operational use their deferred tax assets and generate internal in the latter part of 2016. It will enable lenders to capital. Converting existing preference shares into carry out a more thorough evaluation of a common equity tier 1 (CET 1) eligible instruments borrower’s ability to pay back by providing a (i.e. common shares) could also improve Allied database on the total amount of individual and Irish Banks’ and Bank of Ireland’s fully-loaded SME debt. The availability of borrowers’ total

Basel III capital ratios. indebtedness data would also enable the potential introduction of macro-prudential measures

New prudential measures by the Central Bank involving debt-to-income and debt-service-toof Ireland aim to contain mortgage and housing income ratios.

risks. While the national property price index remains 37.9 % below its 2007 peak, house Non-performing loans prices are increasing rapidly in Ireland (by 16.2 %

year-on-year in November 2014), and especially in The high stock of non-performing loans is

Dublin. This is mainly due to supply shortages. slowly declining. They fell to 24.9 % of total loans

The number of loans issued at high loan-to-value of the three main domestic banks in the third ratios has also been increasing recently. The quarter of 2014, from a high of 27.1 % at the end

amount of loans issued at over 80 % loan-to-value ( 19 ) For principal dwelling housing, new loans above a loan-tovalue

ratio of 80 % will be limited to 15 % of the value of ( 18 ) In Ireland, this involves a phasing out of the counting of the flow of new housing loans in the year, and a cap of

deferred tax assets towards common equity tier 1 capital by 20 % will apply for new loans above 3.5 times the 10 % annually from 2015 until end 2023 for Allied Irish borrower’s income. First time buyers may be granted up to Banks and Bank of Ireland (Permanent TSB also 90 % loan-to-value financing on the first EUR 220 000 of recognised EUR 414 million of deferred tax assets in any mortgage, although the bank will still need to comply 2013). Pursuant to the Capital Requirement Regulation, with the general loan-to-value limit. For buy-to-let preference shares subscribed by the government will no purchases, the value of loans issued above 70 % loan-tolonger count as regulatory capital own funds, after 1 value will be limited to 10 % of the total value of new January 2018. lending.

2.2. Financial sector challenges

of 2013. The decrease reflects the improved Graph 2.2.5: Mortgage arrears macroeconomic environment, in particular reduced unemployment, better GDP growth prospects and 50 EUR billion % 50

the improved net wealth of households and 45 PDH balance > 90 days dpd (lhs) 45

companies amid growing asset prices, especially BTL balance > 90 days dpd (lhs)

property prices. These variables are generally 40 Total mortgage arrears > 1 dpd (lhs) 40 % PDH book > 90 dpd (rhs)

considered to be the main drivers of non 35 % BTL book > 90 dpd (rhs) 35

performing loans. 30 30

25 25

Mortgage arrears continue to fall steadily. 20 20

Central Bank of Ireland data for the third quarter

of 2014 show that the number of accounts in 15 15

arrears for over 90 days decreased by 4.5 % 10 10 quarter-on-quarter. Their value decreased by 3.8 % 5 5

quarter-on-quarter. However, mortgages in arrears 0 Se De M Ju Se De M Ju Se De M Ju Se De M Ju Se 0

stood at 19 % of total mortgage loan balances in p… c… ar… n… p… c… ar… n… p… c… ar… n… p… c… ar… n… p…

the third quarter of 2014, down from 19.9 % in the third quarter of 2013 (Graph 2.2.5). The persistent (1) PDH: primary dwelling housing; BTL: buy-to-lets; dpd:

increase in the build-up of longest-term arrears days past due Source: Central Bank of Ireland

(over 720 days) continued, increasing to 9.6 % of

total loan balances in the third quarter (from 9.2 % Ireland has made progress in implementing at the end of June 2014). The buy-to-let subsustainable restructuring solutions. There are category remains more problematic with 30.8 % of still some discrepancies in the way banks classify total balances in arrears in the third quarter. This is restructured loans. An audit was carried out on the higher than principal dwelling houses arrears that Q4-2013 arrears resolution targets outcomes and stood at 15.7 % in the same period. After recent another audit is being carried on the Q2-2014 increases, however, buy-to-let accounts in arrears outcomes of two banks. They show that there has decreased by 0.4 % quarter-on-quarter in the third been a reliance on standard forbearance techniques quarter of 2014. involving rescheduling principal or interest

The banks continue to meet their mortgage payments rather than lowering both. Examples

arrears resolution targets. In September 2014, all include temporary switches to interest-only mortgages, extending the term of the mortgage and

banks had met and exceeded the target of arrears capitalisation. The latter type of proposing sustainable restructuring solutions to at restructuring has displayed a high propensity to releast 80 % of mortgage holders in arrears of more default. Banks continue to rely heavily on legal than 90 days and concluding 40 % of them. More proceedings in concluded solutions as a way of than the minimum required, in 75 % of concluded convincing customers in arrears to engage with solutions, mortgage holders were meeting the them. As a result, there have been indications that terms of the new arrangement. Half of the the courts system is experiencing some backlogs, proposed solutions involved restructuring, while as shown by the more frequent adjournments and the other half involve legal proceedings that may prolonged proceedings. Finally, rising rents have end in repossession. The number of restructured led to more use of rent receivership solutions for accounts increased in the third quarter of 2014 by buy-to-let loans in arrears.

7.8 % quarter-on-quarter for principal dwelling housing, and 4.8 % quarter-on-quarter for buy-tolet. The number of repossessions in the third quarter increased by almost 7.5 % quarter-onquarter to 2027 properties (Graph 2.2.6), but remains relatively low, with a greater proportion of buy-to-let properties than primary dwelling housing being repossessed.

2.2. Financial sector challenges

Graph 2.2.6: Mortgage restructuring progress on mortgage arrears resolution. However, it has made less progress in developing guidelines

45 EUR billion Units 2,100 on the sustainability of solutions and publishing

data on banks’ SME/commercial arrears. Ireland

40

Mortgages in arrears 1,800 has also yet to develop a strategy to address the 35 Restructured mortgages issue of commercial real-estate arrears ( 20 ),

Repossesions (rhs) 1,500 30 although progress with restructuring some of these

is being monitored under the commercial loan

25 1,200 resolution targets ( 21 ). The National Asset

20 900 Management Agency is accelerating asset 15 disposals, taking advantage of strong market 600 demand. The introduction of a central credit

10 register is underway.

5 300

0 Se De M Ju Se De M Ju Se De M Ju Se De M Ju Se De M Ju Se 0 p… c… ar… n… p… c… ar… n… p… c… ar… n… p… c… ar… n… p… c… ar… n… p…

Source: Central Bank of Ireland ( 20 ) It is, however, important to note that the bulk of banks’ distressed commercial real estate exposures built-up in the

Commercial loan restructuring and disposal run up to the crisis have been addressed through transfers to the National Asset Management Agency that is ahead of

continue, though they still make up most nontargets for their work-out, and the special liquidation of the performing loans. The banks are making progress Irish Bank Resolution Corporation which resulted in

in reaching their non-public commercial loan sizeable disposals of commercial real estate loans to private buyers.

(including SME) restructuring targets. They aimed ( 21 ) Given different practices of portfolio segmentation by to have had almost all of them restructured by the banks, it is challenging to assess whether residual

end of 2014. Lenders have noted a recovery of commercial real estate exposures on banks’ balance sheets

cash-flows in certain SME sectors. The distressed that do not have SME/corporate debtor connections are in fact subject to central bank restructuring targets.

commercial portion of the banks’ loan books is slowly decreasing, through a combination of asset sales, restructures and write-offs. The National

Asset Management Agency (the bad bank tasked with the work-out of distressed commercial real estate exposures transferred by banks) is ahead of schedule with EUR 18.7 billion of assets disposed of at the end of December 2014 (about 28 % of which are Irish), taking advantage of strong market demand. The Consumer Protection (Regulation of

Credit Servicing Firms) Bill was published in

January 2015. The bill aims to address concerns regarding the protection of borrowers when loans are sold to entities unregulated by the Central Bank of Ireland. Under the discussion in the Irish

Parliament, the bill would extend the existing protection of borrowers by regulating credit servicing firms. These firms would need to manage or administer the credit agreement with the consumer or SME on behalf of the unregulated buyer.

Overall, Ireland has made some progress in the implementing the Council Recommendations, including those on non-performing loans. As described above, Ireland has made considerable

2.3. COMPETITIVENESS AND EXTERNAL SUSTAINABILITY

Current account and competitiveness Graph 2.3.2: Exports of goods and services

Large current account surpluses have become 120 % of GDP the norm. The major external imbalances that characterised Ireland in the 2000s seem firmly 110 behind it. Following substantial deficits since

2000, the current account balance has turned 100

positive again since the second half of 2010, driven mostly by increasingly large trade surpluses

(graph 2.3.1). A number of underlying factors 90

explain the sharp turnaround, with the large

presence of multinational companies in Ireland 80

complicating the understanding of the external

accounts. Headline numbers therefore need to be 70

interpreted carefully.

60 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

Graph 2.3.1: Current account balances

1997Q 1998Q 1999Q 2000Q 2001Q 2002Q 2003Q 2004Q 2005Q 2006Q 2007Q 2008Q 2009Q 2010Q 2011Q 2012Q 2013Q 2014Q

8 % of GDP Source: Central Statistics Office

6 The rebalancing process between the tradable

4 and non-tradable sectors seems to be nearing completion. Indications are that the reallocation of

2 resources has reached a ‘natural’ limit ( 22 )

0 sufficient to put Ireland on a sustainable path.

Ireland's unit-labour-cost-based real effective -2 exchange rate is now moving broadly in line with

-4 Germany but still outperforming the euro area's

rate (graph 2.3.3). This contrasts sharply with the -6 period between mid-2008 and mid-2012 when

-8 Irelandʼs adjustment was much faster than that of

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 other euro area Member States. With investment and private consumption having now passed their

2000H 2001H 2002H 2003H 2004H 2005H 2006H 2007H 2008H 2009H 2010H 2011H 2012H 2013H 2014H turning point, domestic demand has stopped

Source: Central Statistics Office contracting and the share of net exports in GDP has stabilised at around 22 % (graph 2.3.4). This

Competitiveness gains and demand shifts have remains very high by historical standards and contributed to external rebalancing. Ireland has could indicate that there may have been some long had a very open economy, with exports overshooting in the rebalancing process between exceeding 80% of GDP as far back as the late the tradable and non-tradable sectors.

1980s (graph 2.3.2). The economic boom of the

2000s, however, led to a significant decrease in the

export ratio as domestic demand surged to ( 22 ) In particular, the proportion of people working in the

unsustainable levels and the non-tradable sector export-oriented sectors should reach an upper limit at some point, as rising income and demand from workers operating

boomed, undermining the countryʼs in the export sector should fuel demand for non-tradables. competitiveness. The adjustment process of the past few years entailed a significant reallocation of resources away from an oversized construction sector to the tradable sector, a sharp contraction in domestic demand and renewed impetus in exports as a result of competitiveness gains.

2.3. Competitiveness and external sustainability

Graph 2.3.3: Real effective exchange rate, 2005=100 do not generate new operational investments in

Ireland. Foreign investments in Ireland have 120 2005 = 100 regained momentum in the past couple of years.

115 This is reflected in the number of projects completed with support from IDA Ireland, the

110 entity responsible for attracting and facilitating 105 foreign investment.

100 Shifts in multinational companiesʼ operations

95 greatly affect Ireland. Business decisions by 90 multinational companies in Ireland are determined

85 not only by country-specific factors, but also by

the dynamics of global value chains and regulatory

80 determinants, including in particular the interplay

75

Ireland Germany Euro area between tax regimes and bilateral tax treaties.

70 Evolutions in global value chains have

1 4 3 2 1 4 3 2 1 4 3 2 1 4 3 2 1 4 3 significantly affected Ireland's economy in the past 00 Q 00 Q 01 Q 02 Q 03 Q 03 Q 04 Q 05 Q 06 Q 06 Q 07 Q 08 Q 09 Q 09 Q 10 Q 11 Q 12 Q 12 Q 13 Q and will continue to do so in the future, at times

Source: European Commission bringing about significant changes in the structure

of output in a short period of time. ( 23 ) Graph 2.3.4: Demand composition of GDP and GDP Multinational companies drive Irleandʼs export

growth performance, provide a significant amount of highskilled employment and generate a substantial

100 % of GDP % 3 share of national value added, particularly in 90 manufacturing. Their activities also impact 80 2 Ireland's balance of payments and international

70 1 investment position to such an extent that it is

60 difficult to disentangle underlying trends from 50 0 specific issues.

40

30 -1 The ʽpatent cliffʼ has been bridged. There were

20 -2 concerns in 2012 and 2013 that the expiration of

10 patents on certain blockbuster drugs could trigger a 0 -3 general decline in the pharmaceutical industry,

1 4 3 2 1 4 3 2 1 4 3 2 1 4 3 2 1 4 3 2 causing a sharp and sustained fall in exports. The 2000Q 2000Q 2001Q 2002Q 2003Q 2003Q 2004Q 2005Q 2006Q 2006Q 2007Q 2008Q 2009Q 2009Q 2010Q 2011Q 2012Q 2012Q 2013Q 2014Q patent cliff did in fact generate a steep drop in

Real GDP growth, q/q, 4 quarter backward moving average exports between their peak in Q2-2012 and the Domestic demand (LHS) trough in Q3-2013. However, renewed investment Net trade, goods and services (LHS) and diversification put pharmaceutical exports on a

Source: Central Statistics Office rising trend again throughout 2014, allaying earlier fears (graph 2.3.5).

Ireland continues to draw investments by large multinational companies. The strong export

performance over the past few decades owes much ( 23 ) Production of computers by multinational companies

to Ireland's ability to attract multinational represented a large share of as recently as the early 2000s, but has now dropped to near-insignificance.

companies. Exports of pharmaceuticals, information technology, business and financial services for example, represent a large proportion of total exports and are almost entirely driven by multinational companies. However, data on net foreign direct investment inflows need to be interpreted carefully because certain transactions

2.3. Competitiveness and external sustainability

Graph 2.3.5: Exports of pharmaceutical products Graph 2.3.6: Difference in net exports (balance of payments vs. customs)

8.0 € billion

4 € billion

7.0

3 6.0

5.0 2

4.0 1

3.0 0

2.0 -1

1.0 -2

0.0

1 4 3 2 1 4 3 2 1 4 3 2 1 4 3 2 1 4 3 2 -3

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3

2000Q 2000Q 2001Q 2002Q 2003Q 2003Q 2004Q 2005Q 2006Q 2006Q 2007Q 2008Q 2009Q 2009Q 2010Q 2011Q 2012Q 2012Q 2013Q 2014Q

Source: Central Statistics Office 2011Q 2011Q 2011Q 2011Q 2012Q 2012Q 2012Q 2012Q 2013Q 2013Q 2013Q 2013Q 2014Q 2014Q 2014Q

Source: Central Statistics Office

Contracted manufacturing inflates recent export figures. A small number of multinational The full and medium-term impact of contracted

companies appear to have used contracted manufacturing remains unclear. The business manufacturing more in recent quarters. Under such decisions underlying the rise in contract contracts, products manufactured overseas for manufacturing are not entirely known. The extent Irish-resident firms are accounted as Irish exports to which a boost to current account and national once shipped to a third country, even if they never accounts data through merchandise trade transit through Ireland. Although such operations could/will be counterbalanced by rising services should result in a countervailing service import, imports is also unclear at this stage. Neither is it they increased the contribution of net exports to known if this situation will be long-lasting or if it GDP in 2014, artificially inflating the current could extend to a wider set of companies. In any account surplus. This recent development has case, it will be an issue to monitor when analysing resulted in a disconnect between customs-based future trends in the current account balance, in trade data and balance of payments-based data. addition to the impact of re-domiciled public

The difference between net merchandise exports limited companies. ( 24 )

on balance of payments and customs bases, which

used to fluctuate around zero, has become Services exports have surged, but so have significantly positive since the first quarter of 2014 imports. Services export growth has far outpaced (graph 2.3.6). goods exports growth in the past few decades as

large multinational companies have increasingly used Ireland as a base for providing ICT, business and financial services. Imports of services, however, have increased nearly as rapidly in the same period, with rising payments on royalties and licences. As a result, Irelandʼs balance on services remains in deficit, even though it is now close to balance compared to sizeable deficits during most of the 1990s and 2000s (graph 2.3.7). Its strong

( 24 ) Everett (2012) and Fitzgerald (2013) first analysed the issue of re-domiciled public limited companiess and their impact on the current account. It is also discussed in the 2014 in-depth review of Ireland.

2.3. Competitiveness and external sustainability

merchandise trade performance therefore remains Graph 2.3.8: International Financial Services Centre and the driving force behind the current account non-International Financial Services Centre

surplus. trade in services, primary and secondary income flows

Graph 2.3.7: Services exports, imports and balance 100 € billion

80

30 € billion

60

25 40

20 20

0 Non-IFSC

15 -20 IFSC

10 -40 Non-IFSC

5 -60

IFSC

Balance -80

0 -100

y y y y y y

-5 ic es ar ic es ar ic es ar

rv im rv im rv im

-10 Se

Pr condar Se Pr condar Se Pr condar

1 4 3 2 1 4 3 2 1 4 3 2 1 4 3 2 1 4 3 2 1 4 3 Se Se Se

2012 2013 2014

1998Q 1998Q 1999Q 2000Q 2001Q 2001Q 2002Q 2003Q 2004Q 2004Q 2005Q 2006Q 2007Q 2007Q 2008Q 2009Q 2010Q 2010Q 2011Q 2012Q 2013Q 2013Q 2014Q Source: CSO

Balance Exports Imports

Source: Central Statistics Office Irelandʼs current account position is strong. The rebalancing and regained competitiveness of the

Offshore financial services are a strong past few years, together with the economyʼs sound generator of net exports. Irelandʼs rise as a fundamentals in terms of the business services exporter must also be considered in the environment, the regulatory framework and skills, light of the International Financial Services Centre. have led to a robust and lasting turnaround in the More than 500 companies operate in the current account position (graph 2.3.9). Despite the International Financial Services Centre, directly rise of Ireland as an international services

employing over 30,000 people. ( 25 ) It generated platform, merchandise trade continues to be the

net services exports of around EUR 10 billion in driving force behind the current account surplus.

2012 and 2013, and EUR 7.8 billion in the first Multinational companies also continue to vastly three quarters of 2014. In contrast, nondominate flows in the current and financial International Financial Services Centre companies accounts. The nature of some of their operations

generated net imports of services of also makes it hard to identify underlying patterns

EUR 16.5 billion, EUR 10.4 billion and EUR and economic impacts. They also make Ireland

10.8 billion, respectively, in the same periods. more susceptible to potential swings than most

Similarly, while International Financial Services other economies.

Centre companies generate broadly balanced net primary income, the rest of the Irish economy is a large net payer of primary income to the rest of the world. Net non-International Financial Services

Centre primary payments represented an average of around EUR 25 billion in 2012–2014, reflecting the high profitability of multinational companies

(graph 2.3.8).

( 25 ) Key activities in the International Financial Services Centre include fund and asset management, banking, insurance, aircraft leasing, securitisation, and corporate treasury.

2.3. Competitiveness and external sustainability

Graph 2.3.9: Current account balance Graph 2.3.10: Net international investment position by institutional sector

15 € billion € billion 5

4 60 % of GDP 10 3 40

5 2 20

1 0

0 0 -20

-1

-5 -40 -2

-60

-10 -3 -80

-4

-15 -5 -100

1 3 1 3 1 3 1 3 1 3 1 3 1 3 1 3 1 3 1 3 -120

2005Q 2005Q 2006Q 2006Q 2007Q 2007Q 2008Q 2008Q 2009Q 2009Q 2010Q 2010Q 2011Q 2011Q 2012Q 2012Q 2013Q 2013Q 2014Q 2014Q -140 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3

Income balance

Services balance 2009Q 2010Q 2010Q 2010Q 2010Q 2011Q 2011Q 2011Q 2011Q 2012Q 2012Q 2012Q 2012Q 2013Q 2013Q 2013Q 2013Q 2014Q 2014Q 2014Q

Trade balance

Current account balance (RHS) Official sector Banks Source: Central Statistics Office Other sectors Total

Source: Central Statistics Office

External assets and liabilities Public sector debt remains the main reason for

Net external liabilities remain large. Ireland had Irelandʼs negative net international investment a negative net international investment position of position. A large proportion of government debt is EUR 176.5 billion (about 96% of estimated 2014 held abroad, either by foreign bond holders or as GDP) at the end of Q3-2014. This was down from debt owed to official creditors, mainly the a peak of EUR 204.4 billion (118% of GDP) in European Financial Stabilisation Mechanism, Q1-2012 (graph 2.3.10). Although the official European Financial Stability Facility and the sector (government and central bank) accounts for International Monetary Fund. As of Q3-2014, most of this net position, the countryʼs general government gross external liabilities international investment position has developed in represented about 73% of estimated 2014 GDP. contrasting ways in recent quarters. The large Although foreign assets partly compensate for this, multinational companies sector and Irelandʼs the general governmentʼs negative net International Financial Services Centre also have international investment position is significant large gross asset and liabilities positions liable to enough that it accounts for most of the overall generate significant swings in the net international position.

investment position, including through valuation

effects General government external liabilities are

stabilising. Given the openness of Irelandʼs economy, including in terms of access to financial markets for government funding, the general governmentʼs large negative net international investment position is unlikely to be reduced at an accelerated pace in the years ahead. Yet, it has stabilised in recent quarters on the back of declining government deficits and the emergence of a small primary surplus in 2014. It is expected to fall only gradually in the coming years, in line with Irelandʼs efforts to ensure long-term fiscal sustainability and put public debt on a firm downward trajectory (Section 3.1.1). The composition of this debt, however, will again shift towards liabilities towards private creditors. The

2.3. Competitiveness and external sustainability

early repayment of XDR 15.7 billion of loans to EUR 110 billion, a third of their position at the end the International Monetary Fund will speed up the of 2009. External assets also stabilised and shrunk process this year. in similar proportion, from EUR 251 billion to

around EUR 85 billion (graph 2.3.12). Once an Target 2 balances fall. In contrast with the important force behind the evolution of Irelandʼs general government, the Central Bank of Ireland international investment position, domestic banks has sharply reduced its net and gross external have therefore become significantly less so. liabilities, mainly Target 2 balances ( 26 ).This was made possible by the end of the emergency Graph 2.3.12: External assets and liabilities of domestic liquidity assistance provided to domestic banks, banks the conversion of promissory notes, the nearcompletion of the deleveraging process of 300 € billion 60 domestic banks and regained access to

international financial markets for the government 200 40

and domestic banks alike. As of the end of 2014, 100 20

Target 2 balances amounted to EUR 40.9 billion,

down from a peak of EUR 162 billion at the end of 0 0

2010 (graph 2.3.11). -100 -20

Graph 2.3.11: Target 2 balances -200 -40

-300 -60 € billion

0 -400 -80 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2

-20

-40 2009Q 2010Q 2010Q 2010Q 2010Q 2011Q 2011Q 2011Q 2011Q 2012Q 2012Q 2012Q 2012Q 2013Q 2013Q 2013Q 2013Q 2014Q 2014Q

-60 Assets Liabilities Net IIP (rhs)

-80 Source: Central Statistics Office

-100

Business entities outside the International

-120 Financial Services Centre have broadly

-140 compensating net international investment

-160 positions. Non-bank financial intermediaries

outside the International Financial Services Centre,

-180

01 07 01 07 01 07 01 07 01 07 01 07 01 07 01 07 01 07 01 07 01 07 01 07 including insurance companies, owned net external

assets worth EUR 75 billion at the end of Q3-2014. 2003M 2003M 2004M 2004M 2005M 2005M 2006M 2006M 2007M 2007M 2008M 2008M 2009M 2009M 2010M 2010M 2011M 2011M 2012M 2012M 2013M 2013M 2014M 2014M This position has been relatively stable in the past Source: Central Bank of Ireland few years, with external liabilities typically small.

In contrast, the net international investment

The net international investment position of position of non-financial companies (mainly domestic banks is stabilising. Before 2007, multinational companies) has been negative in the domestic banks had accumulated large external past few years (graph 2.3.13).

liabilities that enabled them to fuel the housing market boom and acquire assets abroad. The restructuring of the banking sector in recent years has caused a rapid fall in the external assets and liabilities of domestic banks, including by transferring some positions to the public sector.

The external liabilities of domestic banks stabilised in the first three quarters of 2014 at around

( 26 ) TARGET2 is the real-time gross settlement system owned and operated by the Eurosystem. See ECB website .

2.3. Competitiveness and external sustainability

Graph 2.3.13: International investment position of non Graph 2.3.14: International investment position of nonfinancial companies and non-bank financial financial companies

intermediaries (outside the International Financial Services Centre) 400 % of GDP % of GDP 50

100 € billion 300 40

80 30

200

60 20

40 100 10

20 0 0

0

-100 -10

-20 -20

-40 -200 -30

-60 -300

-40 -80

-100 -400 -50 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3

2009Q 2010Q 2010Q 2010Q 2010Q 2011Q 2011Q 2011Q 2011Q 2012Q 2012Q 2012Q 2012Q 2013Q 2013Q 2013Q 2013Q 2014Q 2014Q 2014Q 2009Q 2010Q 2010Q 2010Q 2010Q 2011Q 2011Q 2011Q 2011Q 2012Q 2012Q 2012Q 2012Q 2013Q 2013Q 2013Q 2013Q 2014Q 2014Q 2014Q

Non-financial companies NIIP Assets Liabilities Net IIP (rhs)

Other financial intermediaries NIIP Source: Central Statistics Office

NIIP of non-bank non IFSC

Source: Central Statistics Office

The nature of the external assets and liabilities

The external positions of multinational of multinational companies differ. As of Q3- companies are very large. The net international 2014, resident entities outside the International investment position of the corporate sector outside Financial Services Centre held most of their assets the International Financial Services Centre (mainly abroad in the form of direct investments (64.9 % of multinational companies) has been negative in the the total), including intra-company loans. The repast few years, but decreased to EUR 54 billion at domiciliation of public limited companies the end of Q3 2014. This is mainly because contributed to increasing resident holdings of multinational companies finance most of their Irish direct investment abroad, but the situation now operations abroad, including through intraappears to have stabilised. Portfolio investments, company loans and reinvested earnings. In contrast in turn, accounted for another 20.3 % of resident's to that of non-bank financial intermediaries, their external assets. Direct investment accounted for net position hides much larger assets and only 25.9 % of total liabilities, with more volatile liabilities, amounting to almost 300 % of GDP portfolio investments and other forms of (graph 2.3.14). The size of their liabilities relative instruments accounting for 59.9 % and 34.7 % of to the Irish economy, together with their large the total, respectively. This type of mismatch external assets, also show that multinational between assets and liabilities could potentially companies use Ireland to finance operations in the expose Ireland to risks related to the transactions rest of the EU. It is therefore not possible to of multinational companies.

distinguish the amount of net liabilities that are

directly related to Irish-based operations only. The gross positions of the International Financial Services Centre swamp those of the

rest of the economy. External assets and liabilities of the International Financial Services Centre are exceptionally large in relation to the size of the Irish economy. As of Q3-2014, gross external assets and liabilities each represented almost 1500 % of GDP, by far exceeding even the positions of non-International Financial Services Centre multinational companies. The net position has nevertheless remained relatively small over the past few years, hovering around plus and minus

2.3. Competitiveness and external sustainability

15 % of GDP (graph 2.3.15). As a result of the Graph 2.3.16: International investment position of nontype of activities by International Financial International Financial Services Centre

Services Centre companies, external assets and sectors

liabilities are mainly held as portfolio

investments. ( 27 ) The nature of portfolio holdings 500 % of GDP % of GDP -60

makes asset price variations more likely and 400 -70 potentially larger than for other types of assets. 300

The size of gross positions means that relatively -80 200

modest variations in asset prices are susceptible to 100 -90 have a significant impact on Irelandʼs overall net

international investment position. However, the 0 -100

Irish economy and its external accounts are by and -100 -110 large sheltered from such variations as assets and -200 -120

liabilities refer to foreign entities. -300

-400 -130

Graph 2.3.15: International investment position of -500 -140

International Financial Services Centre 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3

2,000 2009Q 2010Q 2010Q 2010Q 2010Q 2011Q 2011Q 2011Q 2011Q 2012Q 2012Q 2012Q 2012Q 2013Q 2013Q 2013Q 2013Q 2014Q 2014Q 2014Q % of GDP % of GDP 25

Assets Liabilities Net IIP (rhs)

1,500 20 Source: Central Statistics Office

15 1,000

10

500 The core net international investment position 5 has strengthened recently. Abstracting from the

0 0 holdings of the International Financial Services

-500 -5 Centre, Ireland's net international investment

-10 position strengthened significantly over the past

-1,000

-15 few quarters, falling from a negative position of

-1,500 124.2 % of GDP in Q2-2012 to 76.7 % of -20

estimated GDP in Q3-2014 (graph 2.3.16). This is

-2,000 -25

4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 consistent with the significant rebalancing of the

economy in the aftermath of the crisis and the 2009Q 2010Q 2010Q 2010Q 2010Q 2011Q 2011Q 2011Q 2011Q 2012Q 2012Q 2012Q 2012Q 2013Q 2013Q 2013Q 2013Q 2014Q 2014Q 2014Q remarkable shift from a current account deficit of

Assets Liabilities Net IIP (rhs) EUR 10 billion in 20007–2008 to a surplus of Source: Central Statistics Office EUR 7.7 billion in the first three quarters of 2014.

The remaining sizeable negative net international investment position is mostly due to the legacy

( 27 ) Portfolio investments represented 67.7% of total external effects of the economic and banking crisis on

assets and 73.5% of total external liabilities as of Q3 2014. government external debt. It should fall in parallel

Direct investment assets and liabilities are marginal among

International Financial Services Centre companies. with Irelandʼs efforts to reduce fiscal imbalances by moving back towards the 60 % of GDP debt

rule under the Stability and Growth Pact.

2.4. STRUCTURAL CHALLENGES IN THE LABOUR MARKET AND

SKILLS MISMATCHES

The labour market continues to adjust. The Graph 2.4.1: Unemployment rate, long-term crisis caused large-scale unemployment with unemployment rate and youth

associated adverse social consequences. The unemployment rate

rebalancing between the tradable and non-tradable

sectors has created skills mismatches that risk 35

increasing structural unemployment. The 30 authorities have dealt with the situation by putting 25

active labour market policies in place, revamping 20 the further education and training sector and %

stimulating job creation. 15

10

Labour market challenges and rebalancing 5

The collapse of the property market and the 0 1 3 1 3 1 3 1 3 1 3 1 3 1 3 1 3 ensuing financial and economic crisis led to a

sharp deterioration in labour market 2007Q 2007Q 2008Q 2008Q 2009Q 2009Q 2010Q 2010Q 2011Q 2011Q 2012Q 2012Q 2013Q 2013Q 2014Q 2014Q

indicators. Unemployment surged from an Unemployment rate

average of 4.1 % in 2000–07 to a peak of 14.9 % in Long-term unemployment rate (>1yr) Very long-term unemployment rate (>2yrs)

early 2012. Youth unemployment rate (younger than 25)

Source: European Commission

The labour market reached a turning point in

2013 with renewed job creation in the private The adjustment of the Irish labour market has sector, modest rises in participation levels and been supported by both migration and wage modest falls in the unemployment rate. These developments. In the run-up to the crisis strong improvements continued in 2014 with the labour demand attracted significant labour employment rate (15-64 age group) at 62.2 % in migration. In contrast, the proportion of foreigners Q3-2014, up just over 1 percentage point from born in another Member State in the working-age 2013. The unemployment rate (15-74 age group) population decreased between 2008 and 2013. fell from 13.1 % in Q3-2013 to 11.4 % in 2014. Partly as a result of this, the total working-age Long-term unemployment has fallen gradually population has decreased since 2009 (Graph 2.4.2). with the strengthening of the labour market, although it remains high at 7 % in 2014. Youth Graph 2.4.2: Working-age population, active and

unemployment (15-24 age group) has fallen employed people

significantly from its peak of 33 % in mid-2012 to

21.9  % in Q4-2014. The number of young 3500 thousand

jobseekers (15-24) with very low skill levels has

also fallen from 50.4 % in 2012 to 40.8 % in 2013 3000

is a positive development. The situation is also improving for young people not in employment, education nor training, with the rate dropping from 2500

18.7 % in 2012 to 16.1 % in 2013. These improvements in labour market indicators are

encouraging signs that the policy measures put in 2000

place over the past few years are paying off. At Population, 15-64, thousand

10.7 % (15-74 age group) in Q4-2014, however, 1500 Active people, 15-64, thousand the unemployment rate is still more than double its Employed people, 15-64, thousand pre-crisis level (Graph 2.4.1).

1000 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

2000Q 2001Q 2002Q 2003Q 2004Q 2005Q 2006Q 2007Q 2008Q 2009Q 2010Q 2011Q 2012Q 2013Q 2014Q

Source: European Commission 2.4. Structural challenges in the labour market and skills mismatches

Wage developments also supported labour education or training are still very high and above market adjustment. While in the pre-crisis period the EU average. Additionally, among those who Irish wage increases were among the highest in the are not in employment, education or training, a EU, its post-crisis adjustment has also proceeded rising proportion is also not active in the labour rapidly. As a result, the accumulated growth of force ( 28 ). A worrying trend in the Irish youth

Irish nominal unit labour costs between 2000 and labour market is the increase in involuntary part

2014 matches the euro area average (Graph 2.4.3). time work, which stands at 41.4 % of those aged

15-24 in temporary employment (compared with Graph 2.4.3: Nominal unit labour costs, total economy 37.5 % in the EU as a whole). This trend, along

with a 20 percentage points increase in part-time 150 2000 = 100 employment as a percentage of total employment

for those aged 15-24 ( 29 ), points to increasing labour market segmentation for young people.

140

Unemployment figures understate the effect of 130 the crisis on the labour market since many

workers who lost their jobs, especially men,

120 became inactive. The activity rate of men fell by 4 percentage points from its pre-crisis peak to about

78 % in 2014. The activity rate of women held

110 EA-18 strong through the same period, but its pre-crisis Ireland growth has come to a halt. Overall, the number of

Greece

100 economically active people has decreased slightly Spain

since 2009 (Graph 2.4.4). This partly reflects the

Portugal decline in the working-age population, but also the

90 withdrawal of some workers from the labour

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 market through discouragement effects.

Source: European Commission

Long-term unemployment remains a serious ( 28 ) 2012: 46 %, 2013: 48.45 %. In total this cohort comprises concern, with the risk that cyclical 7.8 % of the 15-24 year old population. This group is

unemployment could become structural. Longdefined as individuals who are not in employment, education or training and are not active in the labour force.

term unemployment has fallen with the ( 29 ) Eurostat 2013: 2008: 26.6 % (EU28: 26.2 %), 2013: 46.6 % strengthening of the labour market, but it remains (EU28: 31.9 %). high at 6.6 % in Q3-2014, representing almost

60 % of total unemployment. Almost 5 % of the workforce has been out of work for more than 24 months. This partly reflects the difficulties that redundant workers with construction-sector skills have in transferring to other types of employment.

It is also a mechanical consequence of the gradual nature of the recovery following a period of severe job-shedding during the downturn. The high prevalence of long-term and very long-term unemployment means that the workers affected are at great risk of losing tangible and intangible skills.

This could have a lasting effect on their ability to regain employment.

Despite recent improvements, important challenges remain in relation to youth unemployment. The youth unemployment rate and the rate of people who are not in employment,

2.4. Structural challenges in the labour market and skills mismatches

Graph 2.4.4: Labour market participation rates (ages 15- with upper secondary education and below 7 % for

• 64) 

  those with tertiary or a higher level of education

  (Graph 2.4.6).

  85 %

  80 Graph 2.4.5: Employment by educational attainment

  75 1000 thousand

900

70 800

700

65 600

60 500 Total 400

55 Men 300

Women 200

50

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 100

0

4 4 4 4 4 4 4 4 4 4 4 4 4

2000Q 2001Q 2002Q 2003Q 2004Q 2005Q 2006Q 2007Q 2008Q 2009Q 2010Q 2011Q 2012Q 2013Q 2014Q

Source: European Commission 2001Q 2002Q 2003Q 2004Q 2005Q 2006Q 2007Q 2008Q 2009Q 2010Q 2011Q 2012Q 2013Q

Less than upper secondary ed. (levels 0-2)

Both the crisis and the recovery affected sectors Upper secondary education (levels 3 and 4)

and skill groups differentially. The crisis hit the Tertiary education (levels 5-8) Source: European Commission

construction sector disproportionately. In the first two years of the crisis, some 200 000 jobs were

shed in the construction sector. It also affected the Ireland has digital skills gaps. Some 42 % of the public sector, with employment falling by 24 500 workforce has few or no digital skills. Ireland (6.2 %) over three years to Q3-2014. A drop of suffers from a shortage of skilled ICT 6 000 jobs occurred in the year to Q3-2014, professionals. Demand is high, with over 30 % of bringing the total number of employees in the companies employing ICT professionals. Supply is public sector to 370 300. Conversely, the number not keeping pace with demand. In 2014, over 50 % of employees in the private sector increased by of companies that recruited or tried to recruit ICT 67 800 over the three years to Q3 2014 with an professionals reported difficulties doing so, one of increase of about 26 000 over the last four quarters the highest rates in Europe (

30 ). Ireland has

of the period. High-skilled sectors of the economy nevertheless been proactive in addressing its fuelled this growth. The ICT sector in Ireland digital skills gaps. With the help of relevant grew, year-on-year, at a rate of 16 % during the 12 stakeholders, it has developed an ICT Skills Action months to July 2014. Professional, scientific and Plan for the period 2014–18. The three main aims technical activities increased by 5.9 % in the same of the plan are to increase graduate numbers,

period. enhance ICT capacity, improve awareness in the education system and attract foreign talent.

Skills mismatches have emerged with the

rebalancing of the economy. Since the recovery ( 30 ) Eurostat, Survey on ICT usage and eCommerce.

was strongest in skill-intensive sectors, it opened up job opportunities mostly for high-skilled workers. While total employment of those with tertiary education has continued to increase, total employment of those with less than tertiary education has only stabilised during the recovery

(Graph 2.4.5). The unemployment rates also show how the different effects of the recovery across skill groups. For those with at most lower secondary education, the unemployment rate was at 21.2 % in Q3 2014. It fell below 14 % for those

2.4. Structural challenges in the labour market and skills mismatches

Graph 2.4.6: Unemployment rate by educational reform further education and training. Reforms

attainment (ages 15-64) have been put in place to ensure the creation of a

system that is more responsive and relevant to

30 % labour market needs (Box 2.4.1).

25

It is difficult for lower socio-economic groups to 20 access tertiary education. Young people from a

15 lower socio-economic background are less likely

to attend university given poor educational 10 attainment at secondary school. A number of

5 studies (

31 ) have looked at the impact of social class on higher education participation. They have 0 found persistent evidence of social inequalities in

3 3 3 3 3 3 3 3 3 higher education participation and that financial

2006Q 2007Q 2008Q 2009Q 2010Q 2011Q 2012Q 2013Q 2014Q constraints are a major explanatory factor. The Less than upper secondary education (levels 0-2) abolition of fees for higher education has not been

Upper secondary education (levels 3 and 4)

Tertiary education (levels 5-8) enough to narrow the social class-related gap in Total higher education participation.

Source: European Commission

There have been positive developments in basic Policy responses and tertiary education in Ireland. In the 2012 There are concerns about the effectiveness of Programme for International Student Assessment existing activation policies and training (PISA) tests Ireland scored below the EU programmes. The effectiveness of some of the benchmark of 15 % for low achievers in reading training programmes available to the unemployed and science (9.6 % and 11.1 % respectively). It is unclear. There is evidence that the largest scored slightly above the benchmark in relation to programme, the Community Employment Scheme, mathematics (16.9 %). Early school leaving has is ineffective. Past participation on Community been falling consistently since 2009 (11.7 %) to a Employment was found to increase a claimant’s rate of 8.4 % in 2013, over 3 percentage points probability of falling back into long-term below the EU average of 12 % in 2013. Tertiary unemployment ( 32 ). With respect to JobBridge, education attainment also continues to rise. existing evaluation evidence points to some Ireland’s tertiary education attainment rate for 30- positive effects, particularly where training is

34 year olds was 52.6 % in 2013, up from 51.1 % in 2012. While this represents the highest rate in ( 31 ) Smyth, E. (1999) ‘Educational inequalities among school the EU28, it is still short of Ireland’s Europe 2020 leavers in Ireland 1979–1994’ in The Economic and Social

target of 60 % of the 30-34 year old population Review 30; McCoy, S., Byrne, D., O’Connell, P., Kelly, E. and Doherty, C. (2010a), ‘Hidden disadvantage? A Study

with a tertiary education qualification by 2020. on the Low Participation in Higher Education by the Non

Enrolments are projected to continue to increase manual Group’, Dublin Higher Education Authority;

over the next decade as the number of students O’Connell, P.J., Clancy, D. and McCoy, S. (2006) ‘Who

grows and the national strategy to improve access, went to college? Socio-economic inequality in entry to higher education in the Republic of Ireland in 2004’ in

flexibility and lifelong learning is rolled out. Higher Education Quarterly 60; McCoy, S. and Smyth, E.

(2011), ‘Higher education expansion and differentiation in

At the same time, re-skilling and up-skilling are the Republic of Ireland’ in Higher Education 61; Cullinan, J., Flannery, D., Walsh, S., McCoy, S. (2013), ‘Distance

a challenge for the education and training effects, social class and the decision to participate in higher system. The further education and training system education in Ireland’ in The Economic and Social Review

has been ineffective in providing the types of skills 44. ( 32 ) O’Connell, P., McGuinness, S. and Kelly, E., ‘A Statistical

that the rebalanced Irish economy needs. It also Profiling Model of Long-term Unemployment Risk in failed to give the unemployed valuable and Ireland’, The Economic & Social Review, 2012 Vol. 43(1)

relevant re-skilling and up-skilling opportunities. pp. 135-164.

Traditionally, the apprenticeship system in Ireland has been heavily geared towards the construction sector. The authorities have recognised the need to

2.4. Structural challenges in the labour market and skills mismatches

heavily focused on existing labour market within four months of becoming unemployed or demand ( 33 ). leaving formal education to avoid scarring effects.

Ireland also lacks a more comprehensive outreach Activation policies are underachieving due to strategy regarding, specifically, people not in limited capacities in the employment service. employment, education nor training who are not There are currently around 500 jobseekers per active in the labour force. The data on involuntary caseworker in the Public Employment Service, a temporary employment as a result of employer ratio well above what is considered best practice. uncertainty arising from the financial and Allocation of additional resources and efforts to economic crisis also shows the importance of tackle long-term unemployment, through the rollproviding good-quality offers of employment or out of the JobPath initiative, will see the caseload education, traineeships or apprenticeships relevant fall closer to 200 cases per member of staff. This to labour market needs and leading to permanent will also help to reduce the high rates of jobs. households with low work intensity, given 52.7 % of the total unemployed come from such Further education, training and apprenticeship households. reforms are progressing in the right direction.

The Further Education and Training Authority, It will still take some time before the first effects SOLAS, has put a strategy in place to ensure of JobPath have an impact on the labour programmes are efficient and relevant, link the market. Referrals to the providers are expected to provision of training to labour market needs and start only in the beginning of the second half of facilitate the movement of the long-term 2015. Since a comprehensive monitoring and unemployed back into work. This includes setting evaluation framework is being put in place only up referral protocols between education and now, it is difficult to assess ex ante the training boards and Intreo offices (single points of programme’s effectiveness. It remains to be seen contact for all employment and income supports). how the private sector approach will differ from A sound oversight system has been put in place to that of the Public Employment Services, what ensure that the rollout of the strategy and services profile of claimants they will be working with, and plan is successful. their ability to harness links with employers and provide more effective services (with both Ongoing reforms to the apprenticeship system activation and social inclusion components). The will continue to be employer-led and should effective rolling out of the programme to tackle ensure the alignment of education and training long-term unemployment will be necessary to meet provision with the needs of the labour market. ambitious numerical targets. The Apprenticeship Council has been given the

task of extending apprenticeship opportunities to More measures need to be implemented, within new sectors of the economy. Currently only a the Youth Guarantee, to improve the situation limited number of trades provide apprenticeship of young people. Currently, there is a nine-month opportunities. Carrying out a ‘sustainability test’ waiting period for young people who have been that takes into account the evidence of labour assessed to have a medium or high probability of market needs and future strategic economic exiting unemployment. The Council priorities, future demand for apprenticeships and Recommendation on establishing a Youth the progression routes for apprentices, should help Guarantee recommends young people receive a enhance the labour market relevance of proposals. good-quality offer of employment, continued The first results of this initiative will not be seen education, an apprenticeship or a traineeship before the end of 2015.

( 33 ) Indecon (2013), ‘Indecon’s Evaluation of Jobbridge’ http://www.welfare.ie/en/downloads/indecon-report-onevaluation-of-jobbridge.pdf;

McGuinness, S., O’Connell, P. & Kelly, E. (2014), ‘One Dummy Won’t Get it: The Impact of Training Programme Type and Duration on the Employment Chances of the Unemployed in Ireland’, Economic and Social Review, 2014, Vol. 545(3), pp. 425- 450.

2.4. Structural challenges in the labour market and skills mismatches

Box 2.4.1: Policy responses to labour market challenges and skills mismatches

Activation policies continue to be enhanced under the Pathways to Work strategy. Social welfare and public employment services are being integrated in one-stop-shops (Intreo), linking benefit entitlements more closely with the activation services. Currently, 44 Intreo offices have been opened and all remaining offices are planned to be opened in early 2015. The latest version of the strategy, launched in October 2014, outlines further new measures, including: enhanced engagement, profiling and sanctioning of beneficiaries and the Employment and Youth Activation Charter, which asks employers to commit to interviewing at least

50 % of candidates for a position from the Live Register. In Budget 2015, Pathways to Work is estimated to provide 300 000 places in work and training at a cost of EUR 1.6 billion.

Jobpath will be rolled out in 2015 to address long-term unemployment and help those furthest from the labour market. An employment activation programme, it will provide 1 000 additional staff across approximately 100 different outlets across the country dealing with an estimated 100 000 long-term unemployed jobseekers. It is expected to begin in the first 6 months of 2015. Costs have been estimated at

EUR 340 million with the gross benefit savings estimated at EUR 525 million. The government has also committed to providing at least 57 000 education and training places for long term unemployed people during 2014 and 2015.

Implementation of the Youth Guarantee is continuing. Approximately 16 400 of the 28 000 plus places available under the Youth Guarantee had been taken up at the end of October 2014. New Youth

Guarantee measures were announced in November 2014, including a Youth Developmental Internship which will offer a young person aged 18 to 24, an internship of between six to nine months and participants will receive a EUR 50 top-up of their weekly social security payment. The first intake is expected in March

2015. In order to further address youth unemployment, the JobsPlus scheme (an employer incentive to encourage employers to hire individuals on the live register who have been unemployed for over 12 months) has been revised and employers can receive the same incentive to employ an individual under 25 who has been unemployed for over 4 months.

Ireland continued to reform the further education and training system and apprenticeships. The new

Further Education and Training Authority (SOLAS) and the 16 Education and Training Boards were established in 2013 and all training centres vested in SOLAS were transferred to their respective Education and Training Board by July 2014. In May 2014 SOLAS published its three-year corporate strategy and a five-year strategy for the development and delivery of an integrated further education and training system.

SOLAS published the first annual Further Education and Training Services plan in May 2014. It shows how each Education and Training Board will be delivering the overall budget to make provision for learners. The document clearly sets out data relating to the local demographics of each of the 16 Education and Training Boards and details the programmes and courses it will deliver, as well as target learner profiles and the National Framework of Qualifications levels that will be achieved. This annual service planning also involves consultation with employers and local Intreo offices.

Following on from the Apprenticeship Review an Apprenticeship Implementation Plan was published in June 2014. As part of this plan a new Apprenticeship Council was established in November 2014 with members from among employers, trade unions, government and relevant state agencies. In January 2015 the

Apprenticeship Council issued a call for proposals from employers and education and training providers to develop new apprenticeships in areas outside the current apprenticeship trades and to advise on the implementation of new apprenticeships.

The Action Plan for Jobs coordinates efforts to foster job creation. The first Action Plan for Jobs was launched in 2012 to coordinate job-creation initiatives across all government Departments. The latest iteration of the plan was published in January 2015 and sets out initiatives that includes a National Talent

Drive with a focus on strengthening employability of learners and enhancing employer engagement at all levels.

2.4. Structural challenges in the labour market and skills mismatches

Given continued efforts to strengthen the skills base, the implementation of the new Junior

Cycle would be a major development in school education. Current proposals would gradually replace the Junior Certificate Examinations with a combination of central assessment and schoolbased model of assessment with an emphasis on the quality of students’ learning experience.

Schools will be expected to deliver a programme that enables students to develop a wide range of skills. These include critical thinking skills and basic skills such as numeracy and literacy. Major changes have been made to initial teacher education programmes, with literacy and numeracy units now part of the national teacher induction programme. School self-evaluation has been rolled out and new requirements have been introduced on standardised testing, including the return of aggregate data to the Department of Education and

Skills.

A new national access plan for higher education to increase the participation of disadvantaged students is being drawn up. Due to be finalised in early 2015, it will identify new targets for broadening access and contain recommendations on helping disadvantaged students participate in higher education. They include targeted interventions in disadvantaged neighbourhood schools to increase the numbers of their students attending university and helping those who do make it to university when they get there.

The labour market situation has improved recently. Overall, Ireland has made some progress in addressing the Council Recommendation and the authorities’ efforts to address labour market challenges have started to pay off. Unemployment is on a firm downward trend. The institutional mechanisms are being put in place that should contribute to adequate labour market activation policies and provision of re-skilling or up-skilling training opportunities to address skills mismatches.

3. OTHER STRUCTURAL ISSUES

3.1. HEALTHCARE SYSTEM

Irelandʼs healthcare sector is atypical among Graph 3.1.1: Public healthcare expenditure, Ireland and

EU Member States. Health insurance and the EU delivery of healthcare are organised under a twotiered structure of public and private systems. The 12 % of GNI private system covers the highest share of the 10.0 population among EU countries for supplementary 10 9.4

health services. All residents are eligible for a core 8.7

9.0 8.7

set of public services, including hospital care, but 8 7.5 7.7 7.6 7.4

7.8

full public health coverage is means-tested and restricted to a subset of the population. There are 6 also intermediate levels of public coverage depending on circumstances. This complicates the 4 rules defining entitlements to health services. In addition, there are numerous interactions, both 2 intended and unintended, between the public and private systems. For example, doctors can treat 0 both public and private patients in public hospitals. 03 04 05 06 07 08 09 10 11 12

EU, 25th percentile EU average

Public expenditure on healthcare is Ireland EU, 75th percentile comparatively high in Ireland. In spite of the Source: European Commission relatively favourable demographics, public

healthcare expenditure represented 8.7 % of gross Population health outcomes are comparable to national income in 2012, compared with the EU those of the rest of the EU. In spite of higher average of 7.3 %. ( 34 ) This ratio was down from a public expenditure on health, population health peak of 10.0 % in 2009 after years of increases in status indicators such as life expectancy and infant the 2000s and following efforts to contain mortality are by and large no better than in the rest healthcare costs as part of the measures to restore of the EU. The number of hospital beds and the sustainability of public finances (graph 3.1.1). doctors per resident is comparatively low. A Nevertheless, public healthcare expenditure number of observers ( 35 ) have also independently remains fairly dynamic. In the past several years, pointed out that while efficiency gains have been outturns regularly exceeded the profiles set out in achieved in recent years, the Irish health system successive government budget plans. may have passed an ʽinflection pointʼ making

deeper long-term structural reforms necessary in order to contain expected cost increases.

( 34 ) Given Irelandʼs economic structure and the large negative net factor income flows generated by multinational

companies, the share of expenditure in terms of gross Demographic trends are set to put additional

national income is a more appropriate benchmark than the pressure on health expenditure. While Ireland's

GDP share. If GDP is used, healthcare expenditure demographic structure is currently favourable, its

represents a share of 7.1 %. This is below the EU average population is ageing rapidly. This will put

of 7.3 % and places Ireland 11 th instead of 3 rd in the

ranking. significant pressure on healthcare expenditure

between now and 2060, as recognised in the governmentʼs Comprehensive Expenditure Report 2015 - 2017.

Ireland has begun to implement a wide range of reforms in the healthcare sector. Initial reforms focused on securing savings as part of the fiscal consolidation efforts. In November 2012, the authorities published the Future Health strategy,

( 35 ) See for instance Burke et al (2014), http://www.healthpolicyjrnl.com/article/S0168-

8510(14)00166-3/fulltext

3.1. Healthcare system

an ambitious medium-term plan to reform the Some structural cost-saving measures are being sector based on four pillars: (1) health and wellimplemented in public expenditure on being; (2) service reform through an integrated pharmaceuticals. While recent reforms to bring model of care; (3) structural reform; and down prices from very high levels have worked, (4) financial reform. Future Health set an end-goal public spending on pharmaceuticals remains well of transforming the two-tiered system into a above the EU average. Negotiations under the midsystem based on universal health insurance partly term review of the 2012 agreement between the supported by general taxation. Department of Health/Health Service Executive

and the industry body representing patent The transition towards universal health protected medicines were due to start in the insurance is being slowed down. A White Paper summer of 2014. However, these have been on the subject was published in April 2014, stating delayed and the mid-term review is still ongoing. the governmentʼs aim to complete the reform by This puts the achievement of any further 2019. Since then, the authorities have decided to significant savings in 2015 at significant risk. For postpone the introduction of universal health off-patent medicines, the introduction of insurance without announcing a new target date. interchangeable groups is almost complete. The They are still moving ahead with other reforms and generics penetration rate is now close to 70% in the progressive completion of the building blocks volume terms of publicly-covered outpatient use. for universal health insurance. These include the e This has resulted in substantial cost savings and health strategy ( 36 ), financial reforms, the ʽmoney there may be only limited scope to further improve follows the patientʼ activity-based funding model value-for-money in this market segment. Finally, for hospitals and making savings on public as regards medicinal products, the inclusion of pharmaceuticals expenditure through structural ʽcost-effective prescribing behaviourʼ as a key measures. All of these reforms were launched priority with actions forthcoming in 2015 should under the EU-IMF financial assistance programme. further assist value-for-money gains.

Universal health insurance postponement could Financial reforms and e-health have faced have consequences for the private insurance delays. Financial management systems reforms sector. There may be concerns about the impact of have yet to be completed. A key deliverable is the possible announcement effects on the voluntary introduction of a common chart of accounts across health insurance market, for which the introduction the hospital sector, which has not yet been of lifetime community rating is planned. The rollachieved. The introduction of an activity-based out of free general practitioner care for certain age funding model for budget allocations in statutory groups planned for this year, an intermediate step hospitals has begun on a shadow basis, but a full towards introducing universal health insurance, switch to activity-based funding to make the will also require close monitoring of related budget hospital sector more efficient, will take some years impacts. to complete. The timeline for the roll-out of the

first phase of individual health identifiers has also Several strands of reforms have moved ahead been delayed, even though governance regardless of universal health insurance arrangements for setting up of e-health Ireland postponement. A Council Recommendation have progressed, with the appointment of a new issued under the 2014 European Semester called Chief Information Officer and budget planning to for progress on all the universal health insurance support the first phase of deliverables. A full building blocks in 2014. Some progress has been system of health identifiers is necessary for wider made in making the delivery of high-quality hospital funding reform. healthcare services more cost-effective.

( 36 ) As indicated in the e-health Strategy for Ireland (2013), ehealth ʽinvolves the integration of all information and knowledge sources involved in the delivery of healthcare via information technology-based systems. This includes patients and their records, caregivers and their systems, monitoring devices and sensors, management and administrative functions.ʼ

3.2. IMPROVING ACCESS TO FINANCE AND SME DEVELOPMENT

SME access to finance Graph 3.2.1: Outstanding credit to SMEs

The improved macroeconomic environment has 40 EUR billion EUR billion 800

found its way to the SME sector, enabling firms to stabilise their businesses after a prolonged 35 700 period of distress. According to the Red C SME

Credit Demand Survey, almost half of the 30 600

surveyed firms reported a higher turnover between 25 500

March and September 2014. Profits were recorded in about 56 % of the firms (up from 51 % for the 20 400 preceding six months). Although the outlook is

now more positive ( 37 ), most firms are cautious on 15 300

new investment projects. Different strategies are 10 200 being pursued by SMEs. While some firms still Outstanding amounts - stock (left-hand side)

need to refinance their debt with new borrowing, a 5 100 Gross new lending - flows (right-hand side)

growing number are using retained earnings for 0 M D Se Jun M D Se 0

working capital purposes. New investment ar-1 ec ec

prospects have improved over the past six months, -10

par-1 -13 p

0 11

-12

3 14

with some enterprises renewing their inventories (1) Data refers to credit advanced by all credit institutions

and others (about 11 % of SMEs surveyed) looking resident in Ireland, including foreign subsidiaries and

to expand. About 30 % of SMEs have increased branches. Source: Central Bank of Ireland

their staff since the end of March.

Less credit is extended and less credit is sought, Subdued credit demand is showing signs of but the outlook might be changing. The level of recovery. As shown by the RedC Survey, from outstanding bank credit to SMEs has been in March 2013 to September 2014 SMEs demanded decline since 2012 (Graph 3.2.1). The stock less bank credit. This was the case for all sectors reduced by 8 % in the first two quarters of 2014. except for manufacturing, where credit demand This is consistent with the deleveraging trend remained constant. The lack of need for credit has described in Section 3.1.1 and the focus of SMEs been given as the main reason for SMEs generally on the stabilisation and consolidation of business not applying for credit (81 %). Indicating a activity. Compared with the rising levels of possible reversal of this trend, in the third quarter investment that were observed in 2014, it further of 2014 the banks themselves reported an increase confirms the view that the recovery in Ireland is in demand across all enterprise sizes and loan still largely driven by SMEs internal funds and by maturities (

38 ).The type of products that firms

multinationals financed abroad (including by requested (Graph 3.2.2) could indicate that what parent companies and through market issuance). drove overall credit demand down was fewer Annual SME lending flows (a series reporting on requests for renewals and overdrafts. Applications new credit facilities drawn down by SMEs during for new loans and leasing or hire-purchase the quarter), albeit volatile, shows a moderate agreements increased however (to 24 % of total

recovery in the second half of 2014. products requested from 21 % at the end of March). As a further sign of stabilisation, renewals

and overdraft products sought did not include

( 37 ) 58 % of SMEs surveyed expressed the belief that the requests for additional funds (the sizes of facilities

business climate in Ireland would improve in the next six remained unchanged) in almost half of cases. months. When they did, the additional amount needed was smaller than observed over the previous period.

( 38 ) ECB/EC Survey of Access to Finance of Small and Medium-sized Enterprises (SAFE), Irish responses, October 2014; http://www.centralbank.ie/mpolbo/mpolicy/Documents/Co

mment%20on%20Irish%20Results%20October%202014.p df.

3.2. Improving access to finance and SME development

This means that the ability of SMEs to service Certain collateral requirements and credit their debts is improving. application processes may be discouraging for

some SMEs. According to the RedC survey, at the Graph 3.2.2: Bank products requested by SMEs end of September 2014, collateral such as

buildings, machinery and land was still required

40 % of all for over 40 % of loan applications, putting

products Mar-12

requested businesses with a different asset structure at a Sep-12

disadvantage. The Irish Business and Employers

30 Mar-13 Confederation said that banks have improved their Sep-13 sectoral understanding and their ability to base

Mar-14

20 lending decisions on projected cash flows, but Sep-14 called for further efforts. Personal guarantees are

becoming less of a prerequisite for credit too (38 % 10 at the end of September, compared to 44 % at the

end of March). The upper limit for referring refusals to the Credit Review Office has been

0 di H N N O R R

sc In ire Leas ew ew th Ex enew Ex enew increased to EUR 3 million. The SME

ount vo Loan O er isti isti

ice pur stakeholders’ feedback that the Central Bank of

ing chas ing ver ng Loan al ng D al or

dr /R /R Ireland gathered as part of the consultation on the

e af

es raf es t truc t truc Review of the Code of Conduct for Business

Lending to Small and Medium Enterprises Source: RedC SME Credit Demand Survey revealed a need for more clarity on the lenders’

application process. This referred especially to the SMEs seeking credit are facing fewer rejections information required and the criteria for by banks, but also higher interest rates than the determining the ability to repay, as well as reasons euro area average. Survey data shows that SMEs for credit refusal and appeal rights, including are becoming less worried about access to finance, recourse to the Credit Review Office.

although this is still a major concern for around a third. According to the RedC Survey, rejection Graph 3.2.3: Interest rates on SME loans - comparative

rates for credit applications have fallen to about overview

14 % ( 39 ) and SMEs have a more positive perception of the banks’ willingness to provide 7.5 % interest rates credit, causing the number of discouraged potential 7

borrowers to fall. However, some SME 6.5

organisations say that the overall bank rejection

rate is as high as 38 %. Interest rates for new 6

corporate loans of up to EUR 1 million in value, 5.5 used as a for proxy SME lending, are also higher 5

for Irish SMEs than for most of their euro area 4.5

counterparts (Graph 3.2.3). On average, they are

also markedly higher than the rates for larger 4

firms. This is due to the banks’ efforts to increase 3.5 their interest margins on new lending to improve 3 CY DE ES

profitability. It is because low-yielding legacy FR IT IE 2.5 assets account for large shares of their balance Jan M Se Jan M Se Jan M Se Jan M Se Jan M Se Jan M Se ay ay ay ay ay sheets. It could also be a result of the concentration -09 -09

p

09 -10 -10 pp- ay 10 -11 -11 11 -12 -12

p

12 -13 -13

p

13 -14 -14

p 14

of SME lending markets, in increase since 2013.

Source: Central Bank of Ireland, European Central Bank

( 39 ) The RedC Survey puts the rejection rate at 14 % for the

period between March and September 2014, while the Demand for non-bank credit by SMEs remains

SAFE survey puts it at 10.4 % for the period between April subdued despite a number of SME financing

and September 2014. The Irish Small and Medium

Entrerprises Association Quarterly Bank Watch survey initiatives (Table 3.2.1). As shown by the latest

refers to the fourth quarter of 2014. September 2014 RedC SME Credit Demand

3.2. Improving access to finance and SME development

Survey, the number of SMEs aware of existing Ireland secured an initial amount of EUR 800 government support schemes and the Credit million in funds, of which EUR 550 million are Review Office has decreased. The sometimes guaranteed by the government. A maximum of greater complexity of non-bank borrowing EUR 5 billion could be given by the state provided schemes could deter a number of companies. The there is demand for it.

Credit Review Office also points to a need for further efforts to be made to improve the financial management skills of SMEs. Although the amount of bank financing has decreased, Irish enterprises and SMEs in particular remain heavily reliant on banks for financing. There is therefore further scope for the development of non-bank financing alternatives in Ireland, for both equity and debt instruments, to help SMEs diversify their funding sources. This was also one of the cornerstones of the Commission’s Investment Plan for Europe announced in November 2014 ( 40 ). It is among the priorities on which ongoing Commission work on developing a Capital Markets Union is based ( 41 ).

The recent changes to the Irish Alternative

Investment Fund rulebook also aim to support nonbank lending by allowing loan origination by qualifying investment funds within a prudential framework (Box 4.2.1).

The Strategic Banking Corporation of Ireland and the existing support funds aim to diversify the sources and types of funding for Irish

SMEs. The goal of the newly established Strategic

Banking Corporation of Ireland is to lower funding costs for SMEs by increasing the number of lenders offering SME loans and providing new products with a longer duration and flexible repayment periods. The Strategic Banking

Corporation of Ireland (which does not have a bank license) has lower funding costs and this cost benefit will have to be passed on to SMEs. This will partly address the relevant Council

Recommendation. It was launched in October

2014, with a full roll-out of products expected in the first quarter of 2015 and the inclusion of new non-bank lenders in the market later in the year. It sources funds from the German development bank

KfW, the Ireland Strategic Investment Fund and the EIB and makes them available to SMEs through on-lenders, including retail banks and nonbanks. The Strategic Banking Corporation of

( 40 ) Investment Plan for Europe, http://ec.europa.eu/priorities/jobs-growth-investment/plan/.

( 41 ) Green paper: Building a Capital Markets Union, http://ec.europa.eu/finance/consultations/2015/capital

href="http://ec.europa.eu/finance/consultations/2015/capital-markets-union/docs/green-paper_en.pdf">markets-union/docs/green-paper_en.pdf

3.2. Improving access to finance and SME development

Box 3.2.1: Regulating loan origination by investment funds

The Central Bank of Ireland revised its Alternative Investment Fund rulebook to create a special loan origination regime for qualifying alternative investment funds from 1 October 2014. Ireland has a large investment fund industry (with a net asset value of about EUR 1.1 trillion as at end-2013) Some funds had already been active in secondary loan markets through assignments or purchases from banks, though not in origination (i.e. direct primary lending to firms or projects), which was prohibited. Following a lengthy consultation period and discussions with the industry in 2013, the Central Bank of Ireland decided to revise applicable regulations to strike an appropriate balance between allowing alternative financing options for companies to complement the bank funding channel and addressing ‘shadow-banking’ concerns. Regulatory cooperation with the European Systemic Risk Board and European Securities and Markets Authority during

2014 identified several potential risks, including (i) regulatory arbitrage and an un-level playing field vis-avis the banking sector; (ii) possible runs on investment funds; (iii) contagion risk through interconnectedness with banks and (iv) excess credit growth and pro-cyclicality.

The reforms to the Central Bank of Ireland’s alternative investment fund rulebook were thus geared towards addressing potential financial stability risks associated with loan origination by investment funds. In addition to the rules enshrined in the Alternative Investment Fund Manager Directive qualifying alternative investment funds must comply with detailed risk disclosure requirements in their prospectuses and in periodic reports (to investors and competent and macro-prudential authorities) and liquidity and diversification requirements (the regulations impose a maximum exposure limit to a single issuer or group of

25 % of net assets). They must also apply rigorous credit-granting, monitoring, valuation and management processes (also for concentration risk) and restrict their activities to a single strategy focused on lending and participating in securitisations. Given the relative illiquidity of loan assets and to address possible risks of runs, qualifying alternative investment funds must also be closed-ended, limit leverage to 200 % and comply with stress testing requirements in addition to those in the Alternative Investment Fund Managers Directive.

Finally, to adequately deal with contagion risks through interconnectedness with banks and to ensure that incentives are aligned, alternative investment funds can only purchase or participate in loans originated by banks if the banks retain at least 5 % economic interest in such transactions (in line with minimum risk retention requirements for banks under the Capital Requirements Regulation and Capital Requirements

Directive). The funds should also independently value and regularly stress-test these exposures, and continuously monitor banks’ net economic interest over the lifetime of each loan in which they are invested.

The regulatory requirements for loan-originating alternative investment funds could potentially dampen prospects for material credit extension through this non-bank channel. To date the Central

Bank of Ireland has not authorised any such funds in Ireland, though the new rules have only been in effect since October and there has been considerable interest from promoters and the fund management industry.

In response to industry concerns regarding the limitations to portfolio compositions applicable to loanoriginating alternative investment funds, the Central Bank of Ireland has clarified that loans of different levels of seniority (e.g. subordinated and mezzanine debt) are allowed, that equity can be held if it is part of a distressed loan work-out scenario and that bonds and derivatives are acceptable for treasury management and hedging purposes. However, expectations about a material impact of this regime on credit supply in

Ireland are rather muted, also given the intentions of interested industry participants expressed before and during the consultation process. Based on exchanges with stakeholders, the authorities consider that many potential new investments stemming from loan-originating alternative investment funds could be allocated to European borrowers outside Ireland.

The EU recently introduced provisions explicitly allowing certain types of alternative investment funds to grant loans to qualifying undertakings. Such provisions are included in the EU Venture Capital

Fund Managers and EU Social Entrepreneurship Fund Managers Regulations and are also included in the

European Long-term Investment Fund Regulation. European long-term investment funds – which must be managed by asset managers authorised under the Alternative Investment Fund Managers Directive – may grant loans to qualifying portfolio undertakings. If a fund is set up following the rules of the European Long

Term Investment Fund Regulation (e.g. rules on diversification, leverage or transparency), it can be

(Continued on the next page) 3.2. Improving access to finance and SME development

Box (continued)

marketed everywhere in the EU without additional barriers. Given the European long-term investment funds framework will soon come into effect (publication of the European long-term investment funds rules in the Official Journal is expected in the first semester of 2015), it will provide a safe and well regulated environment available throughout the EU for granting loans through investment funds.

Additional resources have been put in place to tax incentives to further encourage investment in support SME lending, marking some progress SMEs. These include changes to the tax credit

in addressing the Council Recommendation. scheme for research and development ( 43 ) and the

Two SME funds, co-financed by the National removal of the high earners restriction from the

Pensions Reserve Fund, are lending with a Employment and Investment Incentive ( 44 ). The

growing number of projects in the pipeline. The latter should incentivise high earners to invest mandate of a third National Pensions Reserve more in eligible companies. Ireland has moved up Fund, the Turnaround Fund, was not renewed at four positions to 13th place in the World Bank’s the end of 2014. This was due to the limited pool global ranking on the ease of doing business and of underperforming/distressed businesses eligible was among the ten top improvers in 2013/2014. as turnaround investment cases amid a continued However performance has dropped in a number of economic recovery. The Action Plan for Jobs 2015 specific areas (access to credit, construction announced a reconfigured Credit Guarantee permits and enforcing contracts). The Companies Scheme and a simplified operation of the Act 2014 passed by the Oireachtas (Parliament) at Microenterprise Loan Fund. Regarding the latter, the end of December 2014 is due to come into the extent of rejections (43 %) appears to suggest effect on 1 June 2015. It should reduce red tape by

some scope for improvement ( 42 ). An SME Online simplifying many existing company law

Tool was also launched to increase awareness requirements, for example reducing the time and among SMEs of available business supports, cost of setting up a business, providing legal power backed by a communications campaign to borrow money and allowing the establishment showcasing the online guide. 23 % of enterprises of companies with one director. Legislation which were aware of this online tool in September 2014, facilitates and reduces the cost of creditor

following its launch in May. However, awareness protection for SMEs ( 45 ) became applicable in July

and knowledge of SME funding options remains 2014. Despite this, only five SMEs had sought the quite low overall. The Irish central credit register, appointment of an examiner through the Circuit set to become operational in late 2016 (and in 2017 Court until November 2014. Ireland also ranks as for corporate credit), should support lending by the best in the EU and 6th in the world in terms of making it easier to assess the creditworthiness of

borrowers.The value of credit registers as a way of ( 43 ) A 25 % tax credit for qualifying research and development

improving both banks’ and supervisors’ risk expenditure is available for companies carrying out qualifying research and development undertaken within the

assessments has been recognised in over half of European Economic Area.

EU Member States that have established them to ( 44 ) The Employment and Investment Incentive is a tax

date. This will also be an important component of incentive (deduction) to encourage investment in

calibrating some macro-prudential measures (e.g. businesses. It applies to investments in new ordinary share capital in the majority of small and medium sized trading

total debt-to-income and debt-service-to-income companies, with the exception of certain sectors. It can be

ratios). used for investments in companies that are not listed on the official list of a stock exchange or on an unlisted securities

market of a stock exchange.

SME development http://www.revenue.ie/en/tax/it/leaflets/it55.html. ( 45 ) Under Irish law, examinership allows a company that is

Legislative changes are focused on making it experiencing financial difficulties a period of protection from creditor action during which a third party (the

easier to do business. Ireland has modified several examiner) has an opportunity to study the affairs of the

company and, if there is a prospect for the continuation of

( 42 ) Microfinance Ireland Progress Report Q3 2014, the company, to draw up a plan for its continuation. Before http://www.djei.ie/enterprise/smes/MicrofinanceIrelandPro the legislative change which allocated competence to the gressReportQ32014.pdf. Circuit Court, a High Court procedure was necessary which

entailed higher legal costs.

3.2. Improving access to finance and SME development

the ease of paying taxes. Improvements continue to This is mainly due to its economic structure, be made to the system, with increased provision of geared towards several high-tech manufacturing e-services and on-line service platforms. A roll-out sectors and knowledge-intensive services. the Integrated Licensing Application Service is due However, research and development activity is to take place in the first quarter of 2015 for retail largely carried out by foreign multinationals and licenses, after some tender-related delays. there have been limited spillovers to SMEs. Stakeholders have signalled the need to further Concerns remain regarding the lack of innovative improve the existing Regulatory Impact activities by Irish SMEs ( 47 ), insufficient Assessment procedures, emphasising their varying commercialisation of research results and the low quality across departments, a lack of cost/benefit availability of finance for innovative analyses, as well as timing and accessibility companies ( 48 ). issues ( 46 ).

Centralised public procurement might be a ( 47 ) 2013/2014 European Commission Annual Report on

deterrent for SMEs. The streamlining of public European SMEs, http://ec.europa.eu/enterprise/policies/sme/facts-figuresprocurement

procedures through the establishment analysis/performance-review/files/supportingof the Office of Government Procurement as a documents/2014/annual-report-smes-2014_en.pdf

central purchasing body sought to reduce ( 48 ) 2013/2014 European Commission Annual Report on

government costs. It has actively promoted public European SMEs.

private programmes for the training and education of SMEs. However, it may also have generated new challenges for SMEs in seeking procurement contracts. This is mostly due to the frequent use of framework contracts that only consortia of SMEs are large enough to access. The government has sought to address this issue through a number of measures announced in the 2014 Action Plan for

Jobs, among them a review of Public Works

Contracts. Circular 10/14 published in April 2014 recommended a number of actions by procurement authorities to facilitate SME participation. The eTenders platform has also helped increase transparency and streamline procedures. A new

Tender Advisory Service was announced in

December 2014 to enable potential suppliers to raise concerns about a particular live tender process. This is due to be piloted as from February

2015. An SME Working Group has also been set up to assist the Office of Government Procurement in developing and monitoring strategies for SME access to procurement.

There is further scope for domestic innovation to grow. Ireland has made significant progress towards achieving its national research and development intensity target for 2020 of 2.0 % of

GDP. It performs relatively well in terms of innovation outputs, both in the innovation output indicator and on the Innovation Union Scoreboard.

( 46 ) Consultation on civil service accountability and performance, Irish Business and Employers Confederation

(IBEC) submission, March 2014.

3.2. Improving access to finance and SME development

Table 3.2.1: Overview of SME credit policy initiatives

Policy measure Date Additional credit volume Jobs protected/created

Credit Review Office (CRO), set up to mediate on disputes between lenders and prospective SME borrowers who have Q2 2010 €29.7mn overturned (Oct 2014) 2,091 (Oct 2014) been refused credit.

Microfinance Ireland extending loans between €2,000 and

€25,000 to firms with less than 10 employees Q3 2012

€90mn (over 10 year horizon);

€6.3mn approved to Dec 2014 932 (Dec 2014)

SME Credit Guarantee Scheme (CGS), providing a State

guarantee to accredited Lenders of 75% on eligible SME Q4 2012 About €22mn loans sanctioned loans or Performance Bonds . (Dec 2014)

981 (Dec 2014)

Provision of finance via NPRF to SMEs through partnership

with private sector investors, comprising one credit fund €450mn credit and €275mn (Bluebay Mid Market Fund - €200mn NPRF commitment; equity. SME Credit Fund

€450mn total fund size) and one equity fund (Carlyle SME completed loan transactions Restructuring and Growth Fund - €125mn from NPRF, Q1 2013 totalling approxmiately €173mn. 100 (Dec 2014)

€275mn total). The third, Better Capital SME Turnaround SME Equity Fund: two

Fund - €50mn from NPRF, €100mn total did not have its investments have closed (Dec 2014).

mandate renewed at end-2014.

The Strategic Banking Corporation of Ireland (SBCI) aims to

increase the number of lenders offering SME finance as well €800mn in funds, of which as to provide new products with longer duration and flexible Q1 2015 €550mn are guaranteed by the repayment periods and potentially lowering the cost of SME government. Growth potential of

n/a

financing (via on-lenders). up to €5bn.

Source: Department of Jobs, Enterprise & Innovation, Department of Finance, Credit Review Office

3.3. TAXATION AND FISCAL FRAMEWORK

Taxation stronger-than-expected economic environment to introduce a range of tax cuts and reliefs in Budget

Irelandʼs tax burden has marginally increased, 2015. Measures include: (i) income tax reductions but remains low compared to the EU average. through a combination of higher income thresholds The overall tax burden is estimated to have and changes in tax rates ( 50 ); and (ii) higher tax increased to 30.9 % of GDP in 2014 from 28.7% incentives for R&D and the creation of intangibles. of GDP in 2012 (Graph 3.3.1). The ratio is They also include a variety of minor revenuerelatively low, however, at almost 10 percentage increasing adjustments to tax expenditures and points below the EU average of 40.1 % ( 49 ). some increases in excise duties. Overall, the net Indirect tax revenues as a percentage of GDP are impact on revenues is estimated to be negative at the third lowest in the EU, with value-added tax around 0.25 % of GDP. revenue well below the EU average. Direct taxes are the 10 th highest in the EU at 13.5 % of GDP. The tax wedge on labour is set to decline The personal income tax system is very somewhat. The planned personal income tax progressive and the tax wedge in 2013 for the reductions in Budget 2015 will decrease the tax average-wage worker was around 26.6 %, wedge on labour, but only by a small margin. For significantly below the EU average and one of the workers (single people without children) with a lowest among Member States. Social contributions gross income of EUR 35 000, net income is are the second lowest in the EU, largely due to the estimated to increase by 1.4 %. The overall effect small employers’ contributions, which represent tends to be slightly progressive, with net income less than half the EU average. gains as a proportion of earnings decreasing along

the income distribution for the main categories of Graph 3.3.1: Tax burden taxpayers.

40 % of GDP The authorities announced changes to the tax residency rules as part of Budget 2015. The

35 possibility to apply the so-called double Irish tax

30 scheme will disappear with immediate effect for new companies and will vanish after six years for

25 existing companies. The full impact of the changes to Irish tax rules may not be fully apparent in the

20 near term, but they have the potential to broaden

15 the tax base, even if it may take some time to assess their full impact.

10

Tax incentives for the SME sector are variously 5 targeted but appear to lack overall cohesion.

0 Various lending schemes have been introduced to 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14f support business start-ups, notably for the SME

direct taxes indirect taxes social security contribution sector (Section 4.2). Perhaps due to the constraints Source: European Commission imposed by fiscal consolidation tax incentives

have developed in a fragmented manner. Boosting

Tax measures in Budget 2015 focused on tax

cuts. Rather than using the revenue windfall to (

50 ) Budget 2015 increases the band at which the standard-rate income tax rate applies by EUR 1,000 (from EUR 32,800

accelerate debt reduction, as recommended by the to EUR 33,800 for single individuals and from EUR 41,800 Council under the ongoing Excessive Deficit to EUR 42,800 for married one earner couples). At the

Procedure, the authorities took advantage of the same time, the top marginal income tax rate is cut from 41 % to 40 %. Changes to the Universal Social Charge also

apply as of 2015. In particular, the exemption threshold is ( 49 ) The tax burden as a percentage of gross national income increased to EUR 12,012. Contribution rates are reduced

(GNI) might be a more appropriate benchmark in the case for low-income earners, while at the same time an of Ireland given the large presence of multinational increased rate of 8 % applies to high-income earners companies and their share of gross value added in the (above EUR 70,044). These changes are designed to economy. In 2014, the tax-to-GNI ratio was at 43.1 % in support employment and job creation and make the system Ireland, compared with 48.2% on average in the EU. more progressive.

3.3. Taxation and fiscal framework

productive investment remains a priority, however, EU-IMF financial assistance programme, as gross fixed capital formation fell sharply during residential property taxation has shifted from a the crisis and remains well below the EU average transaction tax to a recurrent tax based on in spite of the recovery in investment in 2014. residential property values ( 55 ). The effectiveness

of the new system is also proved by the high The yield on the value-added tax is low in compliance ratio of the new property tax (around comparison with other Member States ( 51 ) as a 95 %). While government revenues from result of the large value-added tax policy gap. immovable property as a percentage of GDP are The value-added tax policy gap measures the projected to increase slightly (from 0.9 % in 2012 additional revenues that could in principle be to nearly 1.1% in 2014), the yield from the collected if a uniform rate applied to all property tax is still relatively low compared to consumption, abstracting from compliance issues, other Member States (Graph 3.3.2). Moreover, the which are limited in Ireland. In turn, the use of base is reduced by the exclusion of some nonreduced rates and exemptions on value-added taxes residential properties, in particular development ( 52 ) is high and generates a large value-added tax land and derelict sites, in spite of the emerging policy gap. Only four Member States have bigger supply constraints on the housing market policy gaps than Ireland. According to a range of (section 4.1). It is also currently based on a selfstudies ( 53 ), at any given level of the tax burden, a assessment of property prices at historic values. system in which indirect taxes account for a large Values are to be re-evaluated in 2016, although a share of total revenue – e.g. a system making property register with cadastral values might be limited use of reduced rates, exceptions and put in place. The possibility for the local exemptions on value-added tax, in line with the authorities to vary, within limits, as of 2015, the European directive – is less distortive and more basic local property tax rate, could further limit tax growth-friendly than a system with a large share of revenues ( 56 ).

direct taxes. There appears to be no process for evaluating the costs and benefits of reduced rates on value-added tax, in sharp contrast with the ( 55 ) A Local Property Tax – as from July 2013 – replaced the

systematic evaluation principles to be applied to flat non-principal private residence charge (as from 2014) and the household charge. The Local Property Tax is based

income tax expenditures as per the October 2014 on a system of valuation bands, and is charged at a rate of

Guidelines for Tax Expenditure Evaluation. 0.18 % for properties valued below € 1 million, and 0.25%

on the excess value. Thus, it clearly increases the fairness

Revenues from immovable properties are lower of the property tax system compared to the repealed charges.

than the EU average. Recurrent taxes on ( 56 ) The ʽlocal factor adjustmentʼ allows local authorities to

immovable property are considered among the vary the basic local property tax rate on residential

least harmful to growth ( 54 ). In the context of the properties in their administrative area (the basic rates of local property tax are 0.18 % and 0.25 %). These rates can

be increased or decreased by up to 15 % (both rates must ( 51 ) VAT revenues amounted to 6.2 % of GDP in 2012, which be adjusted by the same amount). Fourteen local authorities

is the fourth lowest level in the EU. have reduced the local property tax rate for 2015. The ( 52 ) The reduced rate of 9% in the tourism sector (temporarily reductions range from 1.5 % to 15 %. The Irish Revenue

introduced until December 2014) has been further authority estimates a negative impact of the variations on prolonged with Budget 2015. A 13.5 % reduced rate local property tax of EUR 45 million approximately. applies to various services, newspapers, building works and household energy and fuels, whereas other goods and services, such as children clothes and transport, are zerorated. Reduced rates and exemptions not only lead to revenue losses, but are considered a poor instrument of redistribution, since they are not targeted to specific categories of recipients.

( 53 ) See for example: OECD (2010). Tax policy reform and economic growth (No. 20). OECD Tax Policy Studies. OECD Publishing; or OECD (2013), Tax Administration 2013, Comparative information on OECD and other advanced and emerging economies. OECD Publishing.

( 54 ) See, for example, Arnold, J.M., B. Brys, C. Heady, A.

Johansson, C. Schwellnus and L. Vartia (2011), ‘Tax Policy for Economic Recovery and Growth’, Economic Journal, 121 (550), F59-F80.

3.3. Taxation and fiscal framework

Graph 3.3.2: Revenues from property taxes (2012) Overall, some progress has been made in addressing the recommendation to broaden the

4.5 % of GDP tax base and enhance the growth and environmental friendliness of the tax system.

4.0 Yet, there are further opportunities to tap into more

Recurrent property tax

3.5 growth-friendly taxes, notably on consumption and

Other property-related taxes property. In addition, there appears to be no 3.0 process of evaluating the costs and benefits of

2.5 reduced value-added tax rates despite a significant

value-added tax policy gap, while environmental 2.0 taxation generates distortive subsidies making it

1.5 harder to achieve environmental objectives.

1.0 Fiscal framework

0.5 Major reforms to the fiscal framework have

0.0 UK FR DK IT EL BE PL ES IE LV SE PT NL FI RO SI CY DE SK HU EE BG LT CZ AT LU HR MT EU EA been undertaken in the context of the EU-IMF

financial assistance programme. The new rules (1) Ordered by revenue from recurrent property taxes. and procedures, in particular the medium-term

‘Other taxes on property’ include taxes on net wealth,

inheritance, gifts and other property items as well as expenditure framework, if implemented

financial and capital transactions. Data do not include effectively, provide a potential safeguard against personal income tax on imputed rents. pro-cyclical fiscal policy and are crucial for fiscal

Source: European Commission sustainability. However, despite the timely

presentation of a multiannual budgetary planning, Revenues from environmental taxes

and the introduction in 2013 of a medium-term

represented 2.5 % of GDP in 2012, compared to expenditure framework – including three-year

2.4 % of GDP in the EU. The role of ministerial expenditure ceilings – the fiscal environmentally related fiscal measures has been framework does not provide information about the strengthened in the past five years ( 57 ). Limited broad budgetary measures underlying the medium additional changes were introduced in the budget term expenditure targets.

for 2015, except for measures such as extending

the accelerated capital allowances scheme for The Irish fiscal framework has benefited from energy-efficient equipment for another three years. the expertise and independence of the Irish Peat used for electricity generation (subject to the Fiscal Advisory Council. Pursuant to Regulation

emission trading system) is exempt from the

carbon tax, but its extraction remains subsidised (EU) No 472/2013 (part of the ʽTwo-Packʼ), the

( 58 ). Reduced rates of value-added tax on energy task of assessing the macroeconomic forecast products (at 13.5 %) may also conflict with overall underpinning the annual budget plans and the energy and climate policy objectives. They Stability Programme was assigned to the Irish effectively decrease incentives to reduce energy Fiscal Advisory Council in the Fiscal consumption or improve energy efficiency. There Responsibility Act of 2012 and 2013. In practice, appears to be no overall policy of reviewing valuethe macroeconomic forecasts underpinning the added tax rates and excise duty to ensure continued 2014 and 2015 Budget Laws were endorsed. The

alignment with environmental considerations. Irish Fiscal Advisory Council, was also given the mandate of independently providing an assessment

of, and commenting publicly on, whether the

( 57 ) Eunomia Research & Consulting with Aarhus University national budgetary objectives are met and comply

and IEEP, Study on Environmental Fiscal Reform Potential with the numerical fiscal rules introduced by the

in 14 EU Member States, Draft final report 22.10.14 Fiscal Responsibility Act. Its financial and

( 58 ) Subsidising peat extraction for electricity generation results

in substantial inefficiencies, as it is significantly less costly functional independence is ensured by primary

to finance electricity from renewable sources than legislation and has been underscored in the advice

generating the same amount of electricity from peat. given so far.

3.3. Taxation and fiscal framework

Graph 3.3.3: Expenditure ceiling reconciliation for 2015

Graph a: adjustments to gross current 4000 Graph b: adjustments to gross capital

51 expenditure ceiling for 2015 expenditure ceiling for 2015

3900

51 € bn € ml 3800

50 €50.1 bn 3700

3600

50 Budget

2015 3500

49 €3549 mn 3400 Budget

49 3300 2015

48 €48.3 bn 3200 €3252 mn

Exp.Report 2014 3100 Exp.Report 2014 48 3000

47 2900

Source: Comprehensive Expenditure Report 2015-2017

Reporting standards have improved. The Limited progress has been made in addressing authorities have started publishing new fiscal the parts of the Council Recommendation reports covering the general government sector and relating to the fiscal framework. Although the complementing existing fragmented reports by fiscal framework has been strengthened individual government entities. significantly in recent years, in particular with the

adoption of the Fiscal Responsibility Act, some However, the medium-term budgetary plans weaknesses remain. These led the Council to could be undermined by regular changes to recommend in June 2014 that Ireland better define government expenditure ceilings. Under current broad budgetary measures underlying the mediumrules the government has considerable discretion to term fiscal targets and ensure the binding nature of change expenditure ceilings (see Graph 3.3.2). its expenditure ceiling including by limiting the This weakens medium-term budgetary plans. As a statutory scope for discretionary changes. No result, the current set-up falls somewhat short of changes were made in this regard in 2014. the Council Recommendation asking Ireland to

ʽensure the binding nature of the government expenditure ceiling including by limiting the statutory scope for discretionary changesʼ.

Previous Commission reports called on the Irish authorities to strengthen the credibility of the medium-term expenditure plans by limiting changes to the expenditure ceilings to predefined exceptional circumstances specified in the internal

circular 15/13 ( 59 ).

( 59 ) The circular does not in practice restrain the government from making discretionary changes to the ceilings. Transparency could be improved by justifying in more detail the rationale behind adjustments. This could still allow for flexibility within the binding overarching constraint of the expenditure benchmark, considering for instance changes to the projections underlying the budgetary targets.

3.4. LEGAL SERVICES AND JUSTICE REFORMS

Legal services costs have yet to adjust. Irelandʼs the context of the 2014 European Semester calling Competition Authority highlighted price and for the enactment of the Bill by the end of that competition issues in the provision of legal year. services as far back as 2006. As legal services are an input to all sectors of the economy, including Delays in the process persist. Progress towards the tradable goods sector, their cost has a bearing enactment remained slow in the second half of on Ireland’s competitiveness. In its report, the 2014 due to ongoing pressures from vested authority provided a number of recommendations interests. The authorities agreed to reopen the issue on reforming the regulatory framework for the of multidisciplinary practices and finalised the sector to enhance competition and bring about a amendments to be considered at the resumption of reduction in high legal services costs affecting not Dáil Report Stage, to take place in early 2015. The only businesses but also citizens. removal of the ʽsolicitor's lienʼ, part of the 2014

Council Recommendation, will not be included in

Legal services reform is a long-standing project. the Bill. ( 60 )

Given the importance of reducing legal services costs in supporting Irelandʼs competitiveness and Significant amendments have been tabled. The promote SME growth, the authorities committed amendments will require the future Legal Services under the EU-IMF financial assistance programme Regulatory Authority to conduct research and to introduce a new regulatory framework for the consultations on multidisciplinary practices ( 61 ) sector. In this context, they published the Legal before issuing a recommendation to the Minister, Services Regulation Bill in October 2011, building who will then determine whether the section of the on a number of recommendations from the legislation on multidisciplinary practices should be Competition Authorityʼs 2006 report. commenced or not. Although the authorities

indicate that their intention remains to allow The regulatory model is to be overhauled. The multidisciplinary practices, uncertainty on this Bill aims to reshape the essentially self-regulated matter has increased significantly as the structure of the legal profession by establishing an recommendation from the Legal Services independent regulatory authority, improve access Regulatory Authority may well go in the opposite and competition, and make legal costs more direction. In contrast, legal partnerships appear to transparent and less expensive for consumers and be safeguarded. Direct access to barrister is also businesses. Among other things, it provides for the included for non-contentious matters, although establishment of legal partnerships between research and consultations will take place before solicitors and barristers and possible multiconsidering whether to include contentious disciplinary practices bringing together barristers, matters. solicitors and other professional service providers

(such as accountants) or even services of non The Bill might soon be enacted. The authorities professional nature. It should also address confirmed on a number of occasions their intention restrictions on advertising by solicitors and to have the Bill enacted in early 2015 and ensure barristers, for which an infringement procedure that the Legal Services Regulatory Authority is in (2013/2192) under the Services Directive is operation by the middle of the year. Budget 2015 ongoing. has earmarked EUR 500 000 to help set up the

Authority. Vested interests have strongly opposed the Bill from the outset. Progress towards its enactment Justice reforms are progressing. Besides the was therefore slow and could not be completed by reform of the regulatory framework for the the time of Irelandʼs exit from the EU-IMF profession, the country-specific recommendation programme at the end of 2013. Since then, a

significant number of amendments have been ( 60 ) The ʽsolicitor's lienʼ is the practice whereby a solicitor may

introduced, some to strengthen the independence retain possession of a clientʼs file pending receipt of payment, frustrating attempts by a client to switch

of the Board of the Legal Services Regulatory solicitors. The practice was found to be anticompetitive in Authority, some to address specific concerns of the the Competition Authorityʼs 2006 report.

legal profession. A country-specific (

61 ) The process should be split between a six-month research

recommendation was also addressed to Ireland in phase and a six-month consultation period.

3.4. Legal services and justice reforms

also urged Ireland to improve data collection systems as an enabler of quality and efficiency of judicial proceedings. In 2014, Ireland carried out an important reform of the judicial system, setting up the New Court of Appeal between the High

Court and the Supreme Court. This should help resolve long delays in having appeals heard by the

Supreme Court. ( 62 ) In addition, the scope of the jurisdiction of Circuit Courts and of Districts

Courts has been extended. ( 63 )

The authorities have taken measures to improve data collection systems on judicial proceedings.

These measures remain to be completed for some courts and areas of the justice system. In addition, there is no regular evaluation system and there are no defined quality standards or specialised court staff in charge of quality policy. Budgetary restrictions and the relatively low number of judges make it all the more important to step up the measures to support the quality of the justice system, in particular with regard to extending online case management. This is currently only available for some case categories, the evaluation of court activities and courts communication policies. The new Mediation Bill is yet to be submitted to parliament. ( 64 )

The implementation of the country-specific recommendation is progressing at varying speed. Overall, limited progress has been made so far on the implementation of the CSR related to the

Legal Services Regulation Bill. Some progress has been made on data collection systems, however.

( 62 ) The clearance rate for civil and commercial cases at second instance courts in 2013 was 88.7%. See Study of the European Commission for the Efficiency of Justice (CEPEJ) prepared in view of the 2015 EU Justice Scoreboard (to be published in early March)

( 63 ) The Courts and Civil Law (Miscellaneous Provisions) Act

2013 extends the jurisdiction of the Circuit Court to EUR 75 000 and of the District Court to EUR 15 000. In regard to personal injury actions, the revised monetary jurisdiction limit of the Circuit Court will be EUR 60 000.

( 64 ) The Draft General Scheme of Mediation Bill was published in 2012. The publication of the Bill has been delayed several times.

3.5. INFRASTRUCTURE AND CLIMATE

Weaknesses in key infrastructure sectors treatment infrastructure was insufficient. ( 66 ) It is remain. Ireland invested significantly in public estimated that almost 50 % of clean water is infrastructure in the late 1990s and the first part of currently wasted through leaks, while treatment the 2000s when property taxes boosted facilities are insufficient and give rise to serious government revenue. General government gross environmental concerns ( 67 ). Water supply fixed capital formation averaged 4 % of GDP problems (boil notices, reduced pressure and during the period 2000–2008. This investment others) are also recurrent, including in the main push focused on roads and housing, with cities. significant investments also in water supply and sewerage and health. Public investment has Weaknesses in water infrastructure have farnevertheless fallen sharply during the past six reaching consequences. These weaknesses raise years to an estimated 1.5 % of GDP in 2014. As a concerns not only from an environmental and result, key weaknesses in infrastructure remain that social perspective, but also from a growth affect the growth potential, the efficient use of perspective as water supply is a key input to some resources and action against climate change. major industries in Ireland, including the

pharmaceutical sector. Insufficient water supply Graph 3.5.1: Public sector gross fixed capital formation by and treatment capacity has also recently

area constrained the development of new residential projects in Dublin, where demand is largest. ( 68 )

12 € billion Yet, the insufficient housing supply response has Other contributed lately to rising house prices and rents

10 in Dublin, with adverse social and competitiveness Vocational effects.

education 8 committees

Water supply Water sector reforms were initiated in 2011.

and sewerage Ireland considered policies to fundamentally 6 reform the water sector in the National Recovery

Health Plan 2011–2014 already. This process was 4 integrated in the EU-IMF programme of financial

Roads assistance, under which Ireland committed itself to re-organising the sector around a fully publicly

2

Housing owned national utility (Irish Water) and to introducing charges for domestic users to

0

95 97 99 01 03 05 07 09 11 13 incentivise a more sensible use of the resource and ensure more sustainable financing for the sector.

Source: Central Statistics Office Reforms have been progressing since 2011, culminating with the setting up of Irish Water and

Water infrastructure the planned introduction of charges for households

in the last quarter of 2014. The water sector is in urgent need of investment. Until Irish Water was set up in

January 2014, the water sector was run by 34 local authorities each operating over small geographic foreseeable future because charges will not fully cover areas and running their own investment Irish Waterʼs costs.

programmes, financed mainly from general (

66 ) The investment shortfall was explained in the Irish Water: Phase 1 Report drawn up in 2011 to plan the reform

government funds. Water charges were imposed programme. on non-domestic users but collection rates were ( 67 ) Environmental Protection Agency (2014). Focus on Urban

low, and domestic users were not charged at Waste Water Treatment 2013. ( 68 ) The Dublin City Development Plan 2011–2017 indicates

all. ( 65 ) As a result, investment in water supply and that the cityʼs water supply is currently operating at

capacity, frustrating efforts to plan further residential

( 65 ) So far, and until water charges for domestic users were developments. Irish Waterʼs Draft Water Services Strategic introduced, costs have been covered through general Plan published in February 2015 also raises the same issue.

taxation, with transfers from the central government to the local authorities. Such transfers will continue in the

3.5. Infrastructure and climate

The structure and level of charges planned Broadband coverage can improve. Fixed initially have been modified. In November 2014, broadband covers 96 % of households, only the government announced revisions to the slightly below the EU average of 97 %. In 2013, structure and level of charges compared with what 54 % of homes were covered with speeds of at had been determined by the Commission for least 30 Mbps (next generation access), compared Energy Regulation. The core of the reforms with 62 % on average in the EU. This also remains, however, and the authorities publicly represented a 12 percentage point increase in next committed to Irish Water operating the sector as a generation access coverage over the previous year. 100 % state-owned national utility under the Ireland is still a long way from achieving the regulatory oversight of the Commission for Energy Digital Agenda target of 100 % coverage of fixed Regulation. They also indicated that the broadband above 30 Mbps by 2020. In addition, installation of meters would proceed as planned. fibre coverage is low 1.7 %. Fibre connection is The latest decisions raise some concerns, however: critical for higher speeds. The National Broadband

Plan 2012 outlines the governmentʼs policy on the • Infrastructure investment: Irish Water will delivery of high-speed broadband services and

remain dependent on central government specifies targets for delivery and roll-out. These funding for some time and the prospects of the targets are in line with the Digital Agenda targets. company becoming self-funded have become more distant. Although the latest decisions do

not affect its capital spending programme to the Energy infrastructure

end of 2016 as approved by the regulator, the Ireland is vulnerable to gas supply extent to which Irish Water will be in a position interruptions. Gas is the primary fuel for to fund and borrow on the markets for muchelectricity generation (50 %), followed by coal needed capital investment is unclear. (20 %), renewables (19 %) and peat (9 %). The UK is the only source of gas imports through two

• Conservation objectives: capping domestic parallel subsea pipelines. The safety of supply is a water charges at low levels provides weaker concern given both interconnectors experienced incentives to conserve water than under the outages in the winter of 2012/13. Ireland also does original plan for most households, even those not comply with the ʽN-1 ruleʼ, i.e. the ability to with a meter. continue providing gas to domestic (or highpriority) customers when faced with the loss of the

• Fiscal implications: fiscal risk arises from the major gas import route. There are projects to allow uncertainty surrounding the pending Eurostat bi-directional gas flows from Northern Ireland to ruling on whether Irish Water complies with Great Britain and from Ireland to the UK that have the market test under European System of received the label of projects of common interest, Accounting 2010 rules. but implementation is yet to be started.

ICT infrastructure Renewables play an increasing role in electricity production. The main expansion of renewables

A strong ICT infrastructure is of key has taken place in the electricity sector. Renewable importance for the Irish economy. The surge in energy sources for electricity represented 19.6 % services exports (Section 3.3) would not have been of the total in 2012, with wind energy the main possible without a good ICT infrastructure and the contributor (almost 80 % of the total). The share of digital economy has strongly contributed to growth renewable energy reached 7.3 % of final energy and job creation in recent years. Several interconsumption in 2013, which is above the interim related factors contribute to the performance of target of 7 % for 2013/2014. Ireland is thus on digital markets, including broadband internet, track to achieve its 16 % renewable energy target digital skills, e-government and integration of by 2020. Such an increase would help reduce digital technologies by businesses. ( 69 )

7 th on human capital, 17 th as regards the use of internet, 3rd

( 69 ) As regards the five main drivers of the digital economy, in integration of digital technologies by business and 9

th

 in

Ireland ranks 18 th among Member States on connectivity, digital public services.

3.5. Infrastructure and climate

energy dependency and Ireland aims to reach the climate and energy targets for the period up to overall renewables target by achieving by 2020 a 2020 in an integrated way and how best to use the 40% renewables (mostly wind) share in electricity earmarked, available EU support for the structural generation. Increasing the proportion of wind development needed in the different areas. energy in electricity production poses both market and technical challenges, including technical adaptation in energy networks and systems (such as smart meters). To a small extent, Ireland relies on electricity imports from the UK. Work is in progress on the feasibility of a new France-Ireland interconnection and on Ireland-UK electricity interconnections. The ʽNorth Atlantic Green Zone

Projectʼ has already received financial aid under

Connection Europe Facility.

Climate

Ireland is not on track to reach its greenhouse gas emission reduction targets. It is committed to reducing its greenhouse gas emissions in the nonemissions trading system sector by 20 % between

2005 and 2020. According to the latest national projections it is likely to miss this target by a wide margin, with the authorities expecting emissions to decrease only by 3% in 2020 compared with 2005.

Emissions in the agricultural sector, the largest non-emissions trading system sector in terms of greenhouse gas emissions, are expected to remain stable between 2005 and 2020. Emissions in transport, the second largest non-emissions trading system sector in terms of emissions, are expected to increase significantly between 2005 and 2020.

This is mainly due to the lack of public transport, including the underdevelopment of rail and the lack of infrastructure to make it possible to reach national targets on electric mobility. Although

Ireland has a carbon tax in place, it is not linked to the evolution of energy prices and it is not consistent across different energy carriers and climate pollutants (methane and nitrous oxide emissions, for example, are not taxed like carbon).

Policies to address climate-related commitments are insufficient. The government prepared the main parts of a Bill on climate action and low carbon development. It has also adopted a renewable energy strategy, a second energy efficiency national action plan, an agricultural, food sector-specific economic development strategy, and taken measures to improve the household segregation of food waste. However, no progress was made in identifying how Ireland commits itself to meeting its existing, binding

3.6. SOCIAL POLICIES

Social transfers sheltered the most vulnerable (measured as four or more items of experienced and reduced poverty rates throughout the deprivation) rose sharply between 2011 (7.8 %) crisis. In spite of this and an improving labour and 2013 (9.9 %) and is now above the EU market situation, significant challenges remain. average of 9.6 %. Severe material deprivation

among children has also increased. It almost The high proportion of people living in doubled since 2008 (6.8 %) to 13.4% in 2013, households with low work intensity generates above the EU average of 11.1 %. However, the serious social challenges. At 23.9 %, it is most recent available European Union statistics on currently the highest in the EU and more than Income and Living Conditions, for the year 2013, double the EU average of 10.8 %. The rate was indicate that relative poverty has started to fall in higher than the EU average prior to the crisis and Ireland. The at-risk-of-poverty rate was 14.1 %, surged from 14.3% in 2007 to 24.2% in 2011, down from 15.7% in 2012 and 2.5 percentage before falling to 23.4% in 2012 ( 70 ). This increase points below the EU average. Similarly, for has been attributed to a combination of factors, children (aged 0-17) the at-risk-of-poverty rate fell such as the increase in unemployment, changes in from 18% in 2012 to 16 % in 2013 and is over 4 household structure and other factors – for percentage points below the EU average of 20.2 %. instance, having a disability or having caring responsibilities. An important feature of Ireland’s The limited availability and high cost of jobless households is the likelihood that they have childcare remains a significant barrier to children. The rate of children living in jobless increased female labour market participation. households in Ireland is 17.7 % (2013). This rate is The employment rate for women rose in the year the highest in the EU and significantly above the from 60.5 % in Q3-2013 to 61.3 % in Q3-2014. EU average of 11.2%. While fewer than 30 % of However, it still remains over 10 percentage points adults in jobless households live with children in lower than the rate for men (with the gender other EU-15 countries, 56 % do so in Ireland. Low employment gap actually increasing between Q3- work intensity is particularly severe among single 2012 and Q3-2014) and over 2 percentage points adult households with children, and the proportion lower than the EU average. Single-parent of children living in households with low work households and households with three or more intensity is nearly three times the EU average. This children have much lower employment rates and increases the risk of social exclusion of children, lower work intensity when they are in

particularly those in lone-parent households, with employment ( 72 ). According to 2013 figures, the the overall at-risk-of-poverty and social exclusion average fee for childcare nationally was EUR 152 rate for children increasing from 26.2% in 2007 to per child per week, amounting to almost 33.9 % in 2013. Studies also show ( 71 ) that there EUR 16 000 per year for a two-child family. As a

is a wide range of household joblessness in need of percentage of wages, childcare costs are higher tailor-made measures going beyond labour market than in any other EU country ( 73 ). activation interventions.

Access to full-time childcare is limited and the Absolute poverty, including amongst children, quality of services remains a problem. The most is increasing. The severe material deprivation rate recent comparable EU data, from 2011, shows that

Ireland had not reached the Barcelona target of a ( 70 ) The 2012 European Union statistics on Income and Living 33 % coverage rate for children under three as only

Conditions indicates a rate of 23.4 % for low work

intensity households in Ireland. Irish authorities have 21 % of children under three had formal childcare

conducted further research into the measurement and there arrangements. Childcare coverage had fallen

is a disparity when comparing EU Statistics on Income and significantly below EU averages for formal

Living Conditions data and Labour Force Survey data. The latter indicates a rate of closer to 17 % in Ireland and this

would still be the second highest rate of very low work (

72 ) According to the 2011 census, 25.8 % of all families with

intensity households in the EU in 2012. While differences children in Ireland are one-parent families, with 86.5 % of between the two surveys are common across EU member them headed by a woman. states, the magnitude is much larger in Ireland. The issue (

73 ) ‘Economic Policy Reforms: Going for Growth’

will be studied further in order to diminish divergences http://www.oecd.org/inclusivebetween the indicators. growth/Economic%20Policy%20Reforms%202013%20Go

( 71 ) Jobless Households: An Exploration of the Issues, No. 137 ing%20for%20Growth.pdf. See chapter 4, structural policy June 2014, National Economic and Social Council (NESC). indicators, Chart 4.9.

3.6. Social policies

childcare for i) between 1 and 29 hours (10 % education and child health. It also targets compared with the EU average of 15 %) and ii) 30 development outcomes for children and families or more hours (11 % compared with the EU living in disadvantaged areas. The authorities are average of 15 %). Currently, there is no currently evaluating the initial phase of the comprehensive monitoring system for assessing programme’s implementation. the quality of childcare services. The findings from various sources ( 74 ) indicate that there is variable Limited progress has been made in relation to quality in terms of compliance with (minimum improving access to more affordable and fullstandard) pre-school regulations, qualification time childcare, particularly for low-income levels of staff, in particular in centre-based families. Budget 2015 announced the introduction services, and shortcomings in pre-school curricula. of the back to work family dividend to address

childcare and other costs associated with returning Ireland has made some progress in tackling the to work, such as transport. The dividend will allow low work intensity of households. The authorities families to retain the full qualified child increase of have begun to address inactivity traps by altering EUR 29.8 a week per child for the first 12 months the operation of some welfare entitlements. The after returning to work and 50 % of the payment in family income supplement, a weekly tax-free topthe second year. The impact of this initiative is up payment for employees on low pay with likely to be limited because the cost of full-time children, is now payable for a continuous 52 weeks childcare ranges from EUR 210 a week for an for eligible claimants regardless of a change in infant to EUR 53 a week for a primary school age circumstances, such as an increase in weekly child. earnings. Previously the payment was discontinued as soon as a claimant moved above the upper limit. The Department of Children and Youth Affairs The authorities are also in the process of reforming estimates that approximately 100 000 children welfare entitlements for housing and piloting a benefit from support under a range of available housing assistance payment to replace the rent childcare programmes. The Early Childhood supplement. This change should address the ‘cliff Care and Education Scheme was announced in edge’ effect for rent supplement claimants who 2010, introducing the free pre-school year which lose their entitlement as soon as they become provides 15 hours a week of childcare for 38 employed for over 30 hours a week. weeks a year. There is no progress in extending the

daily coverage of this provision and no further In a move to address child poverty, Ireland steps have been taken to introduce a second free focused on fiscal measures. Budget 2015 year which the authorities have committed to announced a EUR 5 increase in child benefit which introducing by 2020. The community childcare brings the rate to EUR 135 per month per child. A subvention for low-income families offers support further increase of EUR 5 is envisaged in 2016. for recipients of social welfare payments and some This represents a strengthening of child benefit as participants in employment schemes. The training it was previously decreased from EUR 166 to and employment childcare programmes, the EUR 130. A universal payment, it is not meansumbrella for all childcare education and training dependent. The increase will affect approximately support funding schemes, offer only a few 1.17 million children. The question remains on the thousand subsidised places. prioritisation of spending with no actual progress in investment in more universal early childhood The scattered provisions for childcare support education and care services. In addition, the 2013– are complicated and difficult to navigate. The 16 Area-based Childhood Programme targets shortcomings of current provisions relate mainly to investments to improve parental wellbeing, a combination of low payment rates for childcare

providers, limited knowledge of the scheme and

( 74 ) Hanafin, S. (2014), Report on the Quality of Pre-school

Services: Analysis of pre-school inspection reports. Dublin: practical obstacles to accessing after-school care

Tusla, Child and Family Agency; Start Strong (2014) (geographical or administrative). In an attempt to

‘Childcare: Business or Profession’; Neylon, G. (2014) ‘An increase the quality of services, a new National analysis of Irish pre-school practice and pedagogy using Quality Support Service will commence in 2015

the early childhood environmental four curricular

subscales’, in Irish Educational Studies, Vol.33, No. 1. with a limited budget and small staff. No budget was allocated to up-skill childcare staff beyond

3.6. Social policies

minimum qualifications. Childcare programmes generally fail to have a significant impact on increasing access to affordable and quality childcare, particularly for low-income families.

The recently set up inter-departmental group on childcare might be seen as a platform to develop more comprehensive solutions to this problem.

ANNEX A

Overview Table

Commitments Summary assessment ( 75 )

2014 Country-specific recommendations (CSRs)

CSR 1: Fully implement the 2014 budget and ensure Ireland has made some progress in addressing

the correction of the excessive deficit in a sustainable CSR 1 (this overall evaluation excludes an

manner by 2015 through underpinning the budgetary assessment of compliance with the Stability

strategy with additional structural measures while and Growth Pact):

achieving the structural adjustment effort specified in

the Council Recommendation under the Excessive • No progress: no changes have been made

Deficit Procedure. to the legal framework for expenditure

ceilings.

After the correction of the excessive deficit, pursue a

structural adjustment towards the medium-term • Some progress: starting in 2015 for new

objective of at least 0,5 % of GDP each year, and companies, and following a transition

more in good economic conditions or if needed to period until the end of 2020 for established

ensure that the debt rule is met in order to put the ones, companies registered in Ireland will

high general government debt ratio on a sustained be treated as resident for tax purposes

downward path. regardless of ownership structure, thereby

scheduling an end to the ʽdouble Irishʼ

Enhance the credibility of the fiscal adjustment system and potentially broadening the tax

strategy, effectively implement multi-annual base. No other measures have been taken

budgetary planning and define broad budgetary to broaden the tax base, and little has been

measures underlying the medium-term fiscal targets. done to enhance the growth and

Ensure the binding nature of the government environmental friendliness of the tax

expenditure ceiling including by limiting the system.

statutory scope for discretionary changes.

To support fiscal consolidation, consideration should be given to raising revenues through broadening the tax base. Enhance the growth and environmental friendliness of the tax system.

CSR 2: Advance the reform of the healthcare sector Ireland has made some progress in addressing initiated under the Future Health strategic framework CSR 2: to increase cost-effectiveness. Pursue additional measures to reduce pharmaceutical spending, • Some progress: the Health (Pricing and including through more frequent price realignment Supply of Medical Goods) Act 2013 exercise for patented medicines, increased generic provided for the establishment of a system penetration and improved prescribing practices. of internal reference pricing, with internal reference pricing now established for 36 Reform the financial management systems of the molecules. Generics penetration increased national health authority to streamline systems across to around 70% in volume by Q3-2014. The all providers and to support better claims mid-term review of the framework

( 75 ) The following categories are used to assess progress in implementing the 2014 CSRs of the Council Recommendation:

No progress: The Member State has neither announced nor adopted any measures to address the CSR. This category also applies if a Member State has commissioned a study group to evaluate possible measures.

Limited progress: The Member State has announced some measures to address the CSR, but these measures appear insufficient and/or their adoption/implementation is at risk.

Some progress: The Member State has announced or adopted measures to address the CSR. These measures are promising, but not all of them have been implemented yet and implementation is not certain in all cases.

Substantial progress: The Member State has adopted measures, most of which have been implemented. These measures go a long way in addressing the CSR.

Fully addressed: The Member State has adopted and implemented measures that address the CSR appropriately.

A. Overview Table

management. agreement with the Irish Pharmaceutical

Healthcare Association (IPHA) on the Roll out individual health identifiers starting by the supply terms, conditions and prices of end of the first quarter of 2015 at the latest. medicines has begun but not finished. The

authorities are asking for a widening of the reference basket, alignment to the lowest price instead of the average price, and more frequent realignments. The outcome of the review is not yet known. The rules on pricing realignment for patented medicines have not been changed.

• Some progress: an activity-based funding model for budget allocations in statutory hospitals has been introduced on a shadow basis, but a full switch to activity-based funding will take some years to complete.

• Some progress: the timeline for the roll-out of the first phase of individual health identifiers has been delayed, but the Health Identifiers Act 2014 was enacted in July 2014 and the Chief Information Officer in charge of leading the work has been recruited. The first phase of deliverables is being supported by budget planning.

CSR 3: Pursue further improvements in active labour Ireland has made some progress in addressing market policies, with a particular focus on the long CSR 3: term unemployed, the low-skilled and, in line with the objectives of a youth guarantee, young people. • Some progress: a new version of Pathways

to Work, the strategy setting out Irelandʼs Advance the ongoing reform of the further education reform of activation and training services, and training (FET) system, employment support was published in October 2014. It sets out schemes and apprenticeship programmes. Offer more new actions to be implemented in the workplace training; improve and ensure the relevance coming year as well as quantitative targets, of FET courses and apprenticeships with respect to with a greater emphasis on long-term and labour market needs. youth unemployment. Pathways to Work

2015 specifies new measures for Increase the level and quality of support services implementating the Youth Guarantee. provided by the Intreo labour offices. There was some delay in setting up the

JobPath initiative, but it is going ahead Put in place a seamless FET referrals system between and the contracts with the two providers Intreo offices and Education and Training Boards. have now been signed. When fully

implemented, it will enable a large number of long-term unemployed to benefit from activation services provided by private contractors.

• Some progress: all training centres under the management of SOLAS have been consolidated under their respective

A. Overview Table

Education and Training Boards, and SOLAS recently published its three-year corporate strategy and a five-year strategy for developing and delivering an integrated further education and training sector.

• Some progress: there are about 550 case officers dealing with jobseekers in Intreo offices. There are 44 Intreo offices now open, but there have been some delays in opening the remaining 16.

• Some progress: protocols have been put in place between Education and Training Boards and Intreo offices.

CSR 4: Tackle low work intensity of households and Ireland has made limited progress in address the poverty risk of children through tapered addressing CSR 4: withdrawal of benefits and supplementary payments upon return to employment. • Limited progress: Budget 2015 announced

that Child Benefit payments will increase Facilitate female labour market participation by by EUR 5 a month throughout 2015. This improving access to more affordable and full-time is not likely to have a significant impact as childcare, particularly for low income families. an individual measure but may help

matters as part of a series of announced measures that includes: (1) reforms to the Back to Work Family Dividend; and (2) the establishment of a Low Pay Commission as an independent statutory body that will make annual recommendations to the government on the appropriate level of the minimum wage and related matters. The Housing Supplement is gradually being replaced with the Housing Assistance Payment in order to reduce the disincentive to return to work arising from housing subsidies for the unemployed.

• No progress was made in improving access to more affordable and full-time childcare.

CSR 5: Advance policies for the SME sector Ireland has made some progress in addressing including initiatives to address the availability of CSR 5: bank and non-bank financing and debt restructuring issues, while avoiding risks to public finances and • Some progress: the legislation to replace financial stability. Advance initiatives to improve the National Pensions Reserve Fund SMEʼs access to bank credit and non-bank finance. (NPRF) with the Ireland Strategic

Investment Fund was enacted in July 2014. Introduce a monitoring system for SME lending in The mandate of the Ireland Strategic the banking sector. Investment Fund is to invest on a

commercial basis to support economic

A. Overview Table

In parallel, work to ensure that available non-bank activity in Ireland. It will focus in part on credit facilities, including the three SME funds co SMEs and manage assets worth EUR 7 funded by the National Pensions Reserve Fund, billion (4% of GDP). The recently Microfinance Ireland and the temporary loan established state development corporation guarantee scheme, are better utilised. Promote the use for SMEs, the Strategic Banking of these and other non-bank schemes by SMEs. Corporation of Ireland was launched in

October 2014 to provide loans through Enhance the Credit Review Officeʼs visibility and existing credit institutions, with a full rollcapabilities in mediating disputes between banks and out of products expected in the first quarter prospective SME borrowers who have been refused of 2015. The Strategic Banking credit. Corporation of Ireland secured an initial

amount of EUR 800 million in funds, of which EUR 550 million are guaranteed by the government.

• Substantial progress: The authorities publish quarterly data on bank lending to

SMEs, but no longer have a formal targetbased system to monitor lending to SMEs though it is closely watched.

• Some progress: Two SME funds, cofinanced by the National Pensions Reserve Fund (NPRF), are lending with a growing number of projects in the pipeline. The mandate of a third NPRF fund, the Turnaround Fund, was not renewed at the end of 2014 due to the limited pool of underperforming/distressed businesses eligible as turnaround investment cases amid a continued economic recovery. The Action for Jobs 2015 announced a reconfigured Credit Guarantee Scheme and a simplified operation of the Microenterprise Loan Fund. A supporting SMEs Online Tool was launched to increase awareness among SMEs of available business supports. A communications campaign is being run to showcase the website.

• Some progress: Permanent TSB has agreed to participate in the Credit Review Office process since it will begin lending to SMEs. The upper limit for referring refusals to the Credit Review Office has been increased to EUR 3 million. As the latest RedC SME Credit Demand Survey (September 2014) shows, there are still issues with the visibility and usage of nonbank schemes and of the Credit Review Office for appeals against credit refusals.

A. Overview Table

Awareness and knowledge of SME funding options remains low.

CSR 6: Monitor banks' performance against the Ireland has made some progress in addressing mortgage arrears restructuring targets. CSR 6:

Announce ambitious targets for the third and fourth • Full implementation: the Central Bank of quarters of 2014 for the principal mortgage banks to Ireland continues to monitor banks' propose and conclude restructuring solutions for performance against the mortgage arrears mortgage loans in arrears of more than 90 days, with restructuring targets. a view to substantially resolving mortgage arrears by the end of 2014. • Full implementation: in June 2014, the

Central Bank of Ireland announced new Continue to assess the sustainability of the concluded targets for the third and fourth quarters of restructuring arrangements through audits and 2014. For the third quarter of 2014, the targeted on-site reviews. banks reached and even exceededed the

targets, with an encouraging 91 % of Develop guidelines for the durability of solutions. solutions meeting the terms. Audits are

taking place of the banksʼ mortgage arrears Publish regular data on banks' SME loan portfolios in resolution targets Q2-2014 returns. arrears to enhance transparency.

• Substantial progress: the Central Bank of Develop a strategy to address distressed commercial Ireland continues to assess the real-estate exposures. sustainability of the concluded

restructuring arrangements through audits Establish a central credit registry. and on-site reviews.

• No progress was made in developing guidelines for the durability of solutions.

• No progress was made in publishing regular data on the banksʼ SME loan portfolios in arrears.

• Limited progress: the National Asset Management Agency is ahead of schedule with EUR 18.7 billion of asset disposals at end-December 2014 (28 % of which are disposals of Irish assets), taking advantage of strong market demand.

• Limited progress: the Credit Reporting Act, 2013 came into force in January 2014. Work on the central credit register has been well underway since January 2014, but the current timeline envisages some delay with the register being operational in late 2016 for consumer credit, and subsequently for commercial credit.

CSR 7: Reduce the cost of legal proceedings and Ireland has made limited progress in services and foster competition, including by

A. Overview Table

adopting the Legal Services Regulation Bill by the addressing CSR 7: end of 2014, including its provision allowing the establishment of multi-disciplinary practices, • Limited progress: the authorities have

indicated that the Legal Services and by seeking to remove the solicitor's lien. Regulation Bill should pass Dáil Report

Stage in early 2015 and proceed to the Monitor its impact, including on the costs of legal Seanad soon after that. Progress towards services. enactment therefore continues to be slow.

Indications were initially that the Bill Take executive steps to ensure that the Legal would proceed to Report Stage (the final Services Regulatory Authority is operational without stage in the Dáil l before being sent to the delay and that it meets its obligations under the Seanad) before the summer recess, but this legislation, including in terms of publishing did not happen. Recurrent long delays regulations or guidelines for multi-disciplinary have been experienced in the past and practices and the resolution of complaints. seem to be happening again after some

acceleration in the process in early 2014. Improve data collection systems to enhance the monitoring and evaluation of the efficiency of • No progress: the Bill will not include a judicial proceedings to identify issues in need of provision to remove the solicitorʼs lien. reform.

• No progress: the Bill needs to be enacted first and it will take time before its impact can be assessed.

• Limited progress: Budget 2015 allocated EUR 500 000 towards setting up the Legal Services Regulatory Authority.

• Some progress: the authorities have taken measures to improve systems to collect data collection on judicial proceedings. The implementation of these measures remains to be completed for some courts and areas of the justice system.

Europe 2020 (national targets and progress)

Employment rate target: between 69 % and 71 % The employment rate (Eurostat definition, age group 20-64) increased to 67.5 % in Q3 2014 compared with an average of 63.7 % in 2011– 12. Concurrently, the unemployment rate (Eurostat definition, age group 20-64) is on a firm declining trend, falling to 11.1 % in Q3 2014 compared with an average of 14.4 % in 2011–12.

R&D investment target: 2.0 % of GDP Ireland has set itself a national R&D intensity target for 2020 of 2.0 % of GDP. It has made very significant progress towards reaching this target.

Investment in R&D grew steadily until the

A. Overview Table

financial crisis. Between 2002 and 2013 R&D intensity increased from 1.1 % in 2002 to 1.28 % in 2007 and 1.74 % in 2013. The first increase reflects considerable real growth of the volume of investment as this came at a time of strong economic growth, while the latter increase in R&D intensity reflects the economic contraction.

Public sector R&D intensity in 2013 was 0.44 % and business R&D intensity 1.2 %. While Ireland has maintained public spending on research at 2010 nominal levels, this constitutes a decrease in real terms. Business expenditure on R&D, which has been evolving more favourably than public expenditures in recent years, has been supported indirectly by an R&D tax credit scheme which has seen a large uptake.

Reduction of greenhouse gas (GHG) emissions in Non-Emission Trading System greenhouse sectors that are not covered by the Emission Trading gas emissions decreased by 12 % between System by 20 % compared to 2005 levels. 2005 and 2013. According to the latest

national projections submitted to the European Commission that take existing measures into account, it is expected that Ireland will miss the target, with 2020 emissions expected to be 2 % lower than 2005 emissions (i.e. a projected shortfall of 18 percentage points).

Renewable energy target: 16 % proportion of The proportion of renewable energy was renewable energy in total gross energy consumption 7.2 % in 2012. Although this is in line with in 2020. the linear trajectory up to 2020, the existing

policy, market and budget framework appears to be insufficient to enable Ireland to gradually achieve the 2020 objective.

Energy efficiency target The second national Irish energy efficiency action plan aims to achieve 20 % energy savings in 2020 (as compared to 2005).

The European Commissionʼs reference scenario projects a 1 % decrease in gross primary energy consumption in 2030 compared to 2005.

Early school leaving target: 8 % The early-school-leaving rate was 11.5 % in

2010, 10.8 % in 2011, 9.7 % in 2012 and 8.4 % in 2013. There has been a consistent positive trend in recent years, with Ireland performing better than the EU-28 average (8.4 % and 11.9 % respectively in 2013). It is

A. Overview Table

on track to reach the target of 8 %.

Tertiary education attainment target: 60 % The tertiary education attainment rate was

50.1 % in 2010, 49.7 % in 2011, 51.1 % in 2012 and 52.6 % in 2013. With the exception of 2011, it has been consistently increasing and Ireland currently has the highest tertiary education attainment rate in the EU. Further participation in tertiary education can be sought by improving access for students from disadvantaged backgrounds and addressing the gender imbalance (57.9 % of women against 44 % of men in 2012).

To reduce the number experiencing consistent The number of people at risk of poverty or poverty to 4 % by 2016 (interim target) and to 2 % or social exclusion increased from a pre-crisis less by 2020, from the 2010 baseline rate of 6.2 %, level of 1.05 million in 2008 to 1.36 million in which will lift at least 200 000 people out of the risk 2013. Achieving the national target remains of poverty and exclusion between 2012 and 2020 ambitious.

(revised target).

ANNEX B

Standard Tables

Table AB.1: Macroeconomic indicators

1996- 2001- 2006-

2000 2005 2010 2011 2012 2013 2014 2015 2016

Core indicators GDP growth rate 9.6 4.9 0.2 2.8 -0.3 0.2 4.8 3.5 3.6

Output gap 1 2.1 0.9 0.0 -1.3 -1.8 -2.5 -0.1 0.7 0.7

HICP (annual % change) 2.7 3.4 1.1 1.2 1.9 0.5 0.3 0.3 1.3

Domestic demand (annual % change) 2 8.9 5.5 -1.3 -0.7 -0.6 -0.3 2.2 3.3 3.6

Unemployment rate (% of labour force) 3 7.8 4.4 8.3 14.7 14.7 13.1 11.1 9.6 8.8

Gross fixed capital formation (% of GDP) 22.3 25.5 23.3 14.5 15.6 15.2 15.9 17.1 18.4 Gross national saving (% of GDP) 24.1 23.3 19.4 16.0 17.6 20.5 22.4 23.2 23.6 General government (% of GDP)

Net lending (+) or net borrowing (-) 2.1 0.8 -10.1 -12.6 -8.0 -5.7 -4.0 -2.9 -3.1 Gross debt 53.3 29.8 48.0 111.1 121.7 123.3 110.8 110.3 107.9 Net financial assets n.a. -10.1 -17.1 -62.1 -79.1 n.a. n.a. n.a. n.a. Total revenue 37.2 34.0 35.1 33.5 34.2 34.8 35.1 34.5 33.9 Total expenditure 35.1 33.2 45.1 46.1 42.2 40.5 39.1 37.4 36.9 of which: Interest 3.2 1.2 1.7 3.4 4.1 4.4 4.1 3.9 3.8 Corporations (% of GDP)

Net lending (+) or net borrowing (-) n.a. n.a. 8.8 12.0 6.2 10.3 10.7 10.4 10.9 Net financial assets; non-financial corporations n.a. -85.1 -97.3 -129.8 -133.8 n.a. n.a. n.a. n.a. Net financial assets; financial corporations n.a. 15.7 -1.4 2.9 14.8 n.a. n.a. n.a. n.a. Gross capital formation n.a. n.a. 7.2 5.4 5.6 6.3 5.6 6.1 6.5 Gross operating surplus n.a. n.a. 30.1 33.5 32.9 32.2 32.7 33.0 33.7 Households and NPISH (% of GDP)

Net lending (+) or net borrowing (-) n.a. n.a. -2.3 2.7 2.3 1.6 -0.3 -0.9 -1.5 Net financial assets n.a. 83.9 57.5 70.7 81.0 n.a. n.a. n.a. n.a. Gross wages and salaries n.a. n.a. 39.2 37.2 37.0 36.5 36.0 35.9 35.7 Net property income n.a. n.a. 0.8 0.7 1.2 1.3 0.2 -0.4 -1.3 Current transfers received n.a. n.a. 15.9 18.2 17.9 18.1 16.9 15.9 15.5 Gross saving n.a. n.a. 6.0 5.7 5.1 4.7 3.5 3.3 3.1 Rest of the world (% of GDP)

Net lending (+) or net borrowing (-) 2.2 -1.3 -4.1 0.2 0.9 3.8 5.7 5.1 4.3 Net financial assets n.a. 20.9 61.6 116.2 116.1 n.a. n.a. n.a. n.a. Net exports of goods and services 12.0 14.5 11.8 20.3 20.5 20.8 21.9 21.7 21.1 Net primary income from the rest of the world -10.6 -15.2 -14.6 -18.7 -17.4 -14.9 -15.2 -15.4 -15.7 Net capital transactions 1.0 0.3 0.1 0.1 0.0 0.1 0.7 0.5 0.4 Tradable sector 50.5 46.7 43.8 48.8 48.8 47.5 n.a. n.a. n.a. Non-tradable sector 38.5 41.9 46.0 43.4 43.4 44.4 n.a. n.a. n.a. of which: Building and construction sector 5.8 7.2 5.5 1.4 1.6 1.6 n.a. n.a. n.a.

(1) The output gap constitutes the gap between the actual and potential gross domestic product at 2010 market prices. (2) The indicator of domestic demand includes stocks.

(3) Unemployed persons are all those who were not employed, had actively sought work and were ready to begin working immediately or within two weeks. The labour force is the total number of people employed and unemployed. The unemployment rate covers the age group 15-74.

Source: European Commission 2015 winter forecast, Commission calculations.

B. Standard Tables

Table AB.2: Financial market indicators

2009 2010 2011 2012 2013 2014 Total assets of the banking sector (% of GDP) 1 1006.9 965.9 807.8 713.7 619.9 638.1

Share of assets of the five largest banks (% of total assets) 52.6 49.9 46.7 46.4 47.8 n.a. Foreign ownership of banking system (% of total assets) 40.4 33.8 37.4 35.7 35.6 n.a. Financial soundness indicators:

              - non-performing loans (% of total loans) 2 9.8 12.5 16.1 24.6 25.3 25.3

              - capital adequacy ratio (%) 2 12.8 14.5 18.9 19.2 20.4 20.4

              - return on equity (%) 2 -35.8 -41.0 -10.8 -7.8 -6.8 -6.8

Bank loans to the private sector (year-on-year % change) 1 -5.6 -12.3 -4.7 -2.6 -6.8 -7.5

1

Lending for house purchase (year-on-year % change) -4.1 -2.5 -0.9 6.6 -1.7 -3.8

Loan to deposit ratio 1 162.0 140.8 133.4 128.7 113.3 99.5

Central Bank liquidity as % of liabilities 3 9.0 18.3 18.4 16.6 6.9 3.6

Private debt (% of GDP) 258.5 261.2 277.9 281.5 266.4 n.a.

Gross external debt (% of GDP) 4 - public 46.5 50.8 63.6 76.3 76.7 77.9

            - private 606.7 680.1 695.6 691.8 714.3 709.0 Long-term interest rate spread versus Bund (basis points)* 200.3 299.6 699.3 467.7 222.0 120.4 Credit default swap spreads for sovereign securities (5-year)* 189.8 267.2 673.9 406.0 120.4 53.5

(1) Latest data November 2014.

(2) Latest data Q4 2013. Basel II.

(3) Latest data September 2014.

(4) Latest data June 2014. Monetary authorities, monetary and financial institutions are not included.

(*) Measured in basis points.

Source: IMF (financial soundness indicators); European Commission (long-term interest rates); World Bank (gross external debt); ECB (all other indicators).

Table AB.3: Taxation indicators

2002 2006 2008 2010 2011 2012

Total tax revenues (incl. actual compulsory social contributions, % of GDP) 28.3 32.1 29.5 28.0 28.2 28.7 Breakdown by economic function (% of GDP) 1

     Consumption 11.0 11.5 10.9 10.3 9.8 10.0

              of which:

              - VAT 7.0 7.7 7.3 6.4 6.0 6.2

              - excise duties on tobacco and alcohol 1.6 1.2 1.2 1.3 1.2 1.2

             - energy 1.3 1.2 1.2 1.4 1.4 1.3

             - other (residual) 1.1 1.3 1.1 1.3 1.2 1.3

     Labour employed 9.9 10.4 11.2 11.4 11.9 12.1

     Labour non-employed 0.1 0.1 0.1 0.1 0.2 0.2

     Capital and business income 5.6 7.1 5.2 4.3 4.1 4.3

     Stocks of capital/wealth 1.7 3.1 2.2 1.9 2.2 2.2

     p.m. Environmental taxes 2 2.4 2.5 2.4 2.6 2.5 2.5 VAT efficiency 3 Actual VAT revenues as % of theoretical revenues at standard rate 60.3 67.9 55.9 48.8 47.2 45.6

(1) Tax revenues are broken down by economic function, i.e. according to whether taxes are raised on consumption, labour or capital. See European Commission (2014), 'Taxation trends in the European Union', for a more detailed explanation. (2) This category comprises taxes on energy, transport and pollution and resources included in taxes on consumption and capital.

(3) VAT efficiency is measured via the VAT revenue ratio. It is defined as the ratio between the actual VAT revenue collected and the revenue that would be raised if VAT was applied at the standard rate to all final (domestic) consumption expenditures, which is an imperfect measure of the theoretical pure VAT base. A low ratio can indicate a reduction of the tax base due to large exemptions or the application of reduced rates to a wide range of goods and services (‘policy gap’) or a failure to collect all tax due to e.g. fraud (‘collection gap’). It should be noted that the relative scale of cross-border shopping (including trade in financial services) compared to domestic consumption also influences the value of the ratio, notably for smaller economies. For a more detailed discussion, see European Commission (2012), 'Tax Reforms in EU Member States', and OECD (2014), 'Consumption tax trends'.

Source: European Commission.

B. Standard Tables

Table AB.4: Labour market and social indicators

2008 2009 2010 2011 2012 2013 2014

Employment rate

(% of population aged 20-64) 72.3 66.9 64.6 63.8 63.7 65.5 66.7

Employment growth

(% change from previous year) -0.6 -7.8 -4.1 -1.8 -0.6 2.4 1.8

Employment rate of women

(% of female population aged 20-64) 64.1 61.8 60.2 59.4 59.4 60.3 60.9

Employment rate of men

(% of male population aged 20-64) 80.4 72.1 69.1 68.2 68.1 70.9 72.7

Employment rate of older workers

(% of population aged 55-64) 53.7 51.3 50.2 50.0 49.3 51.3 52.8

Part-time employment (% of total employment,

age 15 years and over) 18.6 21.5 22.7 23.6 24.0 24.1 23.7

Part-time employment of women (% of women employment,

age 15 years and over) 32.4 34.0 34.9 35.7 35.4 35.6 35.1

Part-time employment of men (% of men employment, age 15

years and over) 7.8 10.9 12.1 13.1 14.1 14.3 14.1

Fixed term employment (% of employees with a fixed term

contract, age 15 years and over) 8.5 8.8 9.6 10.2 10.2 10.0 9.4

Transitions from temporary to permanent employment n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Unemployment rate 1 (% of labour force, 6.4 12.0 13.9 14.7 14.7 13.1 11.4

age group 15-74)

2

Long-term unemployment rate (% of labour force) 1.7 3.5 6.8 8.7 9.1 7.9 7.0

Youth unemployment rate

(% of youth labour force aged 15-24) 13.3 24.0 27.6 29.1 30.4 26.8 23.9

Youth NEET rate (% of population aged 15-24) 14.9 18.6 19.2 18.8 18.7 16.1 n.a.

Early leavers from education and training (% of pop. aged 18-24 with at most lower sec. educ. and not in further education or 11.3 11.7 11.5 10.8 9.7 8.4 n.a. training)

Tertiary educational attainment (% of population aged 30-34

having successfully completed tertiary education) 46.1 48.9 50.1 49.7 51.1 52.6 n.a.

Formal childcare (from 1 to 29 hours; % over the population

aged less than 3 years) 16.0 15.0 21.0 10.0 n.a. n.a. n.a.

Formal childcare (30 hours or over; % over the population aged

less than 3 years) 8.0 5.0 8.0 11.0 n.a. n.a. n.a.

Labour productivity per person employed (annual % change) -2.0 1.6 3.9 4.6 0.3 -2.1 2.7

Hours worked per person employed (annual % change) -1.1 -1.7 -0.6 0.0 0.2 0.5 1.0

Labour productivity per hour worked (annual % change;

constant prices) -0.9 3.4 4.5 4.6 0.0 -2.6 1.7

Compensation per employee (annual % change; constant prices) 7.9 3.0 -2.2 0.3 -0.6 1.0 -1.7

Nominal unit labour cost growth (annual % change) 6.8 -2.6 -6.7 -4.0 0.0 1.0 n.a.

Real unit labour cost growth (annual % change) 10.0 1.3 -5.3 -4.6 -0.6 0.6 n.a.

(1) Unemployed persons are all those who were not employed, but had actively sought work and were ready to begin working immediately or within two weeks. The labour force is the total number of people employed and unemployed. Data on the unemployment rate of 2014 includes the last release by Eurostat in early February 2015.

(2) Long-term unemployed are persons who have been unemployed for at least 12 months.

Source: European Commission (EU Labour Force Survey and European National Accounts).

B. Standard Tables

Table AB.5: Expenditure on social protection benefits (% of GDP)

2007 2008 2009 2010 2011 2012

Sickness/healthcare 6.7 7.9 9.8 11.4 12.8 15.1

Invalidity 0.9 1.1 1.3 1.4 1.3 1.3

Old age and survivors 4.7 5.5 6.3 6.7 6.7 6.9

Family/children 2.6 3.1 3.6 3.5 3.4 3.4

Unemployment 1.4 1.8 3.0 3.8 3.7 3.6

Housing and social exclusion n.e.c. 0.1 0.2 0.2 0.6 0.6 0.5

Total 16.9 20.0 24.9 27.7 28.7 31.0

of which: means-tested benefits 4.2 5.0 6.5 7.8 8.2 8.3

Social inclusion indicators 2008 2009 2010 2011 2012 2013

People at risk of poverty or social exclusion 1

(% of total population) 23.7 25.7 27.3 29.4 30.0 29.5

Children at risk of poverty or social exclusion

(% of people aged 0-17) 26.6 31.4 34.1 34.1 33.1 33.9

Elderly at risk of poverty or social exclusion

(% of people aged 65+) 22.5 17.9 11.3 13.8 14.7 13.3

At-risk-of-poverty rate 2 (% of total population) 15.5 15.0 15.2 15.2 15.7 14.1

Severe material deprivation rate 3 (% of total population) 5.5 6.1 5.7 7.8 9.8 9.9

Proportion of people living in low work intensity households 4 13.7 20.0 22.9 24.2 23.4 23.9

(% of people aged 0-59)

In-work at-risk-of-poverty rate (% of persons employed) 6.5 5.3 5.5 5.6 5.4 4.5

Impact of social transfers (excluding pensions) on reducing

poverty 54.4 60.0 61.9 61.6 60.1 63.4

Poverty thresholds, expressed in national currency at constant

5

prices 13418.1 12700.3 11801.4 11532.8 11028.2 10807.6

Gross disposable income (households) 98634.0 91922.0 87374.0 85579.0 84597.0 n.a.

Relative median poverty risk gap (60% of median equivalised

income, age: total) 17.7 16.2 15.5 17.5 19.1 17.4

Inequality of income distribution (S80/S20 income quintile

share ratio) 4.4 4.2 4.7 4.6 4.7 4.5

(1) People at risk of poverty or social exclusion (AROPE): individuals who are at risk of poverty (AROP) and/or suffering from severe material deprivation (SMD) and/or living in households with zero or very low work intensity (LWI).

(2) At-risk-of-poverty rate (AROP): proportion of people with an equivalised disposable income below 60 % of the national equivalised median income.

(3) Proportion of people who experience at least four of the following forms of deprivation: not being able to afford to i) pay their rent or utility bills, ii) keep their home adequately warm, iii) face unexpected expenses, iv) eat meat, fish or a protein equivalent every second day, v) enjoy a week of holiday away from home once a year, vi) have a car, vii) have a washing machine, viii) have a colour TV, or ix) have a telephone.

(4) People living in households with very low work intensity: proportion of people aged 0-59 living in households where the adults (excluding dependent children) worked less than 20 % of their total work-time potential in the previous 12 months. (5) For EE, CY, MT, SI and SK, thresholds in nominal values in euros; harmonised index of consumer prices (HICP) = 100 in 2006 (2007 survey refers to 2006 incomes).

(6) 2014 data refer to the average of the first three quarters.

Source: For expenditure for social protection benefits ESSPROS; for social inclusion EU-SILC.

B. Standard Tables

Table AB.6: Product market performance and policy indicators

2004-08 2009 2010 2011 2012 2013 2014

1

Labour productivity in total economy (annual growth in %) 0.0 2.4 4.5 2.5 1.4 -2.8 n.a.

1

Labour productivity in manufacturing (annual growth in %) 1.6 5.6 11.9 6.5 0.4 -3.8 n.a.

1

Labour productivity in electricity, gas (annual growth in %) n.a. n.a. n.a. n.a. n.a. na n.a.

1

Labour productivity in the construction sector (annual growth in %) -1.7 10.0 -3.5 -3.5 -0.2 11.6 n.a.

1

Labour productivity in the wholesale and retail sector (annual growth

in %) n.a. n.a. n.a. n.a. n.a. n.a. n.a.

1

Labour productivity in the information and communication sector 14.1 4.8 7.9 6.5 5.7 -7.7 n.a.

(annual growth in %)

Patent intensity in manufacturing 2 (EPO patent applications divided 0.0 0.0 0.0 0.0 n.a. n.a. n.a.

by gross value added of the sector)

Policy indicators 2004-08 2009 2010 2011 2012 2013 2014

Enforcing contracts 3 (days) 515 515 515 650 650 650 650

Time to start a business 3 (days) 15.0 13 13 13 10 10 6

R&D expenditure (% of GDP) 1.2 1.6 1.6 1.5 1.6 n.a. n.a.

Total public expenditure on education (% of GDP) 4.9 6.4 6.4 6.2 n.a. n.a. n.a.

(Index: 0=not regulated; 6=most regulated) 2008 2009 2010 2011 2012 2013 2014

Product market regulation 4 , overall 1.35 n.a. n.a. n.a. n.a. 1.45 n.a.

Product market regulation 4 , retail 1.53 n.a. n.a. n.a. n.a. 1.53 n.a. Product market regulation 4 , professional services 1.25 n.a. n.a. n.a. n.a. 1.25 n.a.

Product market regulation 4 , network industries 5 2.49 2.47 2.25 2.21 2.21 2.21 n.a.

(1) Labour productivity is defined as gross value added (in constant prices) divided by the number of persons employed.

(2) Patent data refer to applications to the European Patent Office (EPO). They are counted according to the year in which they were filed at the EPO. They are broken down according to the inventor’s place of residence, using fractional counting if multiple inventors or IPC classes are provided to avoid double counting.

(3) The methodologies, including the assumptions, for this indicator are presented in detail here: http://www.doingbusiness.org/methodology.

(4) Index: 0 = not regulated; 6 = most regulated. The methodologies of the OECD product market regulation indicators are presented in detail here: http://www.oecd.org/competition/reform/indicatorsofproductmarketregulationhomepage.htm (5) Aggregate OECD indicators of regulation in energy, transport and communications (ETCR).

Source: European Commission; World Bank - Doing Business (for enforcing contracts and time to start a business); OECD (for the product market regulation indicators)

B. Standard Tables

Table AB.7: Green Growth

Green growth performance 2003-2007 2008 2009 2010 2011 2012

Macroeconomic

Energy intensity kgoe / € 0.09 0.09 0.09 0.09 0.08 0.08 Carbon intensity kg / € 0.42 0.39 0.38 0.38 0.35 0.35 Resource intensity (reciprocal of resource productivity) kg / € 1.29 1.11 0.96 0.88 0.74 n.a.

Waste intensity kg / € n.a. 0.13 n.a. 0.12 n.a. 0.12 Energy balance of trade % GDP -1.8 -3.2 -2.4 -3.0 -3.5 -3.2

Energy weight in HICP % 7.9 9.2 8.8 9.3 10.5 12.7 Difference between energy price change and inflation % 6.6 5.6 -4.1 3.3 8.4 7.9

Ratio of environmental taxes to labour taxes ratio 24.1% 21.4% 20.3% 22.4% 20.7% 20.4% Ratio of environmental taxes to total taxes ratio 8.1% 8.1% 8.4% 9.2% 8.9% 8.7%

Sectoral Industry energy intensity kgoe / € 0.08 0.08 0.07 0.07 0.07 0.07

Share of energy-intensive industries in the economy % GDP n.a. n.a. n.a. n.a. n.a. n.a. Electricity prices for medium-sized industrial users** € / kWh n.a. 0.14 0.12 0.11 0.12 0.14 Gas prices for medium-sized industrial users*** € / kWh n.a. 0.04 0.03 0.03 0.04 0.04

Public R&D for energy % GDP n.a. 0.02 0.02 0.02 0.01 0.00 Public R&D for the environment % GDP n.a. 0.01 0.01 0.01 0.01 0.01

Recycling rate of municipal waste ratio 30.4% 36.2% 37.3% 39.5% 43.0% 52.4% Share of GHG emissions covered by ETS* % n.a. 30.1 27.8 28.2 27.5 29.1

Transport energy intensity kgoe / € n.a. n.a. n.a. n.a. n.a. n.a. Transport carbon intensity kg / € n.a. n.a. n.a. n.a. n.a. n.a.

Security of energy supply Energy import dependency % 89.6 90.6 88.8 86.5 89.6 84.8

Diversification of oil import sources HHI 0.50 0.48 0.54 0.50 0.49 0.43 Diversification of energy mix HHI n.a. 0.39 0.38 0.38 0.36 0.34 Renewable energy share of energy mix % 2.3 3.6 4.5 4.4 5.8 5.9

Country-specific notes:

2013 is not included in the table due to lack of data.

General explanation of the table items:

All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2000 prices) Energy intensity: gross inland energy consumption (in kgoe) divided by GDP (in EUR) Carbon intensity: Greenhouse gas emissions (in kg CO2 equivalents) divided by GDP (in EUR) Resource intensity: Domestic material consumption (in kg) divided by GDP (in EUR) Waste intensity: waste (in kg) divided by GDP (in EUR)

Energy balance of trade: the balance of energy exports and imports, expressed as % of GDP

Energy weight in HICP: the proportion of "energy" items in the consumption basket used for the construction of the HICP

Difference between energy price change and inflation: energy component of HICP, and total HICP inflation (annual % change)

Environmental taxes over labour or total taxes: from DG TAXUD’s database ‘Taxation trends in the European Union’

Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (in 2005

EUR)

Share of energy-intensive industries in the economy: share of gross value added of the energy-intensive industries in GDP

Electricity and gas prices for medium-sized industrial users: consumption band 500–2000MWh and 10000–100000 GJ; figures excl. VAT.

Recycling rate of municipal waste: ratio of recycled municipal waste to total municipal waste

Public R&D for energy or for the environment: government spending on R&D (GBAORD) for these categories as % of GDP

"Proportion of GHG emissions covered by ETS: based on greenhouse gas emissions (excl LULUCF) as reported by Member

States to the European Environment Agency "

Transport energy intensity: final energy consumption of transport activity (kgoe) divided by transport industry gross value added (in 2005 EUR)

Transport carbon intensity: greenhouse gas emissions in transport activity divided by gross value added of the transport sector

Energy import dependency: net energy imports divided by gross inland energy consumption incl. consumption of international bunker fuels

Diversification of oil import sources: Herfindahl index (HHI), calculated as the sum of the squared market shares of countries of origin

Diversification of the energy mix: Herfindahl index over natural gas, total petrol products, nuclear heat, renewable energies and solid fuels

Renewable energy share of energy mix: %-share of gross inland energy consumption, expressed in tonne oil equivalents

• * 

  European Commission and European Environment Agency

** For 2007 average of S1 & S2 for DE, HR, LU, NL, FI, SE & UK. Other countries only have S2.

*** For 2007 average of S1 & S2 for HR, IT, NL, FI, SE & UK. Other countries only have S2.

Source: European Commission unless indicated otherwise; European Commission elaborations indicated below

Met de EU Monitor volgt u alle Europese dossiers die voor u van belang zijn en bent u op de hoogte van alles wat er speelt in die dossiers. Helaas kunnen wij geen nieuwe gebruikers aansluiten, deze dienst zal over enige tijd de werkzaamheden staken.

De EU Monitor is ook beschikbaar in het Engels.