EUROPEAN COMMISSION Brussels, 26.2.2020 SWD(2020) 506 final COMMISSION STAFF WORKING DOCUMENT Country Report Ireland 2020 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2020 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011 {COM(2020) 150 final}



Contents Executive summary 1.Economic situation and outlook 2.Progress with country-specific recommendations 3.Summary of the main findings from the MIP in-depth review 4.Reform priorities 4.1.Public finances and taxation 4.2.Financial sector 4.3.Labour market, education and social policies 4.4. Competitiveness, reforms and investment 4.5.Environmental sustainability Annex A: Overview table Annex B: Commission debt sustainability analysis and fiscal risks Annex C: Standard tables Annex D: Investment guidance on Just Transition Fund 2021-2027 for Ireland Annex E: Progress towards the Sustainable Development Goals (SDGs) References LIST OF Tables

Table 1.1:Key economic and financial indicators - Ireland Table 2.1:Annual assessment of the 2019 CSRs (1) Table 3.1:Macroeconomic effects of loan-to-value ratio reduction Table 3.2:Macroeconomic effects of loan-to-value ratio reduction combined with a 10% vacant site levy Table 3.3:MIP Scoreboard Table 4.2.1:Financial soundness indicators, all domestic and foreign banks in Ireland Table C.1:Financial market indicators Table C.2:Headline Social Scoreboard indicators Table C.3:Labour market and education indicators Table C.4:Social inclusion and health indicators Table C.5:Product market performance and policy indicators Table C.6:Green growth LIST OF Graphs Graph 1.1: Modified domestic demand and contributions Graph 1.2: Gross value added and contributions Graph 1.3: Core domestic investment and contributions Graph 1.4: Change in employment by sector Graph 2.1: Ireland – Current implementation level of 2014-19 CSRs Graph 3.1: Overvaluation gap in housing

Graph 3.2: Housing prices developments Graph 4.1.1: General government debt development Graph 4.1.2: Total outgoing royalty payments from EU Member States and share going to offshore financial centers**, average values 2013-2017 Graph 4.2.1: Residential mortgage arrears in the banking sector Graph 4.2.2: Private indebtedness Graph 4.2.3: Breakdown of NFC debt by location of counterparty, 2018 Graph 4.2.4: Comparison of new business loan interest rates (< €1 million) Graph 4.2.5: Credit rejections/refusals Graph 4.3.1: Unemployment by duration Graph 4.3.2: Net childcare costs for a low-income family, by component Graph 4.3.3: Employment rate, by educational attainment Graph 4.3.4: Share of platform workers across 16 EU Member States, year Graph 4.3.5: Main social indicators Graph 4.3.6: At risk-of-poverty rate gap, by age groups Graph 4.4.1: Average labour productivity growth, 2010-2017 Graph 4.4.2: Labour productivity index of main sectors Graph 4.4.3: Labour productivity and GVA, 2017 Graph 4.4.4: Intellectual Property Investments v Total Investments Graph 4.4.5: Source of investment finance, 2017 Graph 4.4.6: Sectoral investment rates

Graph 4.4.7: GVA by sector Graph 4.4.8: Proportion of firms that are finance constrained Graph 4.4.9: Labour productivity, EU28, NL NUTS-2 regions Graph 4.4.10: GVA per worker index by NUTS3 region Graph 4.4.11: Disposable income per person Graph 4.4.12: Ease of doing business, by dimension - 2020 Graph 4.5.1: Projections in non-ETS sectors Graph 4.5.2: Greenhouse gas emissions per capita, 2017 vs. 1990 66 LIST OF Boxes Box 2.1: EU funds and programmes to address structural challenges and to foster growth and competitiveness in Ireland Box 3.1: Drivers of house and rental prices Box 4.3.1: Monitoring performance in light of the European Pillar of Social Rights Box 4.3.2: Social housing policy and provision in Ireland Box 4.4.1: Investment challenges and reforms in Ireland Box 4.5.1: Transition to a climate-neutral and circular economy Executive summary Ireland has enjoyed robust economic growth over the past years, also helped by significant progress in reforms, but a number of challenges remain ( ). Since 2014, Ireland has made remarkable progress in strengthening its financial sector and improving employability. Completing reforms in other areas will help underpin Ireland’s robust economic growth. Closing employment-related skill gaps and encouraging key social, environmental and productive investment could provide the foundations for sustainable and inclusive growth. Reducing public and private debt would increase the economy´s resilience to external shocks. Broadening the tax base and reducing the reliance on volatile corporate taxes would buttress the long-term sustainability of public finances.

Ireland is experiencing strong economic growth. In 2018, real GDP grew by 8.2%, a very high rate for an advanced economy but to a significant extent boosted by the activities of multinational companies operating in Ireland. Meanwhile, domestic activity also remained robust, driven by private consumption and investment in construction. Real GDP growth is slowing, affected by uncertainties linked to the UK’s withdrawal from the EU, and a worsening of the global trade environment. GDP is nevertheless estimated to have grown strongly in 2019 (5.6%) and is expected to grow above 3% this year and the next. Ireland’s outlook depends heavily on the future relationship between the EU and UK, while risks stemming from potential changes to the international taxation environment have not abated. Consumer price inflation remains modest. Public finances have been improving but risks to their sustainability remain. The government balance has turned to a surplus and is expected to further improve. Risks to government finances are tilted to the downside, mainly reflecting uncertainty as regards the economic outlook, the sustainability of the current level of corporate tax receipts, the ongoing review of the international corporate tax system, and over-spending within some sectors, particularly health. Given the major economic challenges ahead, (especially digitisation and climate transition), it is crucial for workers to acquire the right skills. Job creation has continued to progress strongly in most sectors. The employment rate reached its pre-crisis peak and the unemployment rate fell below 5% in 2019, its lowest level in a decade. Against this background, shortages of skilled-labour have become more pressing, especially in fast growing sectors. Providing workers with the skills required, including digital and those for a smooth and just transition to a climate neutral economy, would require investing more in education and training. Ireland has also scope to address labour shortages by further facilitating the access of women and vulnerable groups to the labour market, which although improving, remain relatively low. There remain significant investment needs in various areas. The transition to a climate-neutral and clean economy would require substantial private and public investment in skills, clean energy, water and in decarbonising sectors with high emissions. More investment in R&D, digital infrastructure and skills would address the lagging productivity of domestic firms and would increase the resilience of the economy to external shocks. Substantial investment is also required to address rising homelessness and improving access to employment for women and disadvantage groups. Overall, Ireland has made some progress ( ) in addressing the 2019 country-specific recommendations. There has been substantial progress in the following areas: ·Increasing access to affordable and quality childcare. There has been some progress in the following areas: ·Providing personalised active integration support and facilitating upskilling, in particular for vulnerable groups and people living in households with low work intensity. ·Focusing investment policy on the low carbon and energy transition and the reduction of greenhouse gas emissions. Investing in water management, sustainable transport, digital infrastructure, affordable and social housing. ·Implementing measures, including those in the Future Jobs strategy, to diversify the economy and improve the productivity of Irish firms — small and medium firms in particular — by using more direct funding instruments to stimulate research and innovation. ·Improving the business environment by reducing regulatory barriers to entrepreneurship. There has been limited progress in the following areas: ·Limiting tax expenditure and broadening the tax base. ·Addressing features of the tax system that may facilitate aggressive tax planning, where the effectiveness of the measures taken remains to be seen. ·Addressing the expected increase in age-related expenditure, where the full implementation of some measures remains endangered by issues such as recurrent overspending in healthcare. The indicators of the Social Scoreboard supporting the European Pillar of Social Rights point to a relatively good performance, but challenges remain. While employment continues to grow strongly, some population groups have yet to reap the benefits of the economic upturn. Households’ real disposable income per head continues to grow, but remains slightly below pre-crisis levels. A still relative low percentage of the population has basic digital skills, which might hinder their active participation in a society increasingly reliant on digital tools. While the Irish tax and benefit system continues to be effective in reducing inequalities, a high share of jobless households, especially with children, still face challenges. Although increasing, the employment rate for people with disabilities remains below the EU average. The rising number of homeless people as a result of rent increases and insufficient social and affordable housing is still a concern. Regarding progress towards its national targets under the Europe 2020 strategy, Ireland has met or is very close to its targets for employment, early school leaving, and the reduction of poverty and social exclusion. However, there is scope for improvement in the areas of R&D investment, reducing greenhouse emissions, increasing the share of renewables, energy efficiency and poverty reduction.

Ireland made significant progress in addressing the United Nation’s sustainable development goals (SDG) ( ) related to ‘no poverty’ and ‘decent work and economic growth’ but faces challenges in climate action (SDG13). In the five years to 2018, Ireland surpassed the EU average level in almost all dimensions related to SDG1 (‘No poverty’) and SDG8 (‘Decent work and economic growth’). The main findings of the in-depth review contained in this report and the related policy challenges are as follows: ·Government debt remains high, which limits the room for responding to economic shocks. The public debt‑to-GDP ratio fell to 63.5% in 2018 on the back of strong GDP growth. But other indicators suggest that the public debt burden remains high by historical and international standards. ·Private sector debt remains high in relation to GDP, but has declined in both household and corporate sectors. Private debt was 223% of GDP in 2018, largely due to debt held by non-financial corporations (182% of GDP), which includes intra‑company liabilities of multinationals (who have a strong presence in Ireland). Household debt appears high when compared to disposable income. Moreover, long-term mortgage arrears remain a persistent challenge for some households, despite a number of existing schemes to help resolve them. ·Banks’ asset quality has improved in recent quarters following further sales and securitisations of bad loans (non-performing loan) portfolios. The ratio of bad loans as a share of all banks’ loans declined to 4.2% in the second quarter of 2019, down from 8.5% a year earlier, reflecting sales by all major retail banks. The majority (72%) of remaining bad loans relate to mortgages. ·Ireland’s net international investment position remains highly negative (its external liabilities are higher than its external assets). This has changed little in recent years, though the domestic component has shrunk and is set to shrink further on the back of current account surpluses. ·This negative position is largely due to the liabilities of multinational corporations registered in Ireland and the International Financial Services Centre. But the associated risks are smaller than taken at face value because links with the domestic economy are restricted. ·The risks are also lessened by the long maturity and low interest rates on loans disbursed by official creditors during the economic adjustment programme following the 2008 financial crisis, which comprise the substantial share of the general government’s external liabilities. Nevertheless, the full extent of the risk is difficult to gauge. ·House price growth has slowed but affordability remains a concern. The fall in house prices at the top end of the market has brought annual residential price inflation down to levels not seen since 2013. Prices in the rental sector are still growing fast, due to insufficient, though increasing, housing supply. ·Macro-prudential mortgage measures (designed to mitigate risks to the financial system as a whole) are helping to strengthen the resilience of both households and banks. Combined with measures supporting housing supply, they might also improve affordability for buyers and tenants, which remains a challenge. Other key structural issues analysed in this report, which point to particular challenges for Ireland’s economy, are the following: ·Uncertainty over the sustainability of the current high level of corporate tax revenue is a risk to public finances. Receipts from corporation tax remain concentrated among a small number of companies. Furthermore, its share of total tax revenue has been increasing. Continued reliance on this potentially transient revenue for funding permanent current expenditure remains a concern. ·Evidence suggests that Ireland’s tax rules are used for aggressive tax planning purposes. Specifically, rules such as the limited application of withholding taxes are cause for concern. In addition to implementing European and internationally agreed initiatives, Ireland has taken some unilateral measures, including the extension of transfer pricing rules to non‑trading transactions and to small and medium‑sized firms. ·Ireland has taken a number of steps to strengthen its anti-money laundering framework. But challenges remain given the Irish economy’s exposure to foreign direct investment and the presence of complex legal structures. A register of beneficial ownership was set up in 2019, which records who is benefiting from owning assets held in other parties’ names. If secrecy is to be genuinely limited, it is vital that this register functions as intended. Professionals providing services to companies and trusts show an incomplete understanding of their risk exposure to money laundering. This could be remedied by reviewing the national risk assessment of the organisations and arrangements in this field, and by a more effective, risk-based supervision. Such supervision would require statistics to be collected on professionals in this sector. ·Challenges remain to the long-term fiscal sustainability of the healthcare, long‑term care and the pension systems. Expenditure on healthcare and long-term care is relatively high by EU standards. Difficulties in budget management managing healthcare have led to recurrent overspending, endangering the implementation of the ambitious Sláintecare reform. The reform of the state pension system currently being implemented aims to improve its long‑term sustainability. ·Increasing the productivity of domestic firms may help make the economy less vulnerable to sector-specific shocks. The high productivity of the Irish economy is based on the performance of a small number of multinational firms, concentrated in few sectors, which invest large amounts in research and development. As a result, Ireland’s export share in global trade keeps increasing. In contrast, investments by domestic firms is much lower. This holds back their productivity growth and widens the dichotomy between them and foreign-owned firms. Domestic sourcing by foreign companies, which could lead to knowledge and skills spillover, remains limited. The high cost of credit, commercial properties and legal and insurance services also impair the competitiveness of domestic firms. The Climate Action Plan represents a much-needed breakthrough and a stepping stone in the transition to a climate neutral and circular economy. Ireland has lagged behind so far in tackling climate change. Greenhouse emissions in the transport, building and agriculture sectors are high and on a rising trend. There is scope for improving energy efficiency, renewables provision and material recycling. The Climate Action Plan 2019 constitutes an important step to address these challenges, though its success will depend on the implementation of public measures that could trigger additional private investments. Recent reforms encouraging the repair of water leaks and rational water usage, combined with investment in water and wastewater facilities, could contribute to a more efficient and sustainable use of water resources. ·The EU Just Transition Mechanism will contribute to a fair transition towards climate neutrality. The Commission’s proposal under the next multi-annual financial framework for the period 2021-2027 for a ‘Just Transition Mechanism’ includes a ‘Just Transition Fund’, a dedicated scheme under InvestEU, and a new public sector loan facility with the EIB. It is designed to ensure that the transition towards EU climate neutrality is fair by helping the most affected regions in Ireland address the accompanying social and economic consequences. Key priorities for support by the Just Transition Fund, set up as part of the Just Transition Mechanism, are identified in Annex D, building on the analysis of the transition challenges outlined in this report. ·Regional disparities are among the highest in the EU and increasing. Economic growth follows a distinct geographic pattern with particularly dynamic developments around Cork and Dublin, the location of highly competitive multinational companies. In terms of gross value added per capita, the difference between the richest and the poorest region in Ireland has doubled between 2000 and 2016. While Dublin had a per capita regional gross value added of 248% of the EU average in 2016, the poorest region bordering Northern Ireland stood only at 66%. Productivity growth, attractive and sustainable business environments and disposable income follow a similar pattern of geographic distribution.

1. Economic situation and outlook GDP growth Economic activity remains strong, although it is slowing. GDP grew by 6.6% year-on-year (y-o-y) in the first half of 2019, well above the eurozone average. Real GDP is expected to have grown by 5.7% in 2019 and to expand further by 3.6% in 2020 and 3.2% in 2021 (European Commission, 2019). These headline figures remain inflated by the activities of multinational companies operating in Ireland. Domestic economic activity has been driven by private consumption and investment in construction. Modified domestic demand, a measure of domestic activity that strips out some of the effects of multinationals, grew by 2.3% y‑o‑y in the first half of 2019 (Graph 1.1), after growing by 4.7% in 2018. It is expected to expand above 3% on average between 2019 and 2021. Private consumption, sustained by increasing disposable income amid strongly rising employment, and investment in housing have been the main drivers of domestic demand. Household savings, meanwhile, remain high, likely reflecting caution on the part of consumers. Graph 1.1:Modified domestic demand and contributions Source: CSO The value added in the domestic sector provides further evidence of robust underlying activity. Gross value added (GVA) in the sectors not dominated by multinationals grew by 3.9% in 2018, after 4.8% in 2017, contributing substantially to the total GVA (Graph 1.2). Amongst these sectors, legal, accounting, and engineering activities grew the most (17.7%) in 2018, followed by the construction sector (11.0%). The economic outlook remains clouded by heightened uncertainty. External risks mainly relate to the UK’s withdrawal from the EU, changes in the international taxation environment and the slowdown in global trade. The UK is one of the main trading partners for Ireland and acts as a land bridge to the continent. Thus, depending on the final negotiations, Ireland is likely to experience disruption of its supply chains and a hit on final demand after the UK’s exit. This negative impact might be amplified by a fall in Irish consumer and business confidence, job losses and sterling depreciation. In addition, a large degree of unpredictability, linked to the activities of multinationals, could drive headline growth in any direction. At the same time, the tight labour market and diminishing spare capacity point to an economy operating at or above its potential. Against this background, signs of overheating could become more apparent if adverse external shocks do not materialise. Graph 1.2:Gross value added and contributions Source: CSO Investment Investment in Ireland continues to be driven by volatile investment by foreign multinational corporations. In the first half of 2019, headline investment increased by 112% y-o-y, because of a surge in intellectual property investment in the second quarter of 2019. This surge was matched by a rise in intellectual property imports. These two impacts are largely offsetting and therefore have a broadly neutral impact on GDP. Modified investment, which excludes the volatile components related to the activities of multinationals (such as aircraft and intangible assets) and better reflects domestic investment, decreased by -4.1% y-o-y in the first half of 2019 (Graph 1.3). Investment in construction increased by 3.6% y-o-y in the first half of 2019 and is expected to remain strong as housing supply is still catching up with demand and is supported by various government measures. By contrast, investment in machinery and equipment has been weak in recent quarters, likely reflecting heightened external uncertainty. Graph 1.3:Core domestic investment and contributions Source: CSO Public investment continues to increase. Capital spending has been on an upward path since 2014 after significant cuts in the aftermath of the crisis. Ireland’s 2020 Budget estimates an annual increase in public capital investment above 10% y-o-y in 2020, at 4.4% of modified GNI (GNI*)( ). Capital expenditure is expected to increase at an average annual rate of 5.8% until 2024, and a ratio of 4.3% of GNI* to be maintained in the medium term. Investment so far has centred on key areas such as infrastructure, particularly in housing, transport, education and health. Regional disparities Regional disparities in Ireland remain significant and are increasing. The difference between the richest and the poorest NUTS3 ( ) area in Ireland in terms of GVA per capita has doubled between 2000 and 2016. Productivity (GVA per worker) in the Southern region corresponds to 240% of the EU average, while the Northern and Western region stands at 98% of the EU average. The share of employment in high-technology sectors is twice as high in the Eastern and Midland, as in the Northern and Western region (see sections 4.4.1., 4.4.4. and 4.4.6.). Differences in regional competitiveness are also sizeable. With the location of globally competitive multinational companies around Dublin and Cork, these areas offer increasingly favourable business and innovation environments while areas in the Northern and Western region - predominantly rural and remote - increasingly lag behind. Eastern and Midland region, hosting Dublin, performs well in the Regional Competitiveness Index (89th place in the EU), providing particularly favourable conditions in terms of technological readiness, higher education and lifelong learning and health. The Northern and Western region ranks only 177th, due to below-average results for infrastructure, market size and efficiency. Inflation Wage pressures have not yet passed through to inflation. Consumer price inflation remains subdued, with the harmonised index of consumer prices rising by 0.9% on average in 2019. Core inflation remains contained by low price pressure from non-energy industrial goods, which reflects both low import prices due to the appreciation of the euro real exchange rate towards sterling and a downward bias related to quality adjustments methods (Keating et al., 2018). Services prices continue to be bolstered by rents and catering services and are expected to remain the main driver of inflation, in line with robust domestic demand. House price developments While residential price inflation has slowed down to levels not seen since 2013, prices at the bottom-end of the market are still increasing briskly. Annual residential price inflation was 1.4% in November 2019, down from a 13.3% peak in April 2018. The decline was driven by the top-end of the market (see Box 3.2) Despite its rapid growth in recent years, overall house prices do not seem overvalued (see Section 3.1). However, affordability remains a concern. Housing rental inflation is still high. Rents for new or renewed tenancies increased by 6.6% in Dublin and 9.2% outside Dublin in the third quarter of 2019. This represents a change in growth of respectively -3 pps and +2.3 pps compared with the same period last year. The evolution of rental inflation seems to reflect changes in the stock of houses available for rent with supply in Dublin increasing by 10% to 1,500 units in the year to August while availability was falling nationwide. (see Box 3.3.1)

Labour market The labour market continues to improve. The economic expansion has spurred job creation across most sectors (Graph 1.3). In 2018, the overall employment rate (20-64) reached 74.1%, and the unemployment rate continued to decline steadily to 5%, the lowest rate since 2007 (seasonally adjusted). Graph 1.4:Change in employment by sector Source: Eurostat There is scope for increasing the labour supply through greater labour force participation and workforce attachment, in particular for women. Ireland’s activity rate (15-64) hovers around 72% since 2013, below the EU average (73.7% in 2018). The female activity rate was 67.1% in 2018, 11.7 pps below that of men, and the gender employment gap (20-64) stood at 12.2 pps. This indicates that women are still at a disadvantage to men in the jobs market. Evidence from the International Labour Organisation (2017) suggests that closing the gender activity rate gap by 25% would boost GDP per capita by 2% (a total GDP increase of some € 6.5 billion in current prices in 2018). In 2019, the government launched measures to tackle the specific challenges in the childcare system and foster greater female labour participation - these require close monitoring. Similarly, gains from the economic upturn have not trickled down to all population groups, such as the low skilled or those with disabilities (see section 4.3.1). Skilled-labour shortages are becoming more pressing. While the aggregate job vacancy rate remains stable (1% in the second quarter of 2019), it is trending upwards in some fast-growing sectors and those dominated by multinational companies, such as information and communication technologies, construction, and professional, scientific and technical activities (see section 4.3.1). With a large majority of jobs requiring strong digital skills, the relatively low level of basic digital skills in the workforce is a barrier for greater uptake of innovation. Wages have become more aligned with labour market conditions, with further acceleration over the past year. Nominal wage growth has been contained since 2014 (1.5% on average from 2014 to 2017), and often lower than what could be expected from labour market conditions, in particular from productivity growth (7.9% on average in the period). However, the rate of increase of nominal compensation per employee accelerated to 2.1% in 2018, and it is set to reach 3.2% in 2019 and 3.5% in 2020, closing the gap with the predicted growth based on economic fundamentals. ( ) The labour market tightening points to an economy operating at or above its potential. Strong employment growth and decreasing rates for both part-time employment (-9.3% year on year in the first half of 2019) and long-term unemployment, suggest increasing constraints on the labour supply. As the domestic labour market is close or at full employment, high net inward migration helps alleviate these constraints. Social developments Housing scarcity remains a pressing issue, including rising homelessness due to shortages of social housing. In November 2019, over 10,000 people were counted as homeless, including 3,752 children. The share of people at risk of poverty or social exclusion is decreasing, but challenges remain for some groups. The share of people at-risk of poverty or social exclusion has been declining since 2012, closing the gap with the EU average. However, it remains particularly high for children, largely due to impact of joblessness at household level (see Section 4.3.3). Income inequality after social transfers is below the EU average, but challenges remain. The income of the richest 20% of the population relative to the poorest 20% increased from 4.23 in 2017 to 4.63 in 2018, but remain below the EU average (5.17). Market income inequality is among the highest in the EU (0.543 in 2016). ( ) However, tax and social transfers in Ireland have strong poverty reducing effects, disposable income inequality (0.296) is below the EU average (0.308). ( ) Competitiveness The Irish economy has maintained its competitiveness. In 2018, the real effective exchange rate based on unit labour costs remained broadly unchanged with respect to 2017. Sterling depreciation vis-à-vis the euro continued to negatively affect competitiveness in 2018, but was offset by weak consumer price inflation and the reduction in unit labour costs. The underlying trade balance also shows that the country has maintained its external competitiveness. However, wage pressures in a tightening labour market may affect competitiveness over the medium term. The activities of multinationals continue to inflate overall productivity figures with significant productivity gaps between low-productivity domestic firms and high-productivity foreign companies (see Section 4.4.1.). External position Headline current account figures remain volatile, and net external liabilities largely unchanged. ( ) The headline current account surplus increased dramatically, from 0.5% of GDP in 2017 to 10.6% in 2018, driven by the activities of multinationals. This volatility highlights the importance of alternative indicators that better capture the resources generated by domestic residents. For instance, the modified current account ( ) increased only moderately from 2.3% of GDP in 2017 to 4.0% in 2018. Ireland’s external position remains difficult to grasp by standard value metrics. The high level of net external liabilities is largely due to the operations of some multinationals, including their intragroup liabilities, and the negative net position of the International Financial Services Centre (IFSC), to which domestic sectors have only limited exposure. However, although the external position of the domestic institutional sectors (such as the Central bank, commercial banks and general government) has improved in recent years, the stock of external liabilities remains elevated, even when adjusting for the activity of multinationals and the IFSC (see Section 3). Financial sector Overall, Irish banks are well capitalised and liquid, but their profitability is under increasing pressure as the external outlook remains challenging. Balance sheet repair is well underway, particularly reflecting sales of non-performing loans (NPLs). At the end of the second quarter of 2019, NPLs accounted for 4.2% of gross loans by the banking sector, down from 8.5% a year earlier. A significant proportion of the NPL stock continues to be comprised of residential mortgages, a large proportion of which is in deep arrears. The central bank of Ireland continues to make active use of its macro-prudential policy toolkit to strengthen financial stability. A countercyclical capital buffer at a rate of 1% has been put in place in July 2019. The mortgage measures were maintained in view of increasing the resilience of both the banking and household sectors to adverse shocks. Public finances The government balance is in surplus and further improving, but risks remain. The general government balance is expected to have improved in 2019. Including measures announced in the 2020 Draft Budget Plan, the surplus is expected to further increase to 0.3% in 2020, based on Commission 2019 Autumn forecast (European Commission, 2019l)( ). Ireland’s fiscal position continues to be supported by strong corporate tax revenue and low interest rates (see Section 4.1). Risks to the fiscal outlook remain skewed to the downside, mainly reflecting uncertainty as regards the economic outlook, the sustainability of the current level of some sources of government revenue (notably corporate tax), the ongoing review of the international corporate tax system and over‑spending within some sectors, particularly health.

Ireland is still running high levels of public debt, which limits its room to respond to negative economic shocks. The general government debt ratio further declined in 2018 to 63.6% of GDP, on the back of strong GDP growth. It is projected to fall further to around 54% in 2020, contingent on continued robust growth and positive primary balances. The absolute level of debt increased during 2018 by around €5 billion, despite a modest general government surplus. It is projected to remain at the current level over the medium term (Department of Finance, 2019a). A range of alternative metrics show that Ireland’s stock of public debt remains high by international and historical standards (Section 3). In 2019, the government plans to direct estimated receipts of €0.7 billion from the return of funds deployed for the resolution of the financial crisis towards reducing debt. Over 2020‑2021, additional €4.0 billion from the winding down of the National Asset Management Agency are expected to be used for debt reduction. While debt sustainability has improved, long-term fiscal sustainability risks related to the cost of ageing remain, including in healthcare, pensions and long‑term care (Section 4.1.1). Climate Ireland has not been able so far to decouple fully greenhouse gas emissions and economic growth. While real GDP growth has outpaced the increase in gross inland energy consumption since the start of the recovery, rising output continues to translate into higher energy demand in transport, industry and housing ( ). While the share of renewable sources in electricity generation has increased to about 33% in 2018, the reliance on fossil fuels remains high, which has led to rising CO2 emissions in the past few years. In turn, energy efficiency gains have been rather limited. Continued growth in agriculture has also contributed to rising emissions of non-CO2 greenhouse gases. Sustained real GDP growth in the near term and a rising population mean that reducing greenhouse gas emissions in absolute terms will be a significant challenge and that decoupling could only be achieved via sustained and additional policy efforts. United Nations’ Sustainable Development Goals Ireland made significant progress in addressing the United Nation’s sustainable development goals (SDG) related to ‘no poverty’ and ‘decent work and economic growth’ but faces challenges in climate-related goals. In the five years to 2018, Ireland surpassed the EU average level in almost all dimensions related to the SDG1 — No poverty and SDG8 — Decent work and economic growth. Ireland also performed above the EU average in SDG4— Quality education. Performance in addressing SDG5— Gender equality was good on education but below EU average for leadership positions and in most employment dimensions. Additional effort is still required in addressing climate-related sustainable development goals (SDG13), in particular in reducing greenhouse gas emissions and increasing energy efficiency and the share of renewable energy (see Section 4.5.1). While Ireland performed well in SDG11 — Sustainable Cities and Communities, housing affordability is still a concern. Ireland performed well in the water quality dimension of SDG6 — Clean Water and Sanitation. However, the share of population connected to at least secondary wastewater treatment was among the lowest in Europe (see Section 4.5.3) Table 1.1:Key economic and financial indicators - Ireland Source: Eurostat and ECB as of 4-2-2020, where available; European Commission for forecast figures (Winter forecast 2020 for real GDP and HICP, Autumn forecast 2019 otherwise) 2. Progress with country-specific recommendations Progress implementing recommendations addressed to Ireland since 2014 is substantial. Looking at the multiannual assessment of the implementation of the Country-Specific Recommendations (CSRs) since these were first adopted, at least ‘some progress’ was noted for 87% of all the CSRs addressed to Ireland and ‘limited’ or ‘no progress’ for 13% of these CSRs (Graph 2.1). Policies supporting the financial and employment sector have been among the most successful. Graph 2.1:Ireland – Current implementation level of 2014-19 CSRs Source: European Commission The implementation of country specific recommendations since 2014 has contributed to the improvement in the fiscal position. Since 2014, the public finances have been stabilised to a significant extent and public capital investment has been revamped. Efforts to limit tax expenditures and broaden the tax base have been mixed. Measures to address the expected increase in age-related expenditure are underway but risks to their full implementation still remain. Aside from the transposition of EU Directives, Ireland has taken some additional reforms to address aggressive tax planning, however their effectiveness in addressing the issue remains to be seen. A number of labour market reforms addressing country specific recommendations have been implemented since 2014. Ireland has taken steps to make quality childcare more affordable with the universal free preschool programme ‘Early Childhood Care and Education’ and the Affordable Childcare Scheme. Recent reform efforts have tried to tackle the problem of weak work incentives for low-income groups. Ireland has also revised its activation framework, with a particular focus on improving the progression to employment of vulnerable, inactive individuals. The launching of the Social Inclusion and Community Activation Programme (2018 – 2022) will provide funding to tackle poverty and social exclusion. Measures have been taken to increase basic and advanced levels of digital skills, but further efforts are needed. Policy measures to increase the supply of social housing are in place but their effectiveness is still limited. Progress has been made since 2014 in implementing the country-specific recommendations for the financial sector. The steady pace of reduction in non-performing loans by banks has been maintained, helped by a combination of portfolio sales and restructuring activities. The supervisor is closely monitoring the banks’ non-performing loan reduction strategies and restructuring practices. Long-term mortgage arrears have proven to be the most difficult to restructure, but they have also fallen, although at a slower pace than the overall stock of non-performing loans. Several policy measures have been introduced to support debtors in distress and increase the number of personal insolvency arrangements, but take-up of these measures is only slowly gaining traction. The credit register has been fully operational since 2019. Ireland has made some ( ) progress in addressing the 2019 country-specific recommendations (see table 2.1). Ireland has made limited progress in addressing the 2019 country-specific recommendation on fiscal issues. Recent measures are not meaningfully contributing to broadening the tax base and some increase the scope for tax expenditure. Ireland has not yet fully implemented the envisaged measures to accelerate the reduction of public debt or address the expected increase in age-related expenditure. The effectiveness of the measures taken to address the issue of aggressive tax planning remains to be seen. This means that limited progress has been made on country specific recommendation 1, which reflects euro area recommendation 2. Some progress has been made in addressing the 2019 country-specific recommendation aiming to address skills and social challenges. Some progress has been made in providing personalised active integration support and facilitating upskilling, in particular for vulnerable groups and people living in households with low work intensity. However, further investment in education and training would be still needed to provide workers with the skills required, including digital and those for a smooth and just transition to a climate neutral economy. Substantial progress has been made in increasing access to affordable and quality childcare. Programmes recently launched in this area require appropriate funding and monitoring to ensure their effective implementation Hence the overall assessment of country specific recommendation 2 is ‘some progress’. Ireland has made some progress in addressing the 2019 country-specific recommendation on investment and productivity. Some progress has been made in facilitating investment related to climate change, energy transition, sustainable transport, water, digital infrastructure and affordable and social housing. Measures aiming to diversify the economy and improve the productivity of Irish firms have also recorded some progress. While the bulk of public support for research and innovation is still provided through the Research and Development tax credit, rather than direct support, the 2020 Budget targets more specifically micro and small companies. Some progress has been made to improve the business environment by reducing regulatory barriers to entrepreneurship. As a result, some progress has been made on country-specific recommendation 3, which reflects euro area recommendations 1 and 2. On request from a Member State, the Commission can provide tailor-made expertise via the Structural Reform Support Programme to help design and implement growth-enhancing reforms. Since 2018, such support has been provided to Ireland for 15 projects, most of which started in 2019. Work has begun, for example, on supporting a public sector energy efficiency investment programme, developing a new automatic enrolment retirement savings system, improving management development standards for small and medium-sized firms, assessing the performance of the health system and setting up a supervisory framework for complex investment firms. Table 2.1:Annual assessment of the 2019 CSRs (1) Source: European Commission

Box 2.1: EU funds and programmes to address structural challenges and to foster growth and competitiveness in Ireland Ireland is benefiting from EU support. The financial allocation from EU cohesion policy programmes ( I ) for Ireland amounts to €1.97 billion in the current Multiannual Financial Framework 2014-2020, equivalent to around 0.1% of the GDP annually. As of the end of 2019, some €2.2 billion (more than around 97 % of the total amount planned) was allocated to specific projects, while and €783 million was spent by the selected projects ( II ) showing a level of project implementation in line with the EU average. EU Cohesion policy funding contributes to addressing structural challenges in Ireland. The cohesion policy funds for Ireland have allocated EU funding of €282 million for smart growth, €125 million for sustainable growth and sustainable transport and €603 million for inclusive growth. In 2019 following a performance review ( III ) additional €58 million have been made available within performing priorities. EU cohesion policy is contributing to major transformations of the Irish economy by promoting growth and employment via investments, among others, in research, technological development and innovation, competitiveness of enterprises, sustainable transport, employment and labour mobility. Since 2014, over 55,000 enterprises have been granted support, including over 1,800 start-ups, generating over 5,600 new jobs. European Structural Investment (ESI) Funds contributed to research and innovation in Ireland, supporting over 1,000 researchers and 350 companies cooperating with research institutes. More than 12,000 households are receiving support to improve the energy performance of their homes, leading to a reduction of greenhouse gas emissions by more than 57,000 tons of CO2eq. Under the Rural Development Programme 23 European innovation partnerships (EIP) have been financed and 93,000 beneficiaries have received training. Furthermore, rural development funding supported farming that promoted biodiversity, reduced greenhouse gas emissions, and improved the quality of water, air and soil on 1.5 million hectares. The European Social Fund has significantly contributed to increasing employment and social inclusion in Ireland. It focuses on the activation of the unemployed, improving social and labour market inclusion, enhancing education attainment and tackling youth unemployment. Since 2014, over 160 operations have supported nearly 112,000 unemployed persons, 28,000 persons with disabilities and 1 200 homeless persons. In total over 330,000 participants have been registered and benefitted from upskilling so far. Agricultural and fisheries funds and other EU programmes also contribute to addressing the investment needs in Ireland. The European Agricultural Fund for Rural Development (EARDF) makes available in total 3.92 billion EUR, and the European Maritime and Fisheries Fund (EMFF) in total €239 million (including the national co-funding for both). Ireland benefits also from other EU programmes, such as the Connecting Europe Facility, which allocated EU funding of €107 million to specific projects on strategic transport networks, or Horizon 2020, which allocated EU funding of €812 million (including €202 million for 299 small and medium enterprises). EU funds already invest substantial amounts on actions in line with the Sustainable Development Goals (SDGs). In Ireland, European Structural and Investment Funds support 10 out the 17 SDGs and up to 99% of the expenditure is contributing to those. 3. Summary of the main findings from the MIP in-depth review The 2019 Alert Mechanism Report concluded that a new in-depth review should be undertaken for Ireland to assess the persistence or unwinding of imbalances. (European Commission, 2019f) In February 2019, Ireland was identified as having macroeconomic imbalances (European Commission, 2019g). The imbalances identified relate in particular to large stocks of public and private debt and net external liabilities. High stock of non-performing loans and rapidly rising house prices also warrant close monitoring. This chapter summarises the findings of the analyses in the context of the Macroeconomic Imbalance Procedure (MIP) In‑depth Review that is contained in various sections in this report. 1.1.Imbalances and their gravity The public debt-to-GDP ratio has been declining but the stock of debt remains high. Public debt as a share of GDP fell to 63.6% in 2018, from 67.8% in 2017. The improvement was entirely due to strong GDP growth, whereas the stock of debt increased by around €5 billion over the same period. At 104.4% of GNI* in 2018, the debt burden is de facto among the highest in the EU. Financial market perceptions of sovereign risk remain favourable, as reflected in low sovereign bond yields and credit default swap spreads (Section 4.4.1). Still high, private debt relative to GDP is declining on the back of active deleveraging by both firms and households. In 2018, private debt amounted to 223.2% of GDP and so was well above the EU average (137.5%) and the MIP threshold (133%). It has declined for a third consecutive year from its 2015 peak (305.1% of GDP), reflecting a combination of particularly strong GDP growth and deleveraging by both households and businesses. However, the assessment of the risks associated with these high debt levels needs to take account of how the heavy presence of multinational companies in Ireland affects both corporate debt and GDP. Some two thirds of corporate debt was concentrated in foreign-controlled firms, while domestically-controlled firms’ debt stock was equivalent to 61.7% of GDP or 101.3% of modified gross national income in 2018. About 40% of the latter is held by redomiciled firms, who have very few linkages to the domestic economy. Also, only about one fifth of the debt of non-financial corporations was held by Irish counterparties. So overall, the links between the corporates that account for the high debt and the Irish financial system is weaker than headline figures would suggest. Households have actively been deleveraging since 2009. While household debt in proportion to GDP (41.7%) is below the EU average (60.8%), it nonetheless appears substantial when compared to modified gross national income (68.4%). The net international investment position remains highly negative, even when taking into account the distorting impact of multinational companies operating in Ireland. The highly negative net international investment position (NIIP) of ‑166% of GDP in the second quarter of 2019 is largely due to the activities of multinational companies and the large net position of a financial offshore centre with limited connections to the domestic economy. Although the net external positions of some domestic institutional sectors such as the general government, commercial banks and the central bank have improved over the last two years, the NIIP remains negative even when adjusting for the impact of multinational companies. Commission estimates of Ireland’s domestic net international investment, net of multinational firms and offshore activity, suggest a much lower external liability position, although still elevated compared to other Member States and exceeding MIP thresholds (European Commission, 2019c). The current account balance remains highly volatile and heavily influenced by the activity of some large multinationals. The current account swung from a broadly balanced position in 2017 (0.5% of GDP) to a large surplus in 2018 (10.6% of GDP). The modified current account balance ( ), which better reflects domestic economic activity, suggests that the Irish economy appears to have maintained its external competitiveness. While annual house price inflation has moderated, affordability is still a concern. From 13.3% in April 2018, annual house price inflation has moderated to 1.1% in September 2019, a level well below the 6% prudential threshold of the MIP scoreboard. Increasing housing supply, coupled with more binding macro-prudential rules, seem to have supported this sharp slowdown (see Box 3.1.1). Although overall prices do not seem overvalued, affordability is still a concern: the price-to-income ratio, although slightly declining in the first half of 2019, is still above its fundamental value (see Graph 3.1). Graph 3.1:Overvaluation gap in housing Source: European Commission calculations 1.2.Evolution, Prospects and Policy Response Ireland’s public debt-to-GDP ratio is projected to continue declining. It is expected to have fallen to 59.0% of GDP in 2019 and to fall further to 53.9% in 2020. This is contingent on continued robust economic growth and positive primary balances. However, the stock of debt is estimated to remain around its current level in the medium‑term (Section 1). The government intends to use the proceeds from the return of funds set aside for resolving the financial crisis (notably the winding down of the National Asset Management Agency) to further reduce debt. The continuous decline in household debt masks some structural challenges, such as high mortgage arrears. Long-term mortgage arrears remain a major issue for many households, despite the existence of a number of schemes that help resolve those arrears. These deep arrears are particularly persistent and use of some of those schemes has been low. On the other hand, the mortgage measures put in place by the Central Bank of Ireland are helping limit the share of risky mortgages and safeguard the resilience of both households and banks. The completion of the central credit register in mid-2019 will ensure safer lending and a better monitoring of financial stability risks. Ireland’s highly negative NIIP has changed little, but its domestic component is set to reduce further. The NIIP relative to GDP fluctuated around the same level in recent years, shifting from -167% at end-2017 to -165% at end-2018 and -166% in Q2 2019. While its domestic component is projected to contract further on the back of continued current account surpluses, the evolution of volatile corporate external liabilities (in particular of multinational corporations and the International Financial Services Centre), which comprise the largest share, is hard to predict. The links of these corporations to the domestic economy are limited, which in turn limits the domestic exposure. The general government also accounts for a substantial part of the negative NIIP but its share has diminished over time and is expected to continue shrinking. The risks associated with general government’s external liabilities are lessened by the fact that part of them are loans disbursed by official creditors during the economic adjustment programme. These loans have long maturity and low interest rates, thus posing little risk in the short and medium term. Ireland has recently repaid some of these loans in full, notably bilateral loans to Scandinavian lenders. The net external position of the central bank is marginally positive and has gradually improved over recent years. The current account is positive, although very volatile due to the presence of multinationals. It has changed from 0.5% of GDP in 2017 to 10.6% in 2018 and is expected to fall back to 0.8% in 2019. Stripping out the activities of the multinationals, the current account is more stable and increasingly positive. The modified current account surplus rose from 2.3% of GDP in 2017 to 4.0% in 2018. Policies implemented in recent years seem to have been effective in curbing house price growth, but some challenges remain. The government has implemented various measures to support housing supply, which have contributed to increasing annual housing completions by almost 40% in the two years to September 2019 (see Table 3.3). Combined with effective macroprudential tools, this seems to have helped curb house price inflation. However, there is a risk that any slowdown in housing completions could reignite inflationary pressures in the house and rental sector. Housing affordability is a problem for many households and inflation in the rental sector is persistently high (see Section 1). Further addressing capacity constraints in the construction sector and solving administrative deficiencies in the vacant site levy might ultimately help improve housing affordability in the medium-term. (see Box 3.1). Better targeting the Help-to-Buy incentive to lower-income first time buyers might increase its effectiveness while reducing inflationary pressures in the housing sector. (see Table 3.3) 1.3.Overall Assessment Macroeconomic imbalances continue to unwind, but vulnerabilities related to the high stocks of public, private and external debt remain. The stock of public debt remains high, which limits the capacity to respond to negative economic shocks. The reduction of banks’ non-performing loans has continued in 2019, supported by sales and targeted policies. Despite the active deleveraging, the high level of private sector debt suggests continued sustainability risks, notably in the household sector. The high level of net external liabilities, to which domestic sectors have only limited exposure, has hardly changed. By contrast, the net external position of some domestic institutional sectors has improved over the last two years. Overall, risks to the domestic economy continue to abate somewhat. House price growth has moderated and is now below the scoreboard threshold.

Box 3.1: Drivers of house and rental prices House price growth has moderated sharply, despite persistent housing shortages. Annual housing completions in September 2019 (20,249 units) were still 16% below the lower demand estimates. While year-on-year growth in annual completions (19%) was still high, it moderated significantly compared with the same period in 2018 (33%). House price inflation also fell sharply from 13.3% in April 2018 to 1.4% in November 2019, which has improved affordability for house buyers. The slowdown was driven by the decline in house prices at the high end of the market (see Graph 3.2.A), where macroprudential rules ( IV ) have become more binding ( V ). Graph 3.2:Housing prices developments Source: CSO, daft and European Commission calculations Designed to ensure financial stability, macroprudential rules may also have contributed to the slowdown in overall house price growth. Simulations with the European Commission’s QUEST model, calibrated for Ireland, ( VI ) show that setting a 10% tightening of the loan-to-value (LTV) ratio on mortgages granted to credit-constrained households (CCH) could help curb land and house price inflation. Not taking into account potential second round effects from increased financial stability, such as lower mortgage rates, the simulations suggest that stricter LTV limits could also reduce aggregate housing investment and thus the housing stock (see Table 3.1). These results are consistent with findings of other reports (Duffy et al., 2016). Increasing housing construction might help ease inflation in the rental sector. Contrary to the trend of deceleration in overall house prices (see above), rental price inflation for new and renewed tenancies is still high (8.2% in the third quarter of 2019) and seems to be largely driven by the number of properties available for rent. A supply of 12,000 units per quarter, i.e. four times the supply reported in the first quarter of 2019, would be consistent with constant rental prices (see Graph 3.2.B). If the downward trend in house completion growth persisted, it might lead to an increase in rental inflation. Table 3.1:Macroeconomic effects of loan-to-value ratio reduction

Source: European Commission The combination of macroprudential rules with policies boosting land availability could curb both house and rental price inflation. QUEST simulations of jointly applying a 10% tightening of the LTV ratio and a vacant site levy of 10% show that the levy could lead to higher land availability and lower land prices, thereby reducing the costs of housing supply and thus compensating for the potentially contractionary effects of stricter macroprudential measures (see Table 3.2). Table 3.2:Macroeconomic effects of loan-to-value ratio reduction combined with a 10% vacant site levy

Source: European Commission The vacant site levy, due in Ireland since January 2019, might require some refinement to increase its effectiveness. Sites registered as vacant in 2018, were subject to a 3% levy on their market value in January 2019, unless works had been activated in the interim. This levy is set to increase to 7% as of January 2020. In April 2019, 360 vacant sites were registered, 162 of them in Dublin. A number of local authorities reported difficulties in interpreting the law and identifying vacant sites, which might have left out of the register vacant sites with potential for housing development. Around 10% of the sites identified have already come off the register and started construction, which might indicate that the levy has the potential to incentivise housing supply, as suggested by the results of our QUEST model. Table 3.3:MIP Scoreboard (Continued on the next page) Table (continued) Source: European Commission 4. Reform priorities 4.1.Public finances and taxation 4.1.1.FISCAL POLICY* (Government balance AND DEBT DEVELOPMENTS) Public finances continue to improve. The headline government position turned from a deficit of 0.3% in 2017 to a small surplus of 0.1% of GDP in 2018. The general government balance is expected to have increased in 2019 to 0.2% of GDP, based on the Commission 2019 autumn forecast, and is estimated to further improve in 2020.( ) A continued fall in the interest burden has contributed to the deficit reduction. The development in the non‑interest budget balance since 2015 has been weaker, as pointed out by the Irish Fiscal Advisory Council (Irish Fiscal Advisory Council, 2019b). The improvement in Ireland’s fiscal position is partly driven by corporate tax revenue. In 2019, tax receipts performed strongly, exceeding expectations by 2.4%. This was almost entirely due to receipts from corporate taxes, which were 14.9% above expectations at the end of 2019. Expenditure was ahead of Exchequer target by 1.2%, largely driven by the health sector, as it was the case in recent years. Overall, an Exchequer surplus of €647 million was recorded at the end of December 2019, compared with a surplus of €99 million in the same period last year. Uncertainty over the sustainability of the current high level of corporate tax receipts puts public finances at risk. The high level of corporate taxes, volatile and potentially transient in nature, and the dependence on a small number of multinationals represents a risk to public finances (see Section 4.1.3). A preliminary assessment by the Department of Finance indicates that implementation of OECD’s Base Erosion and Profit Shifting initiative could reduce corporation tax receipts by €0.5 billion per annum from 2022.( ) The risks of relying too much on corporate tax receipts are even more evident as windfalls from these taxes have been used in recent years to cover permanent spending overruns in various departments, notably in health. This has repeatedly been criticised by the Irish Fiscal Council (Irish Fiscal Advisory Council, 2019a). Graph 4.1.1:General government debt development Source: European Commission Public debt remains high, which limits the room to respond to negative economic shocks. The debt‑to‑GDP ratio has been declining on the back of strong growth in GDP (Graph 4.1.1). However, Irish GDP remains inflated by the activities of multinationals. Alternative metrics highlight that debt remains high in Ireland. As a proportion of GNI*, which more accurately captures the underlying economic activity by eliminating some of the impact of multinationals, debt stood at 104.3% in 2018 and is expected to have declined to 100.2% in 2019 (Department of Finance, 2019b). Another metric is the interest‑to‑revenue ratio, which shows the burden of public debt in terms of the annual obligations on debt (interest) as a proportion of government revenue. This stood at 6.4% at the end of 2018 compared with pre‑crisis levels of around 3%. Still, the ratio had fallen considerably from its peak of 13% in 2013, partly due to the substantial increase in corporate taxes since 2015, combined with lower interest payments in recent years.( ) Making public finances more resilient may prove useful, given the heightened risks and the currently favourable cyclical position of the economy. Risks to the fiscal outlook remain skewed to the downside, reflecting uncertainty as regards economic outlook, the sustainability of the current level of corporate tax receipts, the ongoing review of the international corporate tax system and over‑spending in particular in the health sector. In view of these risks and the favourable cyclical position, including buoyant corporate tax revenue, the resilience of public finances to adverse shocks could be enhanced by strengthening fiscal buffers. This could be achieved by firming up the rainy day fund and/or reducing public, and debt broadening the tax base. The Department of Finance (DoF) proposed several measures to address fiscal vulnerabilities. These include reducing the exposure to corporate taxes by setting aside the windfall receipts in the rainy day fund and broadening the tax base (Department of Finance, 2019c). Also, it proposed defining a tailor‑made general government balance that excludes corporate tax windfalls, and setting short‑ and medium‑term debt targets as a percentage of GNI*. DoF also proposed to use alternative estimates of potential growth and structural fiscal balance, which would better reflect the underlying developments in the Irish economy, instead of relying on GDP figures that are inflated and volatile. These initiatives are welcome. Furthermore, in December 2019 the Minister for Finance announced a new target for the debt‑to‑GNI* ratio of 60%, including an interim target of 85% by 2025. He also announced a target for the budgetary surplus of 1% of GDP by 2021 (1.7% of GNI*). Both targets are contingent on continued economic growth. Government financing has benefitted from the low interest rate environment and supportive bond market conditions. In conjunction with strong economic growth and fiscal performance, ECB measures (in particular the non-standard asset purchase programmes) have compressed sovereign borrowing costs and, in turn, debt servicing costs. The 10-year bond yield for Ireland remains low by historical standards at around 0.003% in December 2019. Consequently, total interest payments by the general government have continued to decrease as a share of GDP. Around 70% of the total sovereign debt is at fixed rates, which limits the risk from interest rate shocks and, in turn, increases the sustainability of public debt. The effective interest rates have also declined over recent years but remain above the euro area average (DoF, 2019) The maturity profile of the debt remains comfortable. The low interest rate environment also appears to have had an impact on the extension of the sovereign debt maturity profile (Larkin et al, 2019). At the end of 2019, the stock of public debt amounted to €206.7 billion, with a weighted average maturity of around 10 years. Some 25% of long-term marketable and official debt represented official loans from the EU‑supported financial assistance programme. Redemptions of loans from the European Financial Stability Facility (EFSF) and European Financial Stabilisation Mechanism (EFSM) currently extend until 2042. For EFSF, there are no maturities until 2029 and for the EFSM until 2027. The maturity of EFSM loans can be extended within the limit of 19.5 years of average original maturity established by the Council Decision on Union financial assistance to Ireland. €3.9 billion originally due in 2018 has already been extended ( ). The revised maturity dates of other individual EFSM loans will be determined as they approach their original maturity dates. This decision and the ensuing operations entail financial benefits for Ireland, linked to the EU’s favourable funding conditions. Debt sustainability analysis In the short term, no significant risks of fiscal stress are projected for Ireland. The value of the S0 indicator,( ) the Commission’s early-detection indicator of fiscal stress, is below its critical threshold, for both the fiscal and financial competitiveness sub-indices (see Annex B and European Commission, 2020a). Financial market perceptions of sovereign risk remain favourable, as is reflected in low sovereign bond yields and credit default swap spreads

Debt sustainability risks are anticipated in the medium term. In principle, Ireland also faces low fiscal sustainability risks in the medium term, as measured by both the debt sustainability analysis and the S1 indicator( ). This reflects a relatively strong initial budgetary position and a debt ratio already below 60% of GDP in 2019 (Annex B). However, when debt metrics are measured relative to gross national income (GNI) (which can be considered as a more accurate measure of repayment capacity for Ireland), most of the distribution of the debt burden lies close to the 60% threshold over the projection period (European Commission, 2020a). The Irish GNI is also inflated by the activities of multinationals, as is the case for the GDP, though to a lesser extent. Therefore, the analysis based on the GNI still underestimates vulnerabilities in the Irish context. Analysis by the Irish Department of Finance which uses the GNI* as a metric, points to high risks in the medium term (DoF, 2019a). Furthermore, combined adverse shocks to real GDP growth — of a magnitude reflecting Ireland’s historical variability of output — would increase the public debt to GDP ratio by 17.7 pps by 2030 compared to the baseline scenario.( ) The Central Bank of Ireland estimates that in the event of a significant loss of corporation taxes, combined with a slowdown in the international economy, the debt-to-GDP ratio could increase by between 10 and 20 pps. above central projections, by 2025 (Conefrey. et al., 2019). Debt sustainability risks are anticipated as medium in the long term. The long-term sustainability gap indicator, S2, indicates that a structural primary effort of 2.9% of GDP would be needed to stabilise the debt-to-GDP ratio over the long term. This reflects the projected budgetary impact of an ageing population, which, in the long term, more than offsets the favourable initial budgetary position. Spending on pensions and long-term care both contribute by 1.6% of GDP to the long-term sustainability gap, and expenditure on healthcare by 0.8% of GDP (see Section 4.3.4. for a more detailed discussion on the cost‑effectiveness of the healthcare and long-term care system). In 2018 the Irish authorities published the ‘Roadmap for Pension Reform 2018‑23’ with the aim of improving the long‑term sustainability of the state pension system. It builds on the 2014 reform that brought the state pension eligibility age to 68 by 2028. The implementation of the Roadmap is ongoing but has incurred some delays. The Roadmap targeted implementation of the total contributions approach from the third quarter of 2020, subject to the necessary legislation being enacted and supporting structures being in place 4.1.2.Fiscal framework, spending reviews and green budgeting Consecutive spending overruns highlight challenges in controlling public expenditure. In recent years, there has been a tendency for spending to accelerate towards the end of the year, contributing to limited compliance with EU fiscal rules. The 2020 Budget prudently already incorporates some expected overruns in 2019, in particular related to healthcare expenditure. It also includes additional funds for the Christmas bonus. Furthermore, the Irish Fiscal Advisory Council highlighted that some other areas are facing expenditure slippages, including the local government and housing bodies( ). Enhancing current expenditure planning and control, and ensuring its growth is sustainable remains highly important for increasing the resilience of public finances. A broad public spending review could improve budget execution. In 2017, Ireland has embarked on a comprehensive three-year spending review process, designed to assess the efficiency and effectiveness of government spending. In total, 80 analytical papers have been produced so far. In 2019, key themes were those related to the developing multi‑year sectoral expenditure analysis and aligning the spending review with the public spending code. Yet, the extent to which these spending reviews could improve budget planning and administration or major investment projects remains unclear. In 2020, the Department of Public Expenditure and Reform plans to examine the degree to which the process has achieved its objectives and ways to improve it. Ireland is one of the few countries in the EU to have started green budgeting practices. Ireland introduced a green budgeting exercise for the 2019 budget, which implied identifying and ‘tagging’ all climate-related expenditure. The authorities draw on the definition developed for the Irish sovereign green bonds: ‘any expenditure which promotes, in whole or in part and whether directly or indirectly, Ireland’s transition to a low carbon, climate‑resilient and environmentally sustainable economy’. For the first year of the exercise, the authorities adopted a conservative approach and included only those expenditures that directly contributed to greenhouse gas emissions reduction, including funding for energy efficiency (Cremins and Kevany, 2018). The 2019 Revised Estimates Report details the climate expenditure, grouped by departments and specific programmes (Department of Public Expenditure and Reform, 2018a). Linked to the green budgeting, in May 2019, the Central Statistical Office published estimates of environmentally harmful subsidies for the 2012‑16 period, distinguishing between direct support and tax expenditure. These estimates point to about €4 billion (1.5% of GDP) in potentially environmentally damaging subsidies in 2016, down from €4.2 billion in 2015 (Central Statistics Office, 2019a; Central Statistics Office, 2019b). The shadow cost of carbon is better reflected in cost-benefit analyses of public investments. The Public Spending Code was reformed in 2019 in order to better integrate climate impacts in investment decisions. A shadow price of carbon has been set on an annual basis for emissions originating from Emission Trading System (ETS) and non-ETS sectors, with prices rising from €32/tonne in 2020 to €100/tonne in 2030 and €265/tonne in 2050 in the latter (Department of Public Expenditure and Reform, 2019b). These values represent Ireland’s estimated marginal abatement cost at the level required to reach the binding mitigation targets. For emissions originating from ETS sectors, the shadow price is based on market projections of the price of ETS allowances and the values of the EU Reference Scenario. The reform of the code and the adoption of carbon prices in line with the binding targets and estimated marginal abatement costs could help to align public investment decisions in all sectors with climate policy objectives, regardless of whether they are directly related to climate or not. 4.1.3.Taxation Reliance on corporate tax revenue from multinationals is increasing. Corporate tax receipts remain heavily concentrated, with the top 10 multinationals operating in Ireland accounting for around 45% of total corporate tax revenue and 8.5% of the total tax revenue in 2018. The share of corporate tax receipts in total tax revenue reached 17.2% in 2018, the highest level since 2003. This is an increase by 7.2 pps. since 2014, before the 2015 spike in GDP growth. Reliance on these revenues, which are volatile and potentially transient in nature poses risks to the sustainability of public finances (Section 4.1.1). Recent revenue measures are not meaningfully contributing to broadening the tax base. The main revenue raising measures in the 2020 Budget included increases in the carbon tax and stamp duty on non‑residential property, as well as specific anti‑tax-avoidance measures. Other measures go in the opposite direction. These include increases in certain tax credits, an extension of the Help-to-Buy scheme and the capital acquisition tax. Furthermore, the revaluation of the local property tax was deferred by one year, to November 2020. The favourable cyclical position of the economy provides an opportunity to broaden the tax base and to choose a tax mix that is more conducive to growth. The economic evidence suggests that Ireland’s tax rules are used by companies that engage in aggressive tax planning( ). Eurostat data suggest that outgoing royalty payments from Ireland in 2018 were high, representing 22% of its GDP and that 45% of these were paid to offshore financial centres (OFC)( ), as illustrated in the graph below. For net dividend payments, the share going to OFCs was 71% in 2017( ). The current limited application of withholding tax on royalty and dividend payments going out of Ireland – which may lead to those payments being taxed at a very low rate or escaping tax altogether if they are channelled to a low or no tax jurisdiction – has been flagged as a key element facilitating aggressive tax planning through Ireland. The possibility to offset capital allowances for intangible assets against 100% of the income arising from the use of those intangibles purchased or developed between 2015 and October 2017 is still effective, as explained in the 2019 country report. Ireland is acting to curb aggressive tax planning through the implementation of European and internationally agreed initiatives, as well as unilateral measures. The Irish government has introduced legislative measures implementing the second Anti-Tax Avoidance Directive (ATAD 2), which should neutralise certain hybrid mismatch arrangements that would otherwise result in double non-taxation,( ) and the sixth amendment of the Directive on Administrative Cooperation (DAC 6), which provides for new transparency rules for intermediaries involved in tax planning. Ireland has also ratified the OECD Multilateral Instrument (MLI) to prevent base erosion and profit shifting, which entered into force on 1 May 2019. However, like most countries, Ireland entered a number of reservations to the MLI and the application of its provisions will depend on the choices made by the relevant treaty partners. Ireland has also made changes to its transfer-pricing rules, to take account of the 2017 OECD guidelines and extend their scope, as recommended in the Coffey Review (Department of Finance, 2017). In particular, it has extended transfer-pricing rules to cover non-trading transactions. It has also legislated to extend transfer-pricing rules to SMEs (with reduced documentation requirements), subject to a Ministerial commencement order. In addition, Ireland has made changes to the legislation governing Irish real estate funds (IREFs), to counter aggressive tax planning practices identified by the revenue services, and to the real estate investment trust (REIT) regime and to the taxation of securitisation vehicles, to strengthen anti-abuse measures. The effectiveness of these new measures in limiting the scope for aggressive tax planning and their impact on corporate income tax revenue in the medium term will need to be assessed. Graph 4.1.2:Total outgoing royalty payments from EU Member States and share going to offshore financial centers**, average values 2013-2017 Source: Eurostat The carbon tax was increased by €6 per tonne and should reach €80 per tonne by 2030, though the precise trajectory towards that level remains uncertain. The Climate Change Advisory Council had advised the government to increase the carbon tax( ) to €35/tonne, in part to make up for the decision not to raise it in the 2019 Budget (Department of Finance 2019d). Instead, the 2020 Budget includes an increase to €26/tonne, from €20/tonne, with deferred application to non‑automotive fuels until after the winter heating season. The proceeds from this measure, expected to be €130 million in a full year, are to be ring‑fenced for climate action measures and to protect the vulnerable (Department of Public Expenditure and Reform, 2019a) (see Section 4.5.2). (see Section 4.5.2). It is the intention of the government to linearly increase the tax by €6 per year and bring it up to €80/tonne by 2030 (Department of Finance, 2019e; Department of Communications, Climate Action and the Environment, 2019a). However, the authorities did not take a legally binding approach to the trajectory and indicated that flexibility should be preserved to adapt to future circumstances. Although there is broad political consensus about the need for future increases in the carbon tax, this means that investors still face a fair degree of uncertainty regarding the carbon price trajectory. While the share of environmental taxes in total taxes is above the EU average (6.9% in Ireland versus 6.1% in the EU, in 2018), the potential of environmental taxation to support environmental objectives has not yet been fully exploited. In 2018, revenue from environmental taxes as a percentage of GDP (1.6%) appears to be below the EU average (2.4%), but this is due to the inflated level of GDP in Ireland. The share of environmental taxes was at 2.6% of GNI* in 2018. The Climate Action Plan includes provision for a rolling strategy of reviews across all environmental tax heads. However, there is little detail so far on how this will be implemented. Specific changes to environmental taxes in the 2020 Budget include the replacement of the 1% diesel surcharge, introduced in 2019, by a nitrogen oxide emissions‑based surcharge, the equalisation of electricity tax rates for business and non-business, and the increase in the carbon tax, as mentioned above. 4.2. Financial sector

Table 4.2.1:Financial soundness indicators, all domestic and foreign banks in Ireland Source: ECB Consolidated Banking Data 4.2.1.Banking sector Although capital levels of Irish banks are healthy, profitability is coming under increasing pressure. Profits have been declining since end-2018, with return-on-equity (RoE) dropping to 4.5% as at June 2019, down from 6.9% a year before, (Table 4.2.1). Reduced profitability has been the result of a combination of factors, including a compressed net interest income margin, driven largely by lower yields on debt securities, higher operating costs, the maintenance of legacy assets, and, for some banks, additional provisions required following the Central Bank of Ireland’s (CBI) Tracker Mortgage Examination. All major banks are implementing cost-cutting initiatives, including digitalisation investments and staff reductions, to counteract these trends. The aggregate Common Equity Tier 1 (CET1) capital position of all Irish banks was 21.8% in June 2019, down from 23.0% a year ago but significantly above the euro area average of 14.8%. However, foreign-owned subsidiaries, which are less retail-oriented than the largest Irish banks, were responsible for most of this excess capital position ( ). External uncertainties persist and continue to undermine the market performance of Irish banks. Much like the rest of the Irish economy, domestic banks remain susceptible to external spillovers, most notably related to the UK's decision to leave the EU. These sources of uncertainty have driven the stock prices of the Irish banks down, especially in the third quarter of 2019, trading well below the euro-area financial indices. Credit growth is subdued overall. Loans to households increased by 2% on a year-on-year basis as at August 2019, driven by both housing and consumption loans. Loans for primary dwelling houses (PDH) continued to expand. This increase was driven by fixed-rate mortgages, even though flexible rate mortgages still account for 66% of PDH mortgages. Total credit to domestic non-financial companies (NFCs), however, continued to contract, underlining the weak demand for credit and investments. Over the past year, Irish banks have made significant progress in reducing non-performing loans (NPLs). According to ECB consolidated banking data covering both domestic banks and foreign subsidiaries, the NPL ratio for the banking sector was 4.2% of gross loans as at June 2019, down from 8.5% a year earlier (Table 4.2.1) ( ) . This reduction was possible due to sizeable portfolio sales by the three largest Irish banks in 2018 and early 2019. A significant proportion of the NPL stock continues to be comprised of residential mortgages. Long-term mortgage arrears in the banking sector continue to represent a significant proportion of the NPLs. Loan disposals and securitisations during late 2018 have reduced the stock of long-term arrears, i.e. loans that are more than 720 days past-due (Graph 4.2.1). Nevertheless, these loans continue to represent approximately two-thirds of all loans that are more than 90 days past-due. This portion of the NPL stock is likely to be the most challenging for banks to resolve. The Mortgage-to-Rent scheme ( ), which targets long-term arrears, could play an important role in addressing this challenge. Although the scheme is attracting an increasing number of applications, approvals remain low, around 15% as of September 2019. Moreover, a significant number of applications are either terminated or deemed ineligible while there is evidence of increased delays in the entire process. It remains to be seen if these challenges will be overcome by the recent renewed efforts. Graph 4.2.1:Residential mortgage arrears in the banking sector Source: Central Bank of Ireland (CBI) Aggregate provisioning has dropped to historical lows. Following a prolonged period of decline, the coverage ratio for the banking sector (ECB figures) was 27.4% as at June 2019, down from 32.1% a year earlier. This ratio is much lower than the euro area average of 47.7%. Further analysis shows that the coverage ratios remain low for some of the Irish banks, even after controlling for improving macroeconomic conditions (e.g. rising property prices) and the composition of the NPL portfolio (e.g. higher share of collateralised loans which carries lower provisioning) (European Commission, 2019b, pp. 14-16). A number of initiatives have been proposed over the past years to address the social and economic impact of the non-performing loans workout process. The initiatives expose to a different extent the interests of homeowners and lenders. Some of them, like the Mortgage-to-Rent or the Abhaile ( ) schemes, aim to provide help and restructuring packages to vulnerable homeowners. Others may have unintended consequences by affecting creditors’ rights. Most recently, the Land and Conveyancing Law Reform Act 2019, which entered into force in August 2019, sets out the considerations the courts must take into account when a lender is seeking an order for the repossession of lands. Another recent initiative, the so-called “No consent, no sale” bill that was proposed in January 2019, could adversely affect the process of loan disposals. The Bill passed second stage in Dáil Éireann in January 2019. The Central Bank of Ireland continues to make active use of its macro-prudential policy toolkit. The Central Bank of Ireland (CBI) has decided on 1 October 2019 to maintain the countercyclical capital buffer (CCyB) rate at 1%. The CCyB has been implemented in July 2019 with the objective of increasing the resilience of the financial system. As a part of the macro-prudential policy framework for the real estate sector, the CBI introduced in 2015 mortgages measures, i.e. limits on loan-to-value (LTV) and loan-to-income (LTI) ratios, to increase the resilience of the banking and household sectors to financial shocks ( ). In its latest revision in the fourth quarter of 2019, the CBI decided not to change any of the parameters of the two measures. A recent assessment by the European Systemic Risk Board (ESRB) has concluded that the macro-prudential measures implemented by the Central Bank of Ireland are sufficient to address the identified vulnerabilities in the residential real estate sector (ESRB, 2019). The authorities have also recently announced their willingness to give CBI the power to activate a systemic risk buffer (SyRB). 4.2.2.Non-banking sector The insurance sector continues to face risks related to the UK’s decision to leave the EU. Nearly one-third of the gross premium incomes of Irish insurers and re-insurers are from the UK. The authorities have enacted temporary permissions regimes to provide additional time to insurers to complete the implementation of their restructuring plans to prepare for the UK’s withdrawal from the EU. Beyond these, the Irish insurers and their UK-based head entities are also highly exposed to the UK market through their investment portfolios. This exposes them to significant exchange rate and market risk in case of market valuation fluctuations. Ireland’s large and growing non-bank financial sector deserves close attention. Total assets managed by the investment funds have increased substantially over the past years, reaching €2.7 trillion in June 2019, up from €375 billion ten years ago. According to the latest data available for end-2017, 72% value of the outstanding fund shares and units were issued in other Member States, with the UK issuance representing nearly 40%. Shares and units issued in Ireland represented only 8% of the total assets. These figures clearly highlight the outward orientation of the Irish investment fund sector. While this may limit some of the direct exposure and potential spillovers of risks to the domestic economy, the sheer size and growing interconnectedness in the sector exposes Ireland to global shocks. At the same time, there is evidence that funds are increasingly holding assets with higher risk and lower liquidity under management, which may amplify the generation and propagation of shocks (European Central Bank, 2018a). The CBI aims to enhance its risk monitoring and assessments, which are crucial for timely identification of risks. 4.2.3.Anti-money laundering Ireland has strengthened its anti-money laundering framework, but more remains to be done. In its 2019 follow-up of the 2017 Mutual Evaluation Report (MER), the Financial Action task force (FATF) has upgraded Ireland’s compliance rating on 11 of its 40 recommendations. While this points to a good overall progress in addressing the deficiencies identified in the 2017 MER, a number of weaknesses remain. This is particularly relevant, as Ireland faces some inherent money laundering risks associated to its internationally-oriented economy, the significant volume of foreign direct investment, as well as the presence of special purpose entities, often set up on behalf of non-domestic sponsors(), letterbox companies and shell companies. The new register of beneficial ownership should significantly improve the available information on ownership of special purpose entities, letterbox companies and shellbox companies. In line with the anti-money laundering (AML) Directive, the register was opened in July 2019. Once all the required information has been duly submitted, the register will contribute to mitigating secrecy and reduce the possibility of money laundering. At the end of December 2019, 75% of companies registered in Ireland had done so. The 2017 national risk assessment considers the money laundering risk posed by companies and legal structures as moderate, but this is under revision. Following a 2017 recommendation by the FATF, Ireland is working on a sector-specific risk assessment to complement its existing national risk assessment. Trusts or company service providers are regarded as having a medium to high risk level, mainly due to potential exposure to high-risk jurisdictions and customers, and challenges with customer due diligence (lack of face-to-face contact, lack of transparency on beneficial ownership of shares). The same risk applies to professionals (e.g. auditors, solicitors) servicing companies and trust, yet statistics are not always available to identify professionals providing such services, which hampers the risk-based supervision of activities in the sector.

The incomplete understanding of risk exposure to money laundering by professionals engaged in the provision of services to companies and trusts might hamper their role as gatekeepers. Professionals engaged in the provision of services to trusts and companies are often the first line of defence against money laundering risk, as they are involved in the first stages of company creation. Supervisory inspections by the Department of Justice highlighted deficiencies in compliance with AML obligations. Suspicious transaction reporting by professionals engaged in the provision of services to trusts and companies is low compared to the risk level ( ), which was also stressed by the FATF. This limits the information available to the Financial Intelligence Unit to identify suspicions of money laundering and to disseminate this information to law enforcement and other competent authorities. To improve the understanding of risk among these professionals, Irish competent authorities have issued guidance and organised trainings, including with regard to special purpose entities, letterbox and shell companies. Strengthening supervision and guidance will be key to ensure that the level of customer due diligence applied is commensurate to the risk. Given the significant presence of complex legal structures and foreign ownership, the efficient functioning of the beneficial ownership registers would be critical. 4.2.4.Private indebtedness* Private debt as a share of GDP is high but declining. In 2018, it stood at 223.2% of GDP, almost four times the size of government debt and well above the EU average (137.5%) and the MIP threshold (133%). However, it declined for a third consecutive year and is again approaching its pre-crisis level ( ). This recent decline reflects a combination of particularly strong GDP growth and active deleveraging in both the household and the corporate sectors. The bulk of the stock of private debt is held by non-financial corporations (181.5% of GDP), with households accounting for the remainder (41.7%). The assessment of the risks associated to these high debt levels, however needs to take account of the implications of the strong presence of multinational companies in Ireland, which affects the interpretation of measures of both corporate debt and GDP (Department of Finance, 2019f). Removing the debt of foreign-controlled corporates from the private sector debt stock would bring the latter below the formal MIP threshold that is expressed as a percentage of GDP (see graph 4.2.2). Graph 4.2.2:Private indebtedness Source: CSO While corporate debt is high overall, the exposure of the domestic economy and financial system to it is more limited. Headline indicators of non-financial corporation debt relative to GDP point to high debt burden that would call for further corporate deleveraging. Analysis of the ultimate ownership of firms domiciled in Ireland however shows that about two thirds of corporate debt was concentrated in foreign controlled firms (see graph 4.2.2). Corporate debt of domestically controlled firms was equivalent to 61.7% of GDP or 101.3% of modified gross national income ( ) in 2018 after declining in absolute terms. A breakdown of NFC debt by location of the counterparty reveals that Irish counterparts held about 22%, while 64% was held abroad, including in the form of intra-group loans. The remainder of the debt (14%) is concentrated in so-called redomiciled companies, i.e. firms that have located their headquarters in Ireland without substantial real activity (see graph 4.2.3). Overall, the links between those corporates that account for the high debt and the Irish financial system are thus weaker than headline figures would suggest, implying the impact of possible shocks to the corporate sector would be mitigated as a result. Graph 4.2.3:Breakdown of NFC debt by location of counterparty, 2018 Source: CSO The stock of household debt has declined to 41.7% of GDP in 2018, almost a third of the 2009 ratio (116%) but remains a source of vulnerability. This decline reflects active deleveraging in all years since 2009, combined with high GDP growth. Household debt is largely composed of mortgage loans (83% at the end 2018), which are secured on a property and imply a lower interest burden (Department of Finance, Analysis of Private Sector Debt in Ireland, March 2019). While the stock of household debt in proportion to GDP in Ireland is below the EU average (60.8%), the use of GDP as a benchmark is of limited informational value in an Irish context (see section 1.1). Indeed, in proportion to modified gross national income, household debt was significantly higher at 68.4% in 2018, albeit after steadily declining from 146% in 2009. Furthermore, when expressed in per capita terms or relative to disposable income, the debt of Irish households also appears high in an EU comparison. Overall, and despite the strong deleveraging, the household debt stock remains a source of vulnerability in the event of adverse shocks. The continuous and substantial decline in household debt over recent years masks some structural challenges, such as high mortgage arrears. While the share of Irish borrowers with longer-term fixed rates is low in an international comparison, there has nonetheless been an increase in the share of mortgages with longer fixation periods, i.e. five years or more (Central Bank of Ireland, 2019a). Overall, this will increase households’ resilience against adverse interest rate shocks. While banks have made significant progress in reducing their NPL-ratios (see above), long-term mortgage arrears remain an important issue for many borrowers, despite the existing schemes to reduce mortgage arrears. These deep arrears have been particularly persistent and the utilisation of personal insolvency for borrowers is relatively low. 4.2.5.SME access to finance The cost of credit, especially for small and medium enterprises (SMEs), remains a concern for the competitiveness of Irish firms. For smaller new loans to non-financial corporations (< €1 million), which are mostly destined to SMEs, the Irish interest rates are the highest in the euro area, (Graph 4.2.4). Interest rates for loans to companies in certain sectors are particularly high, including transport and storage, Information and Communication Technology, and construction sectors, (Central Bank of Ireland, 2019b). Weak competition in the market for SME loans, which is currently dominated by only two credit institutions, is one of the main reasons for the high interest rates. Graph 4.2.4:Comparison of new business loan interest rates (< €1 million) Source: ECB Loan application rates, as well as loan rejections, are declining significantly. According to data from the Survey on the Access to Finance of Enterprises (SAFE), the share of firms that applied for loans has declined from 32% in early 2010 to 19% in 2019, which remains consistently lower than sample averages for euro area countries. Although applications have dropped, the share of Irish firms that have either a rejected application, refused offer, or those that did not apply due to expected rejection has also declined to levels comparable with other euro area countries, (Graph 4.2.5). In particular, loan rejections were 10% in 2019, down from a peak of 28% in 2014. Put together, these results suggest a mixed picture, with access to finance being an issue for smaller firms. According to SAFE survey results, working capital remains the most common reason for credit applications among micro and small firms. This implies that high interest rates are likely to be deter