EUROPEAN COMMISSION Brussels, 27.2.2019 SWD(2019) 1006 final COMMISSION STAFF WORKING DOCUMENT Country Report Ireland 2019









Including an In-Depth Review on the prevention and correction of macroeconomic imbalances Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2019 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(2019) 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 Annex A: Overview table Annex B: Commission Debt Sustainability Analysis and fiscal risks Annex C: Standard tables Annex D: Investment guidance on cohesion policy funding 2021-2027 for Ireland References LIST OF Tables Table 1.1:Key economic and financial indicators - Ireland Table 2.1:Annual assessment of the 2018 CSRs

Table 3.1:MIP assessment matrix (*) — Ireland 2018 Table 4.2.1:Financial soundness indicators for domestic and foreign banks 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: Domestic demand and contributions Graph 1.2: Gross value added and contributions Graph 1.3: Regional Convergence in Ireland Graph 1.4: Unemployment rate and labour market participation rate Graph 1.5: Cumulated gap between actual and predicted wage growth, EU28, 2010-2017, percentage points Graph 1.6: Core investment and contributions Graph 2.1: Ireland - Level of implementation today of 2014-2018 CSRs Graph 3.1: Overvaluation gap with respect to price/income, price/rent and fundamental model valuation gaps Graph 4.1.1: Government debt projections, % of gross national income Graph 4.2.1: Access to finance by SMEs — Have you applied for credit?

Graph 4.2.2: Access to finance by SMEs — If applied, what was outcome Graph 4.2.3: Non-performing loans reduction by portfolio Graph 4.2.4: Private indebtedness Graph 4.2.5: Household debt and estimated benchmark Graph 4.3.1: Change in employment by sector Graph 4.3.2: Relative dispersion of employment rates by education level, 2010, 2014 and 2017 Graph 4.3.3: Activity rate by gender and age, 2017 Graph 4.3.4: Main social indicators Graph 4.3.5: Homelessness statistics per region, July 2018 Graph 4.4.1: Current account balance by sectors Graph 4.4.2: Headline trade balance vs. underlying trade balance Graph 4.4.3: Cumulative Labour Productivity Growth 2010-2017 Graph 4.4.4: Trend productivity growth has slowed Index 2000= 100 Graph 4.4.5: Training expenditure domestic firms and multinationals in Ireland. Manufacturing and Services 2000-2016 Graph 4.4.6: Net Capital Stock held at the end of the year by asset type Graph 4.4.7: non-ETS emissions and estimated annual allocations under the ESD and ESR. LIST OF Boxes Box 1.1: Labour force participation rate Box 2.1: EU funds and programmes contribute to addressing structural challenges and to fostering growth and competitiveness in Ireland.

Box 3.1: Net international investment position - additional instruments Box 4.3.1: Monitoring performance in light of the European Pillar of Social Rights Box 4.4.1: Investment challenges and reforms in Ireland Executive summary The sustained strong economic growth in Ireland allows for a further increase in the resilience of the public and domestic private sectors while addressing investment challenges ( ). Further reducing government deficit and debt could increase the economy’s capacity to adjust to external shocks. Moreover, not basing spending on potentially volatile revenue and addressing over-spending in health could ensure the long-term sustainability of public finances. Improvements in the balance sheets of households and banks reflect progress in resolving non-performing loans. Addressing investment challenges and ensuring that growth is broad-based and socially and environmentally sustainable remain key policy challenges. Economic growth remains robust and is expected to moderate. Real GDP grew by 7.5 % year-on-year in the first three quarters of 2018, well above the euro area average, but inflated by multinational companies. Real GDP is estimated to have grown by 6.8 % in 2018 and forecast to moderate to 4.1 % in 2019 and 3.7 % in 2020. The economic outlook continues to be clouded by heightened uncertainty, relating to the terms of the UK’s withdrawal from the EU and to changes to the international taxation and trade environment as well as to possible domestic overheating. Given the uncertainty over the terms of the UK’s future relations with the EU, this report does not speculate on the possible economic implications of different scenarios. Given the ongoing ratification process of the Withdrawal Agreement in the EU and the UK, projections for 2019 and 2020 are based on a purely technical assumption of status quo in terms of trading relations between the EU27 and the UK. This is for forecasting purposes only and has no bearing on the talks underway in the context of the Article 50 process. Although the economy continues to strengthen, improvements in the budget balance are stalling. The deficit is expected to remain broadly stable in the near future. Risks to the budgetary projections are mainly overall economic uncertainties, the volatility of some sources of government revenue (notably corporate income taxes) and over-spending (notably within the health sector). The public debt situation is improving. Employment continues to perform strongly. The unemployment rate is approaching pre-crisis levels and wage growth is accelerating. Skills and labour shortages are increasingly apparent. Shortages of information and communication technology professionals remain challenges. The relatively low rate of activity, notably for women, shows under-used human capital and the importance of developing adequate policies on work-life balance and childcare. Major reforms were passed to facilitate work-life balance and childcare access, but these will take time to translate into more women working or looking for a job. The employment rate of people with disabilities continues to be one of the lowest in the EU. Regional differences in skilled labour, competitiveness and productivity are sizeable. This is mostly due to the concentration of multinationals in Dublin that employ large numbers of highly-skilled employees by offering higher salaries. The resulting lack of qualified employees and skilled managers in small and medium-sized enterprises reduces their innovation capacity and competitiveness. The lack of access to ultrafast broadband in more than 95 % of rural areas further aggravates this problem. Prioritising both public and private investment in infrastructure, decarbonisation, housing, innovation, skills and social inclusion is essential for sustainable and long-term inclusive growth. Investment in research and development, skills and digitalisation is needed to address the lagging productivity of domestic firms and reduce the increasing reliance on multinationals. Sustainable growth will also require an investment push in clean energy, transport, water, broadband and housing as well as to decarbonise sectors with high emissions. The resilience of the economy to international economic shocks could also be increased by diversifying maritime transport and energy connections with Europe. Other key issues are improving access to employment for all jobseekers, including by providing affordable childcare, as well as investing in social housing to address rising homelessness. Annex D identifies key priorities for support by the European Regional Development Fund and the European Social Fund over 2021-2027, building on the analysis of investment needs and challenges outlined in this report. Ireland has set out policies to address these investment challenges, but their implementing them depends on several factors. The National Planning Framework and the National Development Plan 20182027 address the challenges outlined above, but their successful implementation depends on factors such as the administrative capacity and coordination of the departments involved, the removal of capacity constraints, especially in the construction sector, and market barriers, particularly for legal and judiciary services. The announced Future Jobs Programme could help small and medium-sized enterprises invest more in research and development and encourage them to take up new technologies. It could also support small and medium-sized enterprises in diversifying exports, integrating themselves in global value added chains and increasing workers’ skills. Overall, Ireland has made some progress ( ) in addressing the 2018 country-specific recommendations. There has been substantial progress in the following areas: ·Reducing long-term arrears, helped by restructuring activities and portfolio sales. There has been some progress in the following areas: ·Decreasing tax expenditure and broadening the tax base, with the measure with the biggest positive impact being an increase in the lower value-added-tax rate on tourism activities. However, some 2019 budget measures actually go in the other direction. ·Implementing the National Development Plan, where a robust monitoring system, adequately resourced departments and a sound system for selecting projects remain essential for its timely and effective delivery. ·Upskilling the adult working-age population, with a focus on digital skills. There has been limited progress in the following areas:

·Addressing the expected increase in age-related expenditure where despite some measures to increase the costeffectiveness of healthcare, expenditure has continued to increase rapidly. ·Enhancing the productivity of domestic firms by stimulating research and innovation and promoting cooperation between foreign companies, local firms and public research centres. Regarding progress towards its national targets under the Europe 2020 strategy, Ireland is performing well on employment, early school leaving and tertiary education targets and the effectiveness of social assistance in reducing poverty. It needs to do more to invest in research and development, reduce greenhouse gas emissions, increase the proportion of renewable energy, improve energy efficiency and reach its national target on reducing poverty. Ireland fares relatively well on most indicators of the Social Scoreboard supporting the European Pillar of Social Rights, although challenges remain. The effectiveness of the Irish tax and benefits system in reducing poverty and inequalities remains high. The labour market has recovered well from a very sharp economic downturn a decade ago on the back of successful employment policy choices. Real disposable income per person continues to grow but remains slightly below its 2008 level. While Ireland performs well in many education- and social-related indicators, the low percentage of the workforce with basic digital skills reflects the insufficient integration of digital skills in the education and training system. Finally, housing remains a very pressing issue, given increasing homelessness due to shortages of social housing. The main findings of the in-depth review contained in this report and the related policy challenges are as follows: ·Private debt levels continue to fall, improving the resilience of households and businesses. A large part of the stock of private debt is attributed to multinational corporations. Debt of Irish companies, including debt of redomiciled public limited companies, and households, relative to GDP, fell below the indicative macroeconomic imbalance procedure threshold in 2017. However, relative to modified gross national income, domestic debt remains relatively high. Hence, total private debt levels continue to overstate this imbalance. Rising housing prices increased households’ net worth and reduced the number of those in negative equity. ·Domestic banks have reduced non-performing loans, and have remained profitable and well-capitalised. Non-performing loan ratios are down to singledigit levels and banks are well on track to meet their reduction targets, supported by portfolio sales and rising property prices. Long-term mortgage arrears (over two years past due) remain relatively high, helping to keep the non-performing loan ratio above the euro area average. Banks remain well-capitalised and high lending rates continue to support profitability. There are policy measures for vulnerable households. Take-up rates of these schemes are mixed. Insolvency procedures and the use of in- and out-of-court options for arrears resolution remain limited. Applications for the enhanced mortgage-to-rent scheme are picking up. The credit register became fully functional for consumer loans in 2018 and will be crucial for assessing whether borrowers are capable of servicing their debts. ·The public debt ratio has come down, but remains high. The ratio of public debt to GDP fell to 68.4 % in 2017. However, a range of alternative metrics shows that public debt remains high by EU and historical standards, exposing Ireland to economic shocks. ·Ireland’s net international investment position keeps improving. Its highly negative net international investment position is bloated by some large multinational companies located in Ireland and the markedly negative net position of the International Finance Service Centre, although there is strong evidence that neither constitute vulnerabilities in domestic sectors. The international position of the domestic sectors has been improving over the past two years, and is expected to continue so in the near-term on the back of current account surpluses and robust economic growth. Overall, the level of the domestically relevant external position is hard to gauge although vulnerabilities are abating. Some of the activities of large multinationals were also responsible for the recent swings in the current account. Excluding these effects, the current account is less volatile and remains positive, implying that Ireland maintains a strong competitiveness position overall. ·The government has implemented a broad range of measures to tackle the undersupply of housing, but results will take time. Housing supply is rapidly recovering from very low levels but is still falling short of demand. As a result, house price inflation remains high, even if it has recently moderated. The system of rules intended to protect the stability of the financial system, known as the 'macro-prudential framework', remains crucial to ensure that new credit is extended under prudent conditions, preventing credit bubbles. Other key structural issues analysed in this report, which point to particular challenges for Ireland’s economy, are the following: ·Tax revenue continues to increase but the volatility of corporate tax remains a concern. The high proportion of corporate tax in total taxation and the dependence on a small number of taxpayers are a concern from a fiscal stability perspective. ·Ireland’s tax rules appear to be used by multinationals engaged in aggressive tax planning structures, but some steps are being taken to limit such practices. Some elements that may facilitate tax planning include the limited application of withholding taxes on royalties and dividends. However, Ireland has taken steps to amend aspects of its tax system to curb aggressive tax planning, in particular by implementing European and internationally agreed initiatives. Consultation has also started on further changes. ·The performance of the Irish economy is increasingly dependent on the activities of a limited number of foreign firms. The diversification of exports and productivity performance can improve the resilience of the local production base. This would require more effective public research and innovation efforts. Removing obstacles to the functioning of some key markets (e.g. legal services or retail) would also help increase the flexibility and resilience of the Irish economy. ·The long-term fiscal sustainability of the healthcare and pension systems is a challenge. The ambitious Sláintecare reform represents a credible vision for making the health system universally accessible and sustainable. However, its implementation is endangered by the difficulties in improving budget management in the health system to avoid recurrent overspends. The perverse incentives generated by the coexistence of a public and private insurance market should also be addressed to avoid preferential treatment of privately-insured patients in publicly-funded hospitals. The envisaged Roadmap for Pension Reform, published in 2018, aims to address the longterm sustainability of the state pension system. ·Economic growth and greenhouse gas emissions are yet to be decoupled. The government still needs to define a technological pathway and the policy and investment needs to ensure environmentally and socially sustainable development, while also using the economic opportunities arising from the EU’s ambitious climate objectives. 1. Economic situation and outlook GDP Growth The Irish economy maintains momentum. Ireland reported 7.5 % GDP year-on-year (yoy) growth in the first nine months of 2018, a level well above the euro area average. However, the headline figures remain inflated by the activities of multinational companies operating in the country. The economy is expected to have grown by 6.8 % in 2018 and real GDP is forecast to grow by 4.1 % in 2019 and 3.7 % in 2020 (European Commission, 2019a). Employment developments and investment underpin domestic economic growth. Modified domestic demand, a measure of domestic activity that strips out some of the effects of multinationals, grew by 5.1 % yearonyear in the first three quarters of 2018 (Graph 1.1). It is expected to expand at an average rate of over X % between 2018 and 2020. Private consumption, sustained by increasing disposable income on the back of strong employment growth, and investment have been the main drivers behind domestic demand. In particular, investment has been bolstered by construction and investment in machinery and equipment.

Graph 1.1:Domestic demand and contributions Source: CSO The strong underlying activity is also reflected by the value added in the domestic sector. Gross value added (GVA) in the sectors not dominated by multinationals grew by 4.3 % in 2017, after a 5.6 % growth in the previous year, contributing substantially to the total GVA (Graph 1.2). Within this category, the construction sector grew the most in 2017, by 15.2 %. Graph 1.2:Gross value added and contributions Source: CSO Downside risks continue to cloud the economic outlook. Primarily external in nature, these risks relate to uncertainties regarding the terms of the UK’s withdrawal from the EU as well as changes to the international taxation and trade environment. On the domestic side, signs of overheating could become more apparent going forward. A large degree of unpredictability, linked to the activities of multinationals, could drive headline growth in any direction. Regional disparities Regional disparities in Ireland are significant and have been increasing over the last decade. Ireland has rather high regional economic disparities compared to other EU countries in terms of GDP per capita (Graph 1.3). Between 2000 and 2016, GDP per capita in the Southern and Eastern region increased by 74 %, 63 percentage points more than in the Border, Midland and Western region and the increase accelerated after 2012. By 2016, GDP per capita in the Southern and Eastern region was 2.6 times higher than in the Border, Midland and Western region. The Dublin area, with 40 % of Ireland’s population, contributed by 62 percentage points to GDP growth between 2000-2016. Where multinationals decide to locate increases regional disparities. Productivity growth varies substantially across regions (see Section 4.4.2). These regional disparities are very much influenced by the concentration of multinationals, which out-perform domestic firms in terms of productivity (see Section 4.4.1), in the Southern and Eastern region. Graph 1.3:Regional Convergence in Ireland Source: Regional Convergence in Ireland Labour market Robust labour market performance continues to accompany economic growth. In the first three quarters of 2018, employment grew by 3.1 % and has now surpassed its pre-crisis level with job creation taking place across most sectors. Against this background, labour income is bolstered by the slight acceleration in average hourly and weekly earnings, which, combined with subdued inflation, supports household real disposable income. The labour market is tightening and skill shortages are becoming more apparent. Unemployment is approaching pre-crisis levels (5.7 % on average in 2018), with long-term unemployment representing 35.0 % of total unemployment (third quarter of 2018), below the EU average of 42.8 %. Job vacancy rates are trending upward in most economic sectors, while skills shortages are becoming increasingly apparent in fast growing sectors, most notably for information and communication technology, construction and property professionals (see Section 4.3.1). This is becoming a more pressing challenge for employers. Furthermore, the level of basic digital skills in the workforce remains relatively low. Yet the participation rate remains low (see Box 1.1) and has recovered slowly, with marginal increases of 0.3 percentage points to 62.1 % over the year to the third quarter of 2018 (Graph 1.4). In particular, there is scope for more female employment. Graph 1.4:Unemployment rate and labour market participation rate Source: CSO Wage growth remains moderate, but upward pressures are emerging in certain sectors. Nominal compensation per employee grew by 0.9 % in 2017, and it is estimated to have reached 2.7 % in 2018. This remains slightly lower than could be expected, given developments in inflation, productivity and unemployment, as it has been systematically the case in the post-crisis period. This has resulted in the largest shortfall in wage growth across Member States in the period 2010-2017, with the shortfall being higher in 20102013 than in 2014-2017. However, upward pressures are emerging in certain sectors with wages in the second quarter of 2018 growing above 4 % in the information and communication sector (5.4 %), the professional, scientific and technical activities sector (5.3 %), the financial services and insurance sector (5 %), and the building and construction sector (4.3 %). Graph 1.5:Cumulated gap between actual and predicted wage growth, EU28, 2010-2017, percentage points Source: Labour Markets and Wage Developments 2018, European Commission. Social developments The strong redistributive effect of the tax and benefit system still reduces high market income inequality to levels below the EU average. Before taxes and transfers, household income in Ireland is among the most unequally distributed in the EU, with the richest 20 % having close to 30 times the market income of the poorest 20 %. This reflects the high variation in productivity across the economy, in particular between the tradable and non-tradable sectors. In 2017, the share of household disposable income of the richest 20 % was 4.6 times higher than that of the poorest 20 %, marking a slight increase from 4.4 in 2016. Nevertheless, the inequality ratio after taxes and transfers still remains below the EU average (5.1 in 2017) thanks to both high progressivity in personal income taxes and a high level of cash benefits. The population at risk of poverty and social exclusion continues to fall in line with the recovery. The at-risk-of-poverty-or-social exclusion rate was at 22.7 % in 2017 close to the EU average of 22.4 %. A key driver was the high proportion (16.2 %) of people living in households with very low work intensity. However, this number has been falling in recent years and labour market data suggests that this trend continues. The high level of cash benefits significantly reduce poverty: the at-risk-of-poverty rate is 52.6 % lower after social transfers. However, this should be treated with caution, due to the low level of inkind benefits relative to the high cost in the economy. Wealth inequality is high, in part due to the effects of the financial crisis on households in negative equity. In 2014, the wealthiest 10 % of households controlled 54 % of net wealth, a larger share than the euro area average. The Gini coefficient — a measure of statistical dispersion — of net wealth, which also takes into account households in negative equity, was among the largest in the euro area. In the near term, rising property prices are expected to dampen net wealth inequality, given the large number of households in negative equity. However, as the rate of home ownership continues to fall in favour of a larger tenant population, continued increases in property prices have the potential to exacerbate wealth inequalities in the longer term. Rapidly rising rents, insufficient residential construction activity and a lack of affordable and social housing have driven up homelessness especially, in Dublin. The shortage of housing has led to a 23.4 % rent increase since 2015, the highest in the EU. Demand for social housing stands at circa 72 000 homes with just 10 000 planned for delivery in 2019. While a further 17 000 persons are to be assisted through Housing Assistance Payment or the Rental Accommodation Scheme, this risks exacerbating rent increases in the already supply-constrained private rental market. A large number of social homes are under-occupied, (notably in the Dublin area), in part due to current succession practices, thus further aggravating the situation (Melia, 2018). Box 1.1: Labour force participation rate While the unemployment rate is approaching pre-crisis levels, the participation rate has followed the rise in employment only sluggishly. According to the Central Statistics Office, the participation rate — the fraction of the working-age population either working or looking for a job — of individuals over 15 has hovered around 62 % since 2010 and remains 4.5 percentage points below its 2007 peak. Given the role of labour supply in determining actual and potential growth, it is crucial to understand why labour force participation has not bounced back with the recovery. The pre-crisis upward trend in females’ participation rate resumed after the cyclical downturn, whereas male participation has not recovered. Two factors accounted for the pre-crisis rise in total participation: a gradual rise in females’ participation from a low base and a surge of males participation during the construction boom. Female participation declined only marginally during the recession (-2 percentage points from peak to trough) and has returned to its 2007 peak. However, females participation remains low and has room to increase (see Section 4.3.1). By contrast, males participation shrunk (-8 percentage points), as jobs in construction and manufacturing were hard hit, and has hovered around its 2013 level since then. The 2007 peak in male participation was probably unsustainable and reflected the enlargement of the labour force through immigration (Byrne et al., 2016). Between 2002 and 2008, net inward migration accounted for 60 % of the growth of the annual working age population on average. As the participation rate of the Irish provided limited scope for further improvement, net migration met increased labour demand during the 2000s boom. In turn, outward migration worked as a safety valve during the downturn by limiting the rise in unemployment. Net inward migration has provided an important source of labour since it turned positive in 2015. The share of non-Irish nationals in the labour force has returned to its 2008 peak of 16.3 %. Further increases in the participation rate will likely be driven by immigration as skills and labour shortages emerge (see Section 4.3.1). In recent years, the overall participation rate has been sustained by the pick-up in non-Irish nationals’ participation rate, which is much higher than that of the Irish (74.3% vs 60.3 % in 2018), and has been increasing since 2015 (+3 percentage points), while that of the Irish remains flat. While the employment rate of both Irish and non-Irish nationals has picked-up since 2015, the gap in favour of non-Irish nationals has widened to 10 percentage points. As migrants’ qualifications have improved—49 % of immigrants had tertiary education in 2018— immigration may play an important role as a source of skilled labour in a tightening labour market. Hence, migration will likely play an increasing role in driving economic growth. Significant net inward migration in the future could also increase the strain on the already tight housing market in the short term. In particular, high-skilled migration will likely contribute to increasing price pressure on the more expensive rental and housing markets, such as Dublin.

Inflation Consumer price inflation is rising, but remains subdued. The Harmonised Index of Consumer Prices rose by 0.7 % in 2018. Inflation was modest in the first half of 2018 but accelerated in the third quarter as global oil prices rose. Services prices keep being bolstered by rents and catering services. However, core inflation remains dampened by the weakness of non-energy industrial goods, which reflects both low import prices due to appreciation of the real exchange rate towards sterling and a downward bias related to quality adjustments methods (Keating et al., 2018). The higher prices for services are expected to remain the main positive driving force behind inflation, in line with strong domestic demand. Competitiveness The Irish economy has maintained its external competitiveness, but risks persist. In 2017, the real effective exchange rate based on unit labour costs remained unchanged from the previous year. The sterling depreciation in relation to the euro continued to negatively affect the competitiveness of the economy in 2017 but was partly offset by continued weak consumer price inflation. The underlying trade balance also shows that the external competitiveness of the country has been maintained (Section 4.4.1). As the labour market tightens, associated wage pressures and increasing activity in construction, nontradable in nature, should be monitored in order to maintain competitiveness over the medium term. Also, supply constraints in the housing sector could negatively affect competitiveness by restricting mobility of labour and by putting upward pressure on housing costs (Department of Finance, 2018a). Rising commercial and residential rents, along with higher electricity, legal and insurance costs could also affect competitiveness. 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. for more competitiveness challenges). External position Sustainability risks to the domestic economy stemming from external debt seem to be diminishing. The net international investment position (NIIP)( ) has improved over the last three years and is expected to strengthen further in 2019 and 2020 on the back of current account surpluses and economic growth (European Commission, 2019a). The high level of net external liabilities is to a substantial extent due to the operations of some multinationals and the negative net position of the International Financial Services Centre (IFSC), to which domestic sectors have only limited exposure (European Commission, 2018a). Domestic sectors have improved their external position over the last two years. Furthermore, the riskier instruments of the NIIP are to a large extent owned by multinationals and by IFSC entities. The level of the domestic NIIP remains hard to gauge. Financial sector The banking sector is gradually improving its assets while maintaining solid capital buffers. The common equity tier 1 ratio - a measure of bank solvency that gauges a bank's capital strength - stood at 23.0 % in the second quarter of 2018, similar level to one year earlier. While the nonperforming loans ratio fell to 8.5 % in the second quarter of 2018, down from 11.6 % a year earlier, it remains above the euro area average of 4.2 %. The decline in non-performing loans was helped by the sales on secondary markets, but long-term mortgage arrears remain relatively high. Provisioning levels have remained broadly stable over the year leading up to the second quarter of 2018, but are below the EU average. Profits benefit from the high lending rates prevailing in Ireland, pushing return on equity to levels above the EU average. Deleveraging of the domestic private sector is ongoing. Demand of households for credit is increasing, helped by rising property prices. New mortgage lending stood at EUR 2.6 billion in the fourth quarter of 2018, up from EUR 2.2 billion a year earlier. While the flow of new mortgage lending has increased, it is still well below the EUR 9 billion per quarter observed in 2005-2007. Macro-prudential measures have been tightened (see Section 4.2.1) and appear to be holding back demand. The stock of household credit appears to have reached a trough in 2018, but due to positive growth in gross disposable household income (GDHI), the household debt-to-GDHI ratio is declining. The debt of domestic companies, including debt of redomiciled public limited companies, also declined in 2017 and stood at 135% of modified gross national income( ). Investment and housing Volatility in headline investment figures masks robust domestic activity. In the first nine months of 2018, headline investment increased by 2.8 % yearonyear (y-o-y) driven largely by a fall in intellectual property investment in the first half of 2018, which then increased in the third quarter. However, these fluctuations were matched by similar swings in imports and therefore with a neutral impact on GDP. On the other hand, core investment, i.e. investment without aircraft and intangibles, grew by 22.0 % yoy. Construction activity increased by 17.9 % yoy and is expected to remain strong in the short term as housing supply is still catching up with demand, and supported by various government measures. Public investment is on an upward path. Capital spending by the government declined considerably in the aftermath of the crisis in the context of fiscal consolidation, but has been growing gradually since 2014. It is now expected to reach 4 % of modified gross national income by 2024 (up from 2.7 % in 2017) and to remain around this level until 2027, according to the National Development Plan. This plan sets out an allocation of EUR 116 billion over the period 2018-2027 aimed at meeting the infrastructure and investment needs, focusing on housing, transport, education, health and water services (Section 4.4). Graph 1.6:Core investment and contributions Source: CSO Housing price inflation continues to be high but has eased recently. Housing prices increased by 10.9 % in 2017, i.e. 4 percentage points (pps) above the macroeconomic imbalance procedure threshold. In 2018, after an increase to 13.3% in April 2018, annual housing price inflation fell 6.3 pps in the seven months to November 2018. Decline has initially been driven by Dublin but since June affected almost every county in Ireland. It is likely that more binding macroprudential rules (Section 4.2.1) have contributed to dampening housing demand (European Commission, 2019). A more dynamic housing supply may have also helped curb housing price inflation. Inflation in rents seems chiefly determined by the gap between housing supply and demand. In Ireland, annual rent inflation in December 2018 was 6.2 %. Since 2015, rents have increased by 23.4 %, the fastest pace of increase in the EU. National growth rate was highly influenced by Dublin which accounted for 37 % of tenancy agreements. Rents appear to be chiefly determined by supply conditions and, to a lesser extent, by supportive macroeconomic conditions. ( ) Public finances Although the economy continues to strengthen, improvements in the budget balance are stalling. The general government deficit is forecast to have fallen to 0.1 % of GDP in 2018, an improvement of 0.1 % of GDP compared 2017. With the measures announced in the 2019 Draft Budgetary Plan, the deficit is expected to remain broadly stable in 2019. Risks to the budgetary projections remain on the downside. They relate mainly to macroeconomic uncertainties, the volatility of some sources of government revenues (notably corporate income taxes) and over-spending (notably within the health sector). Aggregate 2018 revenues were helped by an unexpected temporary surge. Exchequer returns in 2018 exceeded expectations. In particular, corporate income tax receipts were 26.6 % above target, with international accounting changes a contributor to the surge. Expenditure outpaced budget targets, with a current expenditure overrun of 1.6 %. Debt dynamics are improving, although its stock is relatively high. Ten years after the onset of the global financial crisis, the gross general government debt overhang remains high. It is expected to have declined to 63.9 % of GDP in 2018, from 68.4 % of GDP in 2017, and to further decline to 61.1 % in 2019 and 56 % of GDP in 2020. This is contingent on continued stable medium-term economic growth and positive primary balances. A range of alternative metrics, including an interest-to-revenue ratio, show that Ireland’s stock of public debt remains high by international and historical standards (Section 3). Estimated exchequer receipts of EUR 4.3 billion over 20182021 arise from the funds set aside for the resolution of the financial crisis and winding down of the National Asset Management Agency. The government plans to direct these towards lowering the elevated stock of debt. Almost 60 % of the debt has a maturity of more than five years. While debt sustainability has improved, long-term fiscal sustainability risks related to the cost of ageing remain (Section 4.1.1). Table 1.1:Key economic and financial indicators - Ireland Source: Eurostat and ECB as of 31-1-2019, where available; European Commission for forecast figures (Winter forecast 2019 for real GDP and HICP, Autumn forecast 2018 otherwise)

2. Progress with country-specific recommendations Since the start of the European Semester in 2011, 79 % of all country-specific recommendations addressed to Ireland have recorded at least some progress. 21 % of these country-specific recommendations (CSRs) recorded 'limited' or 'no progress' (Graph2.1). Labour market policies supporting job creation and life-long learning have been among the most successful. Graph 2.1:Ireland - Level of implementation today of 2014-2018 CSRs Source: European Commission Rapid improvement in the fiscal situation has been supported by implementation of country specific recommendations since 2014. Ireland has achieved success in stabilising its public finances. Public investment is on an upward path. Efforts to limit tax expenditures and broaden the tax base have been mixed. Expenditure ceilings now take into account demographic pressures and carry-over effects, although their repeated changes are still a concern for budgetary execution. Measures have been taken to address the expected increase in agerelated expenditure, but some remain in their infancy. Ireland has introduced a range of labour market reforms supporting the country specific recommendations over recent years. Reforms aimed at improving the skills of the adult workingage population and the acquisition of digital skills are promising, yet it is too early to assess their positive impact. The lack of basic digital skills among those in employment remains a concern and requires further investments. Ireland has taken steps to make quality childcare more affordable with the Early Childhood Care and Education universal free preschool programme and the Affordable Childcare Scheme. The insufficient provision of affordable childcare remains the main impediment to increasing activity rates. Recent reform efforts have tried to tackle the problem of weak work incentives for low-income groups. Most of the measures foreseen in the Action Plan for Jobless Households are yet to be implemented. In particular, integrated support for people furthest from the labour market needs to be improved. In addition, people with disabilities are still facing considerable challenges, although support is being enhanced. Progress has been made since 2014 in implementing financial sector country specific recommendations. The pace at which nonperforming loans are being reduced has picked up, helped by a combination of portfolio sales and restructuring activities. 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 nonperforming loans. The supervisor is closely monitoring the banks’ non-performing loan reduction strategies and their restructuring practices. Several policy measures have been introduced to support debtors in distress and increase the number of personal insolvency arrangements, but the take-up of these measures is only slowly gaining traction. The credit register is up and running for consumer loans. It is planned to become fully operational in 2019. Table 2.1:Annual assessment of the 2018 CSRs Source: European Commission Ireland has made some ( ) progress in addressing the 2018 country-specific recommendations (see table 2.1). Scope of important tax expenditure has been limited, but Ireland has not yet implemented the envisaged measures to accelerate the reduction of public debt or address the expected increase in age-related expenditure. This means that limited progress has been made on country specific recommendation 1, which reflects euro area recommendation 2. With regards to country specific recommendation 2, Ireland has made some progress in implementing the National Development Plan, in line with euro area recommendation 1. However, the set-up of a performance and monitoring framework, the improvement of the system for project selection and the assessment of the capacity of the government departments for the implementation of the plan are pending. Ireland has made some progress in the upskilling of the adult working-age population. The new pilot programme EXPLORE aimed at increasing lifelong learning and offering upskilling opportunities for adults was launched in 2018, while the Agency for upskilling those in employment (SkillsNet) was also reinforced. Ireland has also made some progress on country specific recommendation 3. Given the scale reforms needed, progress on fostering the productivity growth of Irish firms has been limited. While the Government has announced the ambitious 'Future Jobs' programme and made operational the Disruptive Technologies Innovation Fund (see Section 4.4.1 and Annex A), the use of direct policy instruments remains to be explored and tax credits remain the main instrument of public R&D. On the other hand, the promotion of faster and durable reductions in longterm arrears has made a substantial progress. Box 2.1: EU funds and programmes contribute to addressing structural challenges and to fostering growth and competitiveness in Ireland. The financial allocation from the European Structural and Investment Funds (ESI Funds) to Ireland amounts to EUR 3.36 billion in the 2014-2020 Multiannual Financial Framework, potentially representing around 0.2 % of GDP (0.3 % of modified gross national income) annually. The allocation supports Ireland in overcoming increasing challenges in competitiveness and regional disparities due to a dual economy in the country. At the end of 2018, EUR 2.3 billion (70 % of the total ESI Funds) had been allocated to specific projects supporting, in particular, closer cooperation between businesses and research institutions and R&D investment in the public and private sectors. ESI Funds have helped to address policy challenges identified in the 2018 Country Specific Recommendations (CSRs). By the end of 2018, around EUR 207 million from the European Regional and Development Fund had contributed to fostering R&I and small and medium-sized enterprises’ competitiveness (CSR3) by providing financial support to 47 000 businesses, assistance to 1 500 start-ups and training to around 50 000 participants and 42 500 businesses. Funds also supported 860 researchers and 370 new industrial partners to engage in innovation activities and collaborate with research centres. As a result, 4 700 new jobs and over 70 new start-ups and spin-offs were created and some 250 patent licences were granted. Horizon 2020 and European Agricultural Fund for Rural Development (EAFRD) respectively contributed with an additional EUR 621 and EUR 39 million to promote R&I in Ireland. The EAFRD financed 17 European Innovation Partnerships and provided training to 68 000 beneficiaries. Furthermore, in the framework of the National Broadband Plan, the European Regional and Development Fund is helping to bring high-speed broadband speeds to the mostly rural intervention area and help Ireland to progress in the achievement of the EU 2025 Gigabit Society objectives. EU funds have also addressed the upskilling and investment challenges in Ireland (CSR 2). For instances, because of the European Social Fund investments, some 56 000 people were engaged in education or training, 79 000 gained a qualification and 6 600 were employed at the end of their training. The Connecting Europe Facility has committed EUR 80 million to a number of energy network projects with the participation of Ireland. The European Agricultural Fund for Rural Development has promoted investments in environmentally friendly agricultural production methods. At the end of 2018, more than EUR 1 billion had been paid out through the Irish Rural Development Programme for environmental and climate change actions. The Commission can provide tailor-made technical support upon a Member State’s request via the Structural Reform Support Programme to help Member States implement growth-sustaining reforms to address challenges identified in the European Semester process or other national reforms. Ireland, for example, is receiving support to improve the fiscal transparency of public finances, enhance strategic human resource management and to establish a modern regulatory environment for gambling and betting with a view to the establishment of an independent regulatory authority. In addition, work has started on the development of an authorisation and supervision framework for a central securities depository. In Ireland, the overall volume of approved operations by the European Investment Bank with European Fund for Strategic Investments backing amounted to EUR 1.4 billion in February 2019, which is set to trigger a total of EUR 6.5 billion in additional private and public investments. So far, 21 projects involving Ireland have been approved under the infrastructure and innovation window of this fund. They amount to EUR 1 billion in total financing, which should, in turn, generate EUR 4.9 billion in investments. Under the SME component, 9 agreements with intermediary banks have been approved for a total of EUR 279 million, which should mobilise around EUR 1.5 billion of total investment. 14 188 SMEs and mid-cap companies are expected to benefit from this support. The European Investment Bank is for instance providing EUR 70 million to a public-private partnership for the construction of 14 new health centres across Ireland. This investment will increase access to primary healthcare and social services, make services more cost-effective and improve facilities. More information at: https://cohesiondata.ec.europa.eu/countries/IE. 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 the imbalances. (European Commission, 2018). In spring 2018, Ireland was identified as having macroeconomic imbalances (European Commission, 2018m). The imbalances identified related 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 warranted 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. ( ) 3.1.Imbalances and their gravity Private sector debt remains high, at 243.6 % of GDP at the end of 2017, despite continued efforts to reduce it. Overall indebtedness is heavily affected by multinational companies. While the debt of all nonfinancial corporations (NFCs) fell from 231 % to 196 % of GDP during 2017, debt of Irish NFCs, including debt of redomiciled public limited companies (PLCs), fell from 90.1 % of GDP in 2016 to 83.6 % in 2017. Relative to modified gross national income (GNI*), debt of domestic companies, including debt of redomiciled PLCs, amounted to 136 % in 2017. Total debt of households and domestic NFCs amounted to 131.3 % of GDP in 2017, slightly below the indicative MIP threshold of 133 % of GDP. Although rising housing prices are putting upward pressure on household debt, households have continued to reduce their debt-to-GDP ratio and brought it down to 47.7 % of GDP in 2017. Relative to disposable income, household debt declined to 135.7 %. This is relatively high compared to other EU countries and suggests that households remain relatively more vulnerable to interest rate and income shocks. Although an increasing share of new mortgages has interest rates fixed for more than one year, around 90 % of the stock of loans is with variable rates. The public debt ratio has come down, while remaining elevated. Public debt as a share of GDP has significantly declined, reaching 68.4 % in 2017. The improvement (of 5.0 % of GDP) compared to 2016 is due to the denominator effect of strong GDP growth. At 111 % of GNI* in 2017, the debt burden is de facto among the highest in the EU. However, financial markets’ perceptions of sovereign risk remain favourable, reflected in low sovereign bond yields and credit default swap spreads. The stock of non-performing loans decreased in the year to June 2018, helped by portfolio sales. While the aggregate non-performing loans ratio was 8.5 % at the end of June 2018, down from 11.6 % a year earlier, it remains higher than the euro area average of 4.2 %. The reduction in the stock of non-performing loans is the result of a combination of restructuring activities and portfolio sales, with varying degrees of success among individual banks. Long-term arrears continue to be relatively high, accounting for more than half of total non-performing loans. The external position of the economy is still rather negative, but risks to the domestic sector seem to abate. The net international investment position stood at 134.5 % of GDP in the third quarter of 2018, a significant improvement from the 2015 peak of 242.7 %. Furthermore, the net external position of some domestic sectors has improved over the last two years. The external risks of the domestic sector seem contained but it remains difficult to assess them fully due to the impact of multinationals on headline statistics. Nevertheless, there is strong evidence that the net international investment position is boosted beyond fundamental levels by the large negative position of multinationals and International Finance Service Centre ( ), to which the domestic sector has only very little exposure. The current account balance remains extremely volatile and heavily influenced by some large multinationals (Graph 4.4.1). The modified current account balance, which discounts for these effects, remains positive and displays less volatility around a moderately declining trend. The Irish economy appears to have maintained its external competitiveness. Graph 3.1:Overvaluation gap with respect to price/income, price/rent and fundamental model valuation gaps Source: European Commission Annual house price inflation has moderated notably since April 2018 but remains high. The recent sharp pickup in construction coupled with more stringent macro-prudential rules appear to have eased pressure on house prices, notably in Dublin. However, despite the expansion in housing supply, a gap between demand and supply persists and continues to be the main driver of house price increases. Although there are not yet consistent signs of overvaluation, the pricetoincome ratio is already above its fundamental value, indicating affordability issues (Graph3.1). In addition, the number of years of gross disposable income required by an average household in Ireland to buy a 100 square metres dwelling amounted to 16 in 2017. This period was above the prudential benchmark equal to 10 and one of the longest in Europe. (European Commission, 2018d) 3.2.Evolution, prospects and policy responses

Ireland’s general government debt-to-GDP ratio is projected to continue declining from its peak of almost 120 % in 2012. The government expects to use the proceeds from the return of funds set aside for the resolution of the financial crisis, notably the winding down of the National Asset Management Agency, and any windfall receipts to accelerate its reduction. The authorities had set a target of debt-to-GDP of 45 % to be achieved by the end of the next decade and an intermediary one of 55 % until major capital projects are completed. However, these are no longer referenced in the latest budget. Insolvency procedures as well as in-court and out-of-court arrears resolutions remain underused. The number of personal insolvency applications has increased since the Abhaile aidand-advice scheme was set up. However, there has been an increase in creditors’ rejections of the proposed insolvency arrangements, which transfers the cases to court, thereby reducing the number of concluded arrangements. The number of successful arrangements between debtors and lenders has been stagnating since end-2017. Collateral repossessions are still quite rare. On the other hand, the credit register should become fully operational in March 2019. The external position of some domestic sectors is improving. In 2017 and 2018, the net external position of domestic banks improved after banks restored their access to market funding in 2016, with positive impact also on the Central Bank’s position. The net international investment position of the general government remains negative but it follows a continuous upward path; furthermore, a substantial part of this debt comprises long-term debt towards official creditors, from the financial assistance programme, with long-term maturity and subject to extension (European Commission, 2019), therefore they do not constitute a vulnerability. The situation of the non-financial corporations appears to be significantly driven by intergroup credits of multinationals to which domestic sectors have only limited exposure. There is however no conclusive evidence on the level of the domestically relevant net international investment position. (see Box 3.1 for more detailed analysis) The government has taken a range of measures to support housing supply, including the construction of social housing. The establishment of the Land Development Agency, the Serviced Site Fund and the Regeneration Development Fund may increase the availability of land serviced with the necessary infrastructure. The new planning rules for apartment design, the announced removal of blanket restrictions on building heights and the increase in the vacant site levy could further boost housing supply. However, there are concerns over the construction sector's capacity to deliver the required level of housing and infrastructure in a timely manner as well as regarding incentives for house ownership created by property taxes based on below-market house valuations. The Construction Sector Group (CSG), established by the government following the launch of Project Ireland 2040, may help assess the supply of necessary skills and measures enhancing this sector’s capacity. 3.3.Overall assessment Public and private debt, as well as rapidly rising housing prices, are a source of vulnerability for the economy. Debt of households and domestic companies, including redomiciled public limited companies, relative to GDP, fell below the indicative macroeconomic imbalance procedure threshold in 2017. However, relative to modified gross national income, debt of the domestic private sector remains elevated. Although new lending with interest rates fixed between one and five years is increasing, 90 % of household debt is on variable interest rates. Rising property prices should support banks' efforts to advance non-performing loans reduction plans, although the share of longterm arrears remains relatively high. The public debttoGDP ratio is on a firm downward trajectory and a balanced government position is expected by 2020. Some windfall gains are planned to reduce government debt. The activities of some large multinationals companies operating in Ireland and the markedly negative net position of the International Finance Service Centre complicate assessment of Ireland’s highly negative net international investment position, even though there is strong evidence that neither constitute vulnerabilities of domestic sectors. The government has repeatedly intervened to tackle the undersupply of housing, but it will take time for the measures to have an effect. Insufficient capacity in the construction sector and housing ownership tax incentives remain a concern. Box 3.1: Net international investment position - additional instruments Complementary indicators assessing the stability of the net international investment position (NIIP) instruments can offer further insights. The NIIP sustainability is contingent on how risky its components are. In this respect, the NIIP excluding nondefaultable instruments (NENDI) is a useful complementary indicator in assessing the external sustainability. The NENDI excludes direct investment and portfolio shares from the NIIP, in theory non-defaultable, and thus it comprises purely arms-length debt and any other instruments that may be subject to default such as insurance, mutual fund shares and derivatives (European Commission, 2018h). Nonetheless, it should be noted that due to the large occurrence of debt-equity conversions in Ireland, the NENDI figure is volatile. This makes the interpretation not straightforward. The riskier instruments of the NIIP are owned largely by multinationals and International Finance Service Centre entities. At the end of 2017, the NENDI stood at 259 % of GDP driven by the investment fund shares with a net position of -661 % of GDP, largely associated with the International Finance Service Centre sector. ( I ) ( II ) Debt instruments had a positive net position of 269 % of GDP. Debt liabilities are mostly attributed to the sectors other than monetary financial institutions and government (in proportion of 77 %). In this category, the debt attributed to non financial corporations belongs largely (more than 75 % ( III )) to non financial corporations with a foreign parent and it is linked to the non-resident funding of intel l ectual property assets (Central Statistics Office, 2017). This is due to some multinationals borrowing money abroad to finance their investment by purchasing intel l ectual property from the parent company, and is therefore not a liability of the Irish sector (Central Statistics Office, 2018b). The equity instruments (excluding investment fund shares) had a net position of 110 % of GDP). The underlying NIIP appears to have improved but is still relatively elevated. In order to discount for the impact of multinationals on headline figures, the underlying NIIP can be estimated by adding cumulated modified current account balance (CA*) ( IV ) to earlier NIIP figures that are known to be less affected by offshore activities than current data. These estimates suggest that the underlying NIIP would be around 80 % to 110 % of modified gross national income (GNI*) (-51% to -68% of GDP) ( V ). Table 3.1:MIP assessment matrix (*) — Ireland 2018 (Continued on the next page) Table (continued) Source: European Commission 4. Reform priorities 4.1.Public finances and taxation 4.1.1.Fiscal policy* ( ) (Public Deficit and Debt Developments) It could be prudent to accelerate deficit and debt reduction, in particular as indicators suggest that the economy is operating close to its potential. In the run-up to the economic and financial crisis, Ireland employed a pro-cyclical budgetary policy approach, with public spending and taxation adding fuel to the fire when the capacity of the economy was constrained. Approaching full employment, the government has acknowledged the need to manage budgetary policy to improve living standards in a way that does not contribute to overheating the economy (Department of Finance and Department of Public Expenditure and Reform, 2018). However, including the pre-committed expenditure increases, the total Budget 2019 package was worth around 1 % of GDP (close to EUR 3.5 billion), a considerable stimulus to the economy. Public debt continues to fall, but remains significant. As warned by the Irish Fiscal Advisory Council, the improvements in the primary budget balance have stalled since 2015, despite the favourable environment (Irish Fiscal Advisory Council, 2018). Other metrics, like the interest-to-revenue ratio, at 7.6 % in 2017, highlight that debt remains high by EU standards (see Section 3). Contingent liabilities continued to decline. In Ireland, a major part of the guarantees is towards financial institutions. They fell to 0.5 % of GDP in 2017, from 1.9 % in 2016. Government financing has benefitted from the low interest rate environment and supportive bond market conditions. Euro area sovereign bond yields remain low by historical standards. The ten-year rates in Ireland stood at 0.91 % in December 2018 ( ). This also reflects Ireland’s continuing strong economic and fiscal performance. At the same time, the lion’s share of Irish sovereign debt, over 95 % of the total, is at fixed rates (Department of Finance, 2018) ( ). Hence, the risks to debt projections mainly relate to changes to the economic outlook. Almost EUR 17.3 billion in nominal benchmark bonds were issued in 2018, well in the EUR 14-18 billion range targeted at the start of the year. Issuance included EUR 3 billion in Ireland’s first-ever sale of sovereign green bonds to diversify the issuance, accessing a new category of investor and providing a new debt instrument that meets untapped investor demand (National Treasury Management Agency, 2018). They are designed to be aligned to the Green Bond Principles, published by the International Capital Market Association. Ireland’s market activity has extended the maturity profile of its debt. At the end of 2017, public debt amounted to EUR 201 billion, with the weighted average maturity at around 10 years remaining one of the longest in the EU. Around 25.4 % of long-term marketable and official debt represented official loans from the financial assistance programme partners. Redemptions of European Financial Stability Facility and European Financial Stabilisation Mechanism loans currently extend until 2042. The maturities of loans to Ireland under the latter have been extended. It is therefore not expected that Ireland will have to repay any of these loans before 2027. This extension and the ensuing operations entail financial benefits for Ireland, linked to the EU’s favourable funding conditions. Together with sensible debt management operations, these have contributed to the decline in the effective interest rate. It was estimated at around 2.9 % in 2017, 0.2 percentage points lower than in 2016, and is projected to have further declined to 2.6 % in 2018.

Debt sustainability analysis and fiscal risks Although improving, debt sustainability remains vulnerable to unfavourable shocks. Short-term sustainability does not appear to be a cause for concern. 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 close to 60 % of GDP in 2020 (Annex B). When debt metrics are measured relative to gross national income, however, most of the distribution of the debt burden lies above the 60 % threshold over the projection period (Graph 4.1.1), and this analysis still underestimates vulnerabilities in the Irish context. Furthermore, in case of combined negative shocks (corresponding to the 90th percentile rank of the debt distribution), the debt ratio would lie close to or above the threshold of 90 % of gross national income. Graph 4.1.1:Government debt projections, % of gross national income Source: see Box 3.1 in European Commission (2019), Fiscal Sustainability Report 2018 Spending on long-term care, pensions and healthcare is projected to increase over the next decades as a result of an ageing Irish population. According to the 2018 Ageing Report, long-term care expenditure would increase by 1.9 percentage points (pps) of GDP between 2016 and 2070, with an increase of 1 pp of GDP for healthcare spending, both above EU average expenditure growth (see Section 4.3.4). Outlays for pension benefits are projected to rise by 1.6 pps of GDP over the same period, compared to a slight decrease of 0.2 pps of GDP for the EU as a whole. The demographic factor alone would lead to an increase of 4 pps of GDP in pension expenditure by 2070. Other factors such as coverage and benefit level soften the overall impact on pension spending, though. The pension expenditure-to-GDP ratio would peak at 7.5 % of GDP in 2053 up from 5 % in 2016. It would nevertheless fall back to 6.6 % in 2070, compared to 11.0 % for the EU as a whole. However, if fertility rates were 20 % lower than the baseline assumption during the entire projection period, ageing would be more pronounced and pension expenditure would rise by 2.9 pps of GDP between 2016 and 2070, 1 pp higher than the baseline projection. If the employment rate of workers aged 55-74 were to rise by 10 pps on top of the baseline assumption, the increase in pension expenditure by 2070 would be 0.4 pps of GDP lower. The introduction of a link between legal retirement ages and gains in life expectancy would reduce the baseline projection by 0.5 pps of GDP. ( ) The Roadmap for Pension Reform, published in 2018, aims to address the longterm sustainability of the state pension system and will build on a reform already introduced in 2014, to move the state pension eligibility age to 68 by 2028. However, the remaining envisaged reforms have not yet been finalised. 4.1.2.Fiscal frameworks and spending reviews Expenditure overruns in some departments are a cause for concern. The pace of fiscal consolidation has slowed in recent years, following several in-year expenditure increases. Expenditure ceilings have kept drifting up on the back of better-than-expected (but possibly temporary) revenue. In some departments, slippages of EUR 810 million in total emerged in 2018, driven by expenditure in healthcare and, to a lesser extent, the department of housing. This was offset mainly by lower than expected spending in other departments and debt interest payments. Overall, the purse strings have been loosened in 2018, with expenditure up by 7.2 % y-o-y. Within this, current primary expenditure increased by 6.5 %, while capital expenditure was up sharply, by 31.1 % (see Section 4.4.3). The rolling nature of the spending review puts equal emphasis on the existing level of public expenditure and incremental amounts to be made available in future budgets. This is a welcome shift in the focus away from the year-on-year incremental increases in spending. The spending review process has in its second three-year cycle continued to focus on key priority areas of expenditure, in terms of the amount of expenditure and the significance of the emerging policy challenges. This includes staffing and pay bill trends to guide future workforce projections and planning. However, it remains to be seen how the budget preparations will actually benefit from the spending review process. Concerning capital expenditure, the multi-annual allocations agreed in the 2018 budget are being extended under the National Development Plan for a further year and so will now underpin each department’s capital planning process for a five-year period from 2018 to 2022. These five-year allocations will be reviewed and extended annually on a rolling basis to include a fifth year, as part of the annual budgetary process. The government’s capital allocation for 2019 is broadly in line with the overall allocation set out in the National Development Plan. The planned rainy day fund could contribute to prudent management of public finances. To this end, the government has published the draft law to establish the fund, which will formally be known as the National Surplus (Exceptional Contingencies) Reserve Fund. The bill is currently before the parliament. So far, the allocations for the fund for 2019-2023 in the 2019 budget remain unchanged from the Stability Programme 2018 (at EUR 500 million per annum). However, the legislation provides for a facility to add potential windfall tax receipts or income to the fund where the parliament so approves. Timely publication of all finance bill measures would increase transparency. In principle, Finance Bills give effect to tax measures announced in the Budget. However, the latest Finance Bill includes some measures, with a possible budgetary impact, which were not announced in advance, as part of Budget 2019. The Parliamentary Budget Office has highlighted that, while some are only technical in nature, it would be useful if all measures, and associated costings, were published in advance of consideration of the proposal by the parliament, where practicable (Parliamentary Budget Office, 2018). 4.1.3.Taxation Tax revenue continues to increase but the volatility of the corporate income tax remains a concern. Corporation tax revenue in 2018 increased by EUR 2.2 billion (or 27 %) compared to 2017, with EUR 0.7 billion linked to non-recurring factors, including changes in international reporting standards. This increase comes after a surge of 11.6 % in 2017. Corporation tax revenue also remains highly concentrated. In 2017, 10 companies accounted for 39 % of tax revenue and foreign-owned multinational enterprises paid 80 % of corporate taxation. Corporate income taxes as a percentage of total taxation continued to increase, amounting to 12.2 % of total taxation in 2017. This is the highest level since 2003 and an increase of 3.9 pps. since 2014. The high proportion of corporate taxes and the dependence on a small number of major taxpayers make Irish public finances dependent on a small number of multinationals. The Minister of Finance has announced that he plans to propose measures in 2019 to address the increased concentration of overall taxation revenue on corporation tax receipts. The measures of budget 2019 will moderately broaden the tax base and decrease tax expenditure. The measure with the biggest impact is an increase in the lower value-added-tax rate on hospitality, from 9 % to 13.5 %. Furthermore, the vehicle registration tax relief granted for certain leased vehicles will be suppressed and the scope of the sugar sweetened drinks tax will be widened. The tax mix will also be slightly changed, including increased betting duties, higher excise duty on tobacco products and higher employer contributions to the National Training Fund levy. At the same time, personal income tax is lowered by changing bands and increasing certain tax credits, while universal social charge is also lowered through bands and rate changes. A timely review of the property tax has been announced for 2019. It is an opportunity to broaden the tax base and change the tax mix in a more sustainable way less detrimental to growth (see Section 4.4.2). High capital flows, coupled with limited application of withholding taxes on royalties ( ) and dividends ( ) may be an indication that Ireland's tax rules are used by companies to engage in aggressive tax planning. Ireland has a very high level of outbound royalties and dividends as a share of GDP (European Commission, 2018a). Changes to tax residence rules implemented since 2015 have reduced opportunities for aggressive tax planning, although companies incorporated before 2015 are grandfathered until the end of 2020. ( ) Intangibles worth billions of euros were on-shored in 2015, while companies were allowed 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. Following recommendations from the Coffey Review, the quantum was reduced back from 100 % to 80 % but only for new capital allowances on intangible assets. Ireland is acting to curb aggressive tax planning through the implementation of European and internationally agreed initiatives. Some provisions of the Anti-Tax Avoidance Directive have been transposed into national law, such as the exit tax since October 2018 or the Controlled Foreign Company rules (option B) since January 2019. Ireland has provided for a specific anti-abuse rule to prevent the risk that the exit tax at 12.5 % could be used to circumvent the capital gain tax, whose rate is at 33 %. Public consultations are ongoing on the interest limitation and hybrid rules. In September 2018, the government published a Corporation Tax Roadmap, which announces consultations in 2019 on the transfer pricing methodology and on the possibility of a transition from a worldwide to a territorial tax system. A possible review of the withholding tax system, as mentioned in the Roadmap, could be instrumental in stopping payments leaving the EU potentially untaxed. Ireland has now fully ratified the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, which provides for a minimum level of protection against treaty abuse. Ireland has chosen to apply it to the vast majority of its treaty partners, even though it has, similar to a majority of countries, put in a number of reservations not forming part of the minimum standard. The actual changes will depend on the combined effect of reservations by Ireland and its partners. Ireland has published in November 2018 a Competent Authority Agreement with Malta to make sure that the bilateral tax treaty between Ireland and Malta is not used for aggressive tax planning practices through the so-called ‘Single Malt’ structure. ( ) It is too early to assess the effect of these various measures, as well as of the US tax reform, in limiting aggressive tax planning. The potential of environmental taxation to support environmental objectives in a socially fair manner has not been fully exploited. Revenue from environmental taxes are above EU average as a percentage of total taxes (7.6 % v 6.1 % in 2017), but fossil fuel subsidies remain significant and have in fact been rising over the past decade. Peat production and consumption remain subsidised and other subsidies and exceptions exist for petroleum, natural gas and coal (OECD, 2018c). Diesel is still taxed at a lower rate both in terms of carbon and energy content, even though it emits more air pollutants. The different tax treatment of diesel and gasoline for road use is nevertheless beginning to be addressed with a 1 % vehicle registration tax surcharge for diesel engine passenger vehicles registering in Ireland from 1 January 2019. In addition, fiscal measures are being extended in 2019 to support the purchase of electric, hybrid and plug-in hybrid vehicles. The government decided against raising the carbon tax in the 2019 budget. The Climate Change Advisory Council strongly advocated (Climate Change Advisory Council, 2018) an increase in the tax from EUR 20/ton of CO2 to EUR 30 as a first signal towards further increases to EUR 80 by 2030. The government seriously considered the measure and commissioned a study by the Economic and Social Research Institute (de Bruin and Yakut, 2018) to assess its impact, but decided against it in this budget pending further analysis of the impacts of multiannual increases in carbon tax before commencing with the implementation of such a policy.. The increase would have been an important and much-needed signal to economic agents. The government indicated that it would again consider raising the carbon tax in future. 4.2. Financial sector

4.2.1.BANKING SECTOR* ( ) New lending continues to be subdued, which is mainly due to weak demand for loans. For the first three quarters of 2018, the flow of new loans to households and non-financial corporations was EUR 23.8 billion, up from EUR 22.7 billion for the same period a year ago, with newly issued mortgages, excluding renegotiations, expanding by over 40 %. Despite recent improvements, these figures are substantially below the pre-crisis levels, especially for small ticket (i.e. less than EUR 1 million) loans to non-financials, which have remained below one-fifth of their peak values in 2010. External uncertainties undermine the market performances of Irish banks. Much like the rest of the Irish economy, domestic banks remain susceptible to external spill-overs, most notably from the UK’s decision to leave the EU. As a result of these external sources of uncertainty, the stock prices of the Irish banks dropped, especially in the third quarter of 2018, trading well below the euro-area financial indices. Despite these conditions, the state-owned Allied Irish Banks (AIB) and Bank of Ireland (BOI) have maintained healthy capital ratios in the EU-wide stress test of 2018, even under the adverse scenarios. Demand for loans among SMEs remains depressed. According to the Survey on the access to finance of enterprises (SAFE), loan applications by Irish SMEs have been declining since 2012 (Graph 4.2.1). Only 13 % of respondents applied for new loans in 2017, down from 19 % in 2012. Discouragement and external funding do not seem to be the main drivers, implying that an increasing share of SMEs either use internal funds or are deterred from investment altogether. Supplementary results show that applicants are increasingly likely to receive the full amounts they asked for in their loan applications (Graph 4.2.2), suggesting that credit supply factors are not driving the weak lending conditions. Graph 4.2.1:Access to finance by SMEs — Have you applied for credit? Source: European Commission, SAFE survey Graph 4.2.2:Access to finance by SMEs — If applied, what was outcome Source: European Commission, SAFE survey Table 4.2.1:Financial soundness indicators for domestic and foreign banks Source: ECB CBD Increased portfolio sales are facilitating faster non-performing loans reduction in the banking sector. The three main domestic banks continue to improve their asset quality, (Graph 4.2.3). While the aggregate non-performing loans (NPL) ratio fell to 8.5 % of gross loans in the second quarter of 2018, down from 11.6 % one year earlier, it remains above the euro area average of 4.2 %. The non-financial private sector non-performing loans ratio remains nevertheless elevated, at 11.8 %, pushed up by still-high mortgage arrears. Asset quality improvements over the past year have been primarily driven by loan sales, which will continue in the upcoming months, assuming that the announced sales are fully implemented. The sales that have been executed so far have led to a significant reduction in mortgage arrears. Provisioning levels remain low at 32.1 % as of June 2018. After a temporary rise in late 2017, repossessions have reverted to their downward trend. Voluntary repossessions peaked in the last quarter of 2017, driven by a temporary ‘voluntary surrender’ programme implemented by an Irish bank. Both voluntary and court-ordered repossessions declined in the first half of 2018. An analysis of the repossession data (Central Bank of Ireland, 2018a) reveals that banks are more likely to engage in repossessions than non-banks, including credit purchasers, although this result is partly driven by the rise in repossessions at end-2017 and may change over time as more loans are held by credit purchasers. Graph 4.2.3:Non-performing loans reduction by portfolio Source: CBI Long-term mortgage arrears resolution continues to be slow due to the inherent difficulty of restructuring these cases. Although the stock of long-term mortgage arrears (i.e. arrears of more than two years) has declined by EUR 1.4 billion in the year to September 2018, the share of these problem loans in the overall share of mortgage loans (8.5 %) and among 90+ days past due mortgage loans (72 %) remains high. Moreover, there is evidence that the pace of reduction in long-term arrears is slowing down (O’Malley, 2018). Since vulnerable households are more likely to be in long-term arrears, a positive development has been the increase in approvals for the Enhanced Mortgage-to-Rent scheme. ( ) In particular, the number of approvals under the new scheme has already surpassed the number of approvals under the original scheme in 2012. The number of personal insolvency applications also continues to increase following the introduction of the Abhaile aid-and-advice scheme. However, the number of debtors successfully entering into an arrangement with their lender has been stagnating since end-2017. A number of initiatives have been proposed that aim to address the social and economic impact of non-performing loan resolution may have consequences for the functioning of the financial sector. The Consumer Protection Bill (Regulation of Credit Servicing Firms) Act 2018, which came into effect on 21 January 2019, subjects authorisation and regulatory requirements on loan purchasers. Following a critical opinion from the European Central Bank (European Central Bank, 2018a), certain provisions of the original proposal, including the requirement to disclose the purchasing prices to borrowers were removed. Any inconsistencies of the bill with the European Commission’s March 2018 proposal for a directive on credit servicers, credit purchasers and the recovery of collateral will be addressed until the latter enters into force. ( ) Another relevant initiative is the draft Mortgage Arrears Resolution (Family Home) Bill 2017, which sets up the Mortgage Resolution Office, to administer restructuring solutions and may potentially call into question agreed restructuring terms (European Central Bank, 2018b). Other recent initiatives may also have unintended consequences by generating undue obstacles to non-performing loan resolution, including the Courts and Land and Conveyancing Law Reform Bill 2018, which was sent to the European Central Bank for its opinion in January 2019, and the "No Consent, No Sale" Bill, which proposed in early 2019. Lastly, concerns remain that a draft bill enabling the Central Bank of Ireland (CBI) to cap interest rates on variable rate mortgages, if enacted, could have negative implications for the transmission of monetary policy, financial stability and bank competition. The tracker mortgages examination is in its final phases. In 2015, the CBI initiated a systemic examination of borrowers that were wrongfully taken off a tracker rate ( ) or received an incorrect margin on the tracker. As of the end of 2018, 39 800 customers have been identified as being impacted across several lenders. Around 97 % of these customers have received offers of redress and compensation, with EUR 650 million paid out by lenders. The authorities have recalibrated the macro-prudential toolkit to increase the resilience of banks. Amendments to macro-prudential measures, which entered into force at the beginning of 2018, mean that first-time buyers (FTB) and second and subsequent buyers (SSBs) are treated differently for the purposes of the loan to income allowances. While up to 20 % of FTBs can still be exempted from the 3.5-loan-to-income (LTI) requirement, up to 10 % of SSBs can also benefit from this exemption. Required deposits remained unchanged at 10 % of FTBs and 20 % for SSBs. The third review of the framework currently in place was completed in November 2018 and without making any changes to existing parameters. Moreover, the CBI has introduced a 1 % countercyclical capital buffer in July 2018, effective from July 2019. 4.2.2.PRIVATE INDEBTEDNESS* ( ) Private sector debt remains high, pushed up by large multinational companies in Ireland. The private sector has continued to reduce debt in 2018, driven by the corporate sector. The private debt-to-GDP ratio is heavily influenced by multinational corporations’ activities, affecting both the numerator and the denominator of the debt ratio. Debt of households and domestic companies, including that of redomiciled public limited companies, relative to GDP, fell below the indicative Macroeconomic Imbalance Procedure (MIP) threshold in 2017 (Graph 4.2.4). Relative to GNI*, debt of domestic companies and households stood at 213 % in 2017. While high, the debt of non-financial companies has continued its downward trend. Debt of nonfinancial corporations fell from 231 % to 196 % of GDP in the course of 2017. Multinational companies located in Ireland are driving the trend, falling from 140.9 % of GDP in 2016 to 112.4 % in 2017. Debt of Irish companies, including that of redomiciled public limited companies, fell from 90.1 % of GDP to 83.6 % over the same period. Graph 4.2.4:Private indebtedness Source: CSO

Rising property prices put upward pressure on household debt. Household debt as a percentage of GDP has fallen from its peak of 116.2 % in 2009 and was 47.7 % in 2017 (Graph 4.2.5). While some of the decline is explained by the surge in GDP in 2015, active deleveraging efforts by households have also contributed significantly to the decline. However, household savings rate is low and to ensure debt sustainability over the medium term, households would need to increase their savings rate by 2.4 pps of GDP. Furthermore, increasing credit flows suggest that nominal household debt bottomed out in 2018. Household debt relative to gross disposable income, which is unaffected by the presence of multinational companies and comparable across countries, remains among the highest in the EU at 136 %, despite a significant reduction in that metric since it peaked in 2009 at 218 %. Graph 4.2.5:Household debt and estimated benchmark Source: European Commission The debt servicing ratio of Irish households is currently at historically low levels, but still represents one of the highest in the EU. Despite a marked decline in household debt, relative to gross disposable income, from 215 % of disposable income in 2009 to 135.7 % in 2017, household indebtedness is among the highest in the EU. The high level of debt, together with the high lending rates prevailing in Ireland, is also reflected in a high debt servicing ratio, estimated at 7.9 % of disposable income. This is relatively high compared to other EU countries. ( ) The composition of mortgages suggests that households are becoming more resilient to economic shocks. Given the still-high debt servicing ratio, Irish households remain vulnerable to sudden income shocks. Households are nevertheless becoming less exposed to interest rate shocks, as an increasing share of new mortgages is loans with interest rate fixation of one to five years. Moreover, CBI (Gaffney et al., 2018) shows that recent new loans with deferred amortisation are rarely related to primary dwellings. In 2007, 15 % of new mortgages were with deferred amortisation. While the composition of new mortgages is encouraging, its impact on the stock of mortgages remains limited. 90 % of the mortgage stock remains characterised by variable interest rates. 4.3. Labour market, education and social policies 4.3.1.Labour market Labour market conditions continue to improve overall, but some groups are not fully benefitting from it. Job creation during the recovery has taken place across most sectors of the economy (Graph 4.3.1). In 2018, construction and accommodation and food services contributed most to the growth in employment, reflecting the strength of domestic activity. Unemployment kept on falling (5.4 % in the fourth quarter of 2018), as did youth unemployment (12.5 % in the fourth quarter of 2018). Wage pressures are emerging in certain sectors (see Section 1). Steady economic growth is positively reflected in the main employment and social indicators. Furthermore, other than in terms of skills, there are no significant disparities in the main labour and social indicators at regional level (Nomenclature of territorial units for statistics NUTS 2 ( )). However, inactive people, low work intensity households, people with disabilities, and low-skilled individuals are still facing considerable challenges. There are some labour shortages coupled with skill shortages emerging in certain sectors. Even though Ireland is one of the countries where employers report the least difficulty in hiring (ManpowerGroup, 2018), 78 % of employers report having experienced moderate to extreme skill shortages in 2017 (20 % labelled as extreme) (Hays, 2018). According to the survey on the access to finance of enterprises, the share of companies that consider the availability of skilled staff or experienced managers as their most pressing problem has increased from 15 % in 2017 to 22 % in 2018. The largest shortage occupations are information and communication technologies professionals, construction and property professionals. Skills needs are being tackled through training (see Section 4.3.2) and migration. Digital skills of the wider workforce and shortages of information and communication technology (ICT) professionals remain challenges. Whilst the proportion of ICT specialists in the overall workforce (4.4 %) is slightly above the EU average of 3.7 % (European Commission, 2019b), there is a significant shortage of specific ICT skills, as highlighted in various reports (SOLAS, 2018). Roughly half of the enterprises who tried to recruit ICT specialists experienced difficulties (European Commission, 2019b). As for more universal digital skills, 52 % of the adult population lack even basic digital skills, well above the EU average of 43 %. Graph 4.3.1:Change in employment by sector Source: European Commission Regional differences persist in terms of skilled and high-skilled labour and targeted training for small and medium enterprises needs. Ireland shows large regional differences in job skill levels. The Southern and Eastern region is among the top 20 % of the Organisation for Economic Co-operation and Development (OECD) regions (considered an appropriate comparison among industrialised countries in the absence of regional Eurostat data) and the Border, Midland and Western region in the bottom 20 %. Wages in multinationals of EU and US origin are 64 % and 74 % higher respectively than in domestic companies (OECD, 2018a). Hence, high-skilled human capital tends to gravitate towards working for the multinationals and towards the greater Dublin area and the Southern and Eastern region. Moreover, OECD findings show a shortage of managerial skills in small and medium enterprises (OECD, 2018a). Disparities persist in employment levels between different skill groups. The differences between the employment rates of low-, medium-, and high-skilled workers remain among the highest in the EU in 2017 (Graph 4.3.2), although it has decreased since 2014. Indeed, the employment rate of high-skilled workers (84.0 % in the third quarter of 2018) is significantly higher than that of medium- (72.3 %) and low-skilled workers (51.3 %). Ireland saw a rise in skills mismatches in recent years following considerable job destruction affecting primarily low-skilled workers in the construction sector. Efforts to raise the skills of the working age population are already ongoing (see Section 4.3.2) but are likely to require further investments to meet the size of the challenge. Graph 4.3.2:Relative dispersion of employment rates by education level, 2010, 2014 and 2017 Source: Own calculations based on Eurostat. Annual average based on the average of four quarters Underemployment and the quality of employment remain an issue. About a quarter of all part-time employees in 2017 would take full-time employment if they could find it (Eurostat). Bogus self-employment, zero-hour contracts and the status of individuals working within the ‘gig economy’ have been the focus of much policy debate. Atypical forms of work tend to be associated with higher income volatility and lower job security (European Commission 2018j). Precarious employment has risen in Ireland (Irish Congress of Trade Unions, 2017), with nearly 8 % of the workforce having significant variations in their hours of work. The social security system covers all people in employment, provided their income meets the income threshold indicating attachment to the workforce i.e. EUR 38 per week in the case of employees or EUR 5 000 per annum in the case of the self-employed.. The self-employed do not have formal coverage to unemployment benefits and to accident and occupational injuries, and are excluded from contributory sickness benefit schemes. New measures are targeting the quality of employment. The Government published the ‘Employment Miscellaneous Provisions’ Bill in July 2018. It aims at tackling exploitative employment arrangements by providing better information on the nature of employment, strengthening provisions around minimum pay, prohibiting zero hour contracts, and protecting employees who wish to invoke their rights under the Act against being penalised. Labour market participation remains relatively low. Whilst the activity rate in Ireland continues to increase (78.2 % in the third quarter of 2018 for individuals between 20 and 64), it has not yet reached its pre-crisis high and remains slightly below the EU average (78.4 %). The activity rate is particularly low for the low skilled and for women. According to recent research (OECD, 2018b), limited work experience, low levels of skills, and scarce job opportunities are the more common potential employment barriers amongst individuals with no or weak labour market attachment. Over 110,000 inactive people could benefit from non-standard working arrangements to transition from inactivity into the labour force (SOLAS, 2018). The insufficient provision of childcare is the main cause of high female inactivity. In 2017, 54.2 % of inactive Irish females reported caring responsibilities as the main reason for inactivity, against an EU average of 31 %. This is the main reason behind the above-average gender gap in employment rates for the age group 20-64 (12.8 % in the second quarter of 2018 vs 11.9 % in the EU) (Graph 4.3.3). Box 4.3.1: Monitoring performance in light of the European Pillar of Social Rights The European Pillar of Social Rights is designed as a compass for a renewed process of upward convergence towards better working and living conditions in the European Union. VI It sets out twenty essential principles and rights in the areas of equal opportunities and access to the labour market; fair working conditions; and social protection and inclusion. Ireland performs relatively well on a number of indicators of the Social Scoreboard supporting the European Pillar of Social Rights, while challenges remain. The Irish tax and benefits system continues to be very effective in reducing poverty and inequalities, but with a slight increase in inequality recently. The labour market also shows relatively good employment-related outcomes. Real disposable household income per capita has been bolstered by accelerating wages and subdued inflation, but it remains below pre-crisis levels. Many people have yet to reap the social benefits of the economic upturn. The employment rate of people with disabilities is the lowest in the EU. Child poverty remains a concern with one in every ten children living in persistent poverty. At the same time, a low percentage of the population has at least basic digital skills. The rapidly rising number of homeless people as a result of rent increases and insufficient social housing merits urgent action. Insufficient levels of investment and construction over the last decade, including social housing, have led to a huge shortage of adequate accommodation for those most at risk. The bulk of the challenge is concentrated in the major urban areas and it is affecting different groups, notably single parents, single men, the elderly, people with disabilities and an increasing number of families and youth. Meeting social housing demand, in line with the Pillar principle on housing and homelessness, will take several years of sustained investment to address quantity, quality and variety of housing and to provide supporting services. Ireland is delivering very well on education in general in line with the Pillar principle on education, training and lifelong learning. The education system in Ireland continues to show positive outcomes with the rate of early school leavers standing at 5.1%, one of the lowest in the EU. The level of tertiary education completion places Ireland among the top three EU Member States and the country ranks top in terms of the percentage of students attaining baseline proficiency by migrant background. Formal childcare remains unaffordable for many. While participation in early childhood education and care from age four is now well above the EU average at 98.8 %, the participation of children below three years of age in formal childcare is below the EU average. Childcare provision in Ireland (34.4 % in 2017) has caught up with the EU average (34.0 % in 2017), although Irish families avail of a much lower rate of formal childcare for children enrolled in childcare for 30 hours or more (10.6 % compared to 7.0 % for children under 3). Childcare costs are the highest in the EU: in 2015, the net cost for a lone mother with two children and low earnings amounts to 42 % of her disposable income (OECD, 2017e). Graph 4.3.3:Activity rate by gender and age, 2017 Source: Eurostat

Several measures have been taken to enhance the provision of childcare, in line with the European Pillar of Social Rights. The bill establishing the Single Affordable Childcare Scheme was passed in 2018 and the information technology system is now ready to be deployed after some setbacks. Once implemented, this legislation will give parents a clear legal entitlement to financial support f