Council Opinion of  14 March 2006  on the updated stability programme of Ireland, 2005-2008
Date: 2006-03-14
Institutions: Council of the European Union
Subjects: Ireland, budget estimate, economic forecasting, public finance, stability programme

5.4.2006

EN

Official Journal of the European Union

C 82/19

COUNCIL OPINION

of 14 March 2006

on the updated stability programme of Ireland, 2005-2008

(2006/C 82/05)

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveil-
lance of budgetary positions and the surveillance and coordination of economic policies (1), and in particu-
lar Article 5(3) thereof,

Having regard to the recommendation of the Commission,

After consulting the Economic and Financial Committee,

HAS DELIVERED THIS OPINION:

(1)

(2)

(3)

(4)

(5)

On 14 March 2006 the Council examined the updated stability programme of Ireland, which covers
the period 2005 to 2008.

Ireland has experienced an impressively rapid increase in real GDP per capita and employment
levels over the last decade. In recent years the Irish economy has continued to grow at just below
5 % p.a., the highest rate in the euro area, while employment is on the rise and inflation has
converged rapidly towards the euro-area average. As regards budgetary developments, the fiscal
position has been broadly sound, with the general government balance recording surpluses in most
years over the last decade and the debt ratio falling significantly (to under 30 % of GDP in 2005).

In its opinion of 17 February 2005, the Council endorsed the budgetary strategy presented in the
previous update of the stability programme, covering the period 2004-2007. As regards budgetary
implementation in 2005, the previous update targeted a general government deficit of 0,8 % of
GDP, while the current update estimates a 0,3 % surplus despite a downward revision of growth.
The main reason for the far better outcome in 2005 than initially targeted is to be found on the
revenue side.

The programme broadly follows the model structure and data provision requirements for stability
and convergence programmes specified in the new code of conduct (2).

The macroeconomic scenario underlying the programme envisages that real GDP growth will
remain in a narrow range of between 4,5 % and 5 % over the programme period. Assessed against
currently available information, this scenario appears to be based on plausible growth assumptions.
While the current picture suggests a broadly healthy condition of the economy with robust growth
to continue, there are some downside risks to the macroeconomic outlook in the medium term. In
particular, these are related to global economic prospects, given the openness of the economy; and
domestically,
to any sharp downturn from the extended residential construction boom. The
programme's projection for HICP inflation may be on the low side.

(1) OJ L 209, 2.8.1997, p. 1. Regulation as amended by Regulation (EC) No 1055/2005 (OJ L 174, 7.7.2005, p. 1). The

documents referred to in this text can be found at the following website:
http://europa.eu.int/comm/economy_finance/about/activities/sgp/main_en.htm

(2) The programme provides all compulsory data prescribed by the new code of conduct but some of the optional data

are missing.

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Official Journal of the European Union

5.4.2006

(6)

(7)

(8)

The update confirms the commitment of the Irish government to maintaining sound public finances.
Starting from a 0,25 % of GDP surplus in 2005, the budgetary strategy envisages a general govern-
ment deficit of 0,6 % in 2006 and 0,8 % of GDP in the final two years of the programme. The
primary surplus falls from 1,5 % of GDP in 2005 to 0,5 % in the years 2006-2008. The revenue-to-
GDP ratio is on a declining trend, while the expenditure ratio initially increases and falls back to the
2005 level only towards the end of the programme period. The investment-to-GDP ratio is projected
to increase by 0,5 percentage point of GDP over the period 2005 to 2008. Apart from the better-
than-expected 2005 outturn, the new update broadly confirms the budgetary targets of the previous
programme.

Following the fiscal expansion planned for 2006, the structural balance (i.e. the cyclically-adjusted
balance net of one-off and other temporary measures) calculated according to the commonly agreed
methodology is planned to stabilise at around 0,1 % of GDP over the rest of the programme period.
The programme sets the medium-term objective (MTO) for the budgetary position at a structural
position of close to balance and plans to maintain a structural position that satisfies the program-
me's MTO throughout the programme period. As the programme's MTO is more demanding than
the minimum benchmark (estimated at a deficit of around 1,25 % of GDP), its achievement should
fulfil the aim of providing a safety margin against the occurrence of an excessive deficit. As regards
appropriateness, the programme's MTO lies within the range indicated for euro area and ERM II
Member States in the Stability and Growth Pact and the code of conduct and is more demanding
than implied by the debt ratio and average potential output growth in the long term.

The budgetary outcome could be better than projected in the programme, in particular in 2006.
The revenue forecast might imply cautious assumptions on tax projections in the programme and,
on the expenditure side, the capital outlays might turn out somewhat below planned allocations.
Risks to the budgetary targets stemming from the macroeconomic projections in the update appear
neutral and are broadly in line with the Commission services' evaluation; however, the budgetary
projections could be vulnerable if the downside macroeconomic risks in the medium term were to
be realised.

(9)

In view of this risk assessment, the budgetary stance in the programme seems sufficient to maintain
the programme's MTO throughout the programme period, as envisaged in the programme. In addi-
tion it provides a sufficient safety margin against breaching the 3 % of GDP deficit threshold with
normal macroeconomic fluctuations in each year.

(10)

The debt ratio, which was still just below 100 % of GDP in the early 1990s, is estimated to have
reached 28 % of GDP in 2005, well below the 60 % of GDP Treaty reference value. The programme
projects the debt ratio to stabilise at this level over the programme period. In the absence of acquisi-
tion of non-general government assets by the National Pensions Reserve Fund (NPRF), the debt ratio
would be falling significantly throughout the programme period.

(11) With regard to the sustainability of public finances, Ireland appears to be at medium risk on
grounds of the projected budgetary costs of an ageing population. The currently sound budgetary
position, in conjunction with the low debt level and the accumulation of assets in the National
Pension Reserve Fund, helps partly to offset the significant rise in age-related government expendi-
ture, notably on pensions, projected over the long term. Ireland has also recently enacted reforms to
the pension system for public servants, and the authorities envisage further measures that should
contribute to a more sustainable basis for the provision of public service pensions. The commitment
to monitoring the adequacy of contribution rates through regular actuarial reviews is helpful. Imple-
menting additional measures aimed at easing the budgetary impact of an ageing population over the
long term would be nevertheless an important element in reducing risks to the sustainability of
public finances.

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Official Journal of the European Union

C 82/21

(12)

(13)

The envisaged measures in the area of public finances are broadly consistent with the broad
economic policy guidelines included in the integrated guidelines for the period 2005-2008. In par-
ticular, Ireland respects its MTO and the update provides an overview of the government's structural
reform programme that should contribute towards enhancing the quality of public services,
increasing the efficiency of public spending and addressing the infrastructural needs of the Irish
economy.

(i)

implications for public finances:

The National Reform Programme of Ireland, submitted on 28 October 2005 in the context of the
renewed Lisbon strategy for growth and jobs identifies, in particular, the following challenges with
significant
in
economic and social infrastructure and other growth-enhancing expenditures; and (ii) to maintain a
stable macroeconomic environment and sustainable public finances, and to ensure moderate infla-
tion levels. The budgetary implications of the policy directions outlined in the National Reform
Programme appear to be reflected in the budgetary projections of the stability programme. The
measures in the area of public finances envisaged in the stability programme are in line with the
actions foreseen in the National Reform Programme. The stability programme complements these
measures with proposed changes in the institutional features of the public finances, including some
innovations in the budgetary and estimates process.

to continue to prioritise public investment

The Council is of the opinion that, overall, the budgetary position is sound and the budgetary strategy
provides a good example of fiscal policies in compliance with the Stability and Growth Pact. The Council
invites Ireland to continue to implement measures to address the long-term budgetary implications of an
ageing population.

Comparison of key macroeconomic and budgetary projections

2004

2005

2006

2007

2008

Real GDP
(% change)

HICP inflation
(%)

Output gap
(% of potential GDP)

SP Dec 2005

COM Nov 2005 (2)

SP Dec 2004

SP Dec 2005

COM Nov 2005

SP Dec 2004

SP Dec 2005 (1)

COM Nov 2005 (6)

4,5

4,5

5,3

2,3

2,3

2,3

0,1

0,1

4,6

4,4

5,1

2,2

2,2

2,1

4,8

4,8

5,2

2,0

2,5

2,0

5,0

5,0

5,4

2,0

2,4

1,9

4,8

n.a.

n.a.

1,8

n.a.

n.a.

– 1,3

– 1,9

– 2,2

– 2,1

– 1,6

– 2,2

– 2,6

n.a.

n.a.

SP Dec 2004 (1)

– 1,0

– 1,8

– 2,3

– 2,0

General government
balance
(% of GDP)

SP Dec 2005

COM Nov 2005 (2)

Primary balance
(% of GDP)

Cyclically-adjusted
balance
(% of GDP)

SP Dec 2004

SP Dec 2005

COM Nov 2005 (2)

SP Dec 2004

SP Dec 2005 (1)

COM Nov 2005 (2)

SP Dec 2004 (1)

1,4

1,4

0,9

2,6

2,7

2,1

1,4

1,4

1,2

0,3

– 0,6

– 0,8

– 0,8

– 0,4

– 0,3

– 0,1

– 0,8

– 0,6

– 0,6

1,5

0,8

0,6

0,8

0,2

– 0,2

0,6

0,8

0,6

0,2

0,6

0,1

0,4

0,9

0,7

0,1

0,9

0,0

n.a.

n.a.

0,5

n.a.

n.a.

0,1

n.a.

n.a.

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Official Journal of the European Union

5.4.2006

Structural balance (3)
(% of GDP)

SP Dec 2005 (4)

COM Nov 2005 (2) (5)

Government gross debt
(% of GDP)

SP Dec 2004

SP Dec 2005

COM Nov 2005 (2)

SP Dec 2004

2004

2005

2006

2007

2008

0,7

0,7

n.d.

29,4

29,8

30,5

1,1

0,6

n.a.

28,0

29,0

30,1

0,1

0,6

n.a.

28,0

28,7

30,1

0,1

0,9

n.a.

28,2

28,2

30,0

0,1

n.a.

n.a.

28,3

n.a.

n.a.

Notes:
(1) Commission services' calculations on the basis of the information in the programme.
(2) Commission services' autumn 2005 forecast pre-dates the December 2005 Budget on which the updated stability programme is

based.

(3) Cyclically-adjusted balance (as in the previous rows) excluding one-off and other temporary measures.
(4) One-off and other temporary measures taken from the programme (0.3% of GDP in 2005; surplus decreasing). An estimate of one-
offs for 2004 and 2006 provided by the Irish Department of Finance: 0.7% of GDP in 2004 and 0.1% of GDP in 2006 respectively
(both surplus increasing).

(5) One-off and other temporary measures taken from the Commission services' autumn 2005 forecast (0.4% of GDP in 2005; surplus

decreasing).

(6) Based on estimated potential growth of 5.8%, 6.1%, 5.5% and 5.3% respectively in the period 2004-2007.

Source:
Stability programme (SP); Commission services' autumn 2005 economic forecasts (COM); Commission services' calculations.