Council opinion of 27 February 2007 on the updated stability programme of Ireland, 2006-2009
Date: 2007-02-27
Institutions: Council of the European Union
Subjects: Ireland, budget estimate, economic forecasting, public finance, stability programme

27.3.2007

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Official Journal of the European Union

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(Resolutions, recommendations, guidelines and opinions)

OPINIONS

COUNCIL

COUNCIL OPINION

of 27 February 2007

on the updated stability programme of Ireland, 2006-2009

(2007/C 70/01)

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 particular
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)

On 27 February 2007 the Council examined the updated stability programme of Ireland, which
covers the period 2006 to 2009.

The macroeconomic scenario underlying the programme envisages that real GDP growth will edge
lower from 5,4 % in 2006 to an average of a little above 4½ % over the rest of the programme
period. Assessed against currently available information, this scenario appears to be based on plau-
sible growth assumptions, though a sharp downturn in high levels of residential construction and
property prices are important risks. The programme's projections for inflation appear realistic.

For 2006 the general government balance is estimated in the programme as a surplus of 2,3 % of
GDP, against a budgeted deficit of 0,6 % of GDP in the previous update; more recent cash data for
central government points towards an even stronger surplus, of around 2½ % of GDP. The stronger
than expected result compared with a year earlier is entirely attributable to the revenue side, reflecting
in particular the continuing buoyancy of the property market boosting housing-related taxes, and to
a more limited extent higher output growth having a similar effect on mainstream taxes. The esti-
mated outturn for nominal expenditure is close to budget.

Ireland's medium-term budgetary strategy is based on maintaining budgetary sustainability, anchored
in respect of the Stability and Growth Pact. Surpluses are projected to be maintained throughout the
programme period, moderating from an estimated headline surplus of 2,3 % of GDP in 2006 to
1,2 % in 2007 and progressively declining to 0,6 % in 2009; the primary surplus declines similarly
from an estimated 3,3 % of GDP in 2006 to 1,6 % of GDP in 2009. The halving of the budgeted
headline surplus in 2007 is due to a higher planned expenditure ratio, the increase representing
mainly higher social transfers; in 2008 and 2009 both revenue and expenditure ratios are projected

(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

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(5)

(6)

(7)

(8)

(9)

to decline, but expenditure only slightly. Compared with the projections in the previous update (to
2008), the strong increase in the estimated 2006 balance, achieved through higher than expected
revenues, is carried forward in terms of the revenue and headline and primary surplus ratios in the
following two years, at a declining rate, with virtually no change in the profile of the projected expen-
diture ratio.

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 decline from a
surplus of just under 3 % of GDP in 2006 to just over 1½ % in 2009. As in the previous update of
the stability programme, the medium-term objective (MTO) for the budgetary position presented in
the programme is a balanced position in structural terms, which the programme plans to maintain
by a large margin throughout the programme period. As the MTO is itself more demanding than the
minimum benchmark (estimated at a deficit of around 1¼ % of GDP), achieving the programme's
structural balance should fulfil the aim of providing a safety margin against the occurrence of an
excessive deficit. The 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 risks to the budgetary projections in the programme appear broadly balanced. On the one hand,
the macroeconomic situation, after a probably stronger than assumed starting position, could evolve
less favourably than projected, and, associated with this, specific revenue sources, particularly those
most closely linked to the housing market, could also be significantly weaker. On the other hand,
other revenues taken together appear to have been projected cautiously, and in recent years expendi-
tures have been contained within or close to planned levels.

In view of this risk assessment, the budgetary stance in the programme seems sufficient to maintain
the MTO throughout the programme period, as envisaged in the programme. In addition, it provides
a sufficient safety margin against breaching the 3 % of GDP deficit threshold with normal macroeco-
nomic fluctuations throughout the same period. For 2008 and 2009 the fiscal policy stance is in line
with the Stability and Growth Pact. In 2007, however, the structural balance declines strongly,
carrying the risk that the fiscal policy stance implied by the programme may be pro-cyclical in this
year should the economy turn out to be experiencing good times, a situation to be avoided under the
Stability and Growth Pact.

Government gross debt is estimated to have declined to around 25 % of GDP in 2006, well below
the 60 % of GDP Treaty reference value. The programme projects the debt ratio to decline by a
further three percentage points over the programme period.

The long-term budgetary impact of ageing in Ireland is well above the EU average, mainly as a result
of a relatively younger population and consequently a higher increase in pension expenditure as a
share of GDP over the coming decades, influenced in part by the maturing of the pension system.
The initial budgetary position, improved compared with 2005, contributes significantly to easing the
projected long-term budgetary impact of ageing populations, but is not sufficient to fully cover the
substantial increase in expenditure due to the ageing of the population. Maintaining high primary
surpluses over the medium term and implementing measures aimed at curbing the significant increase
in age-related expenditures would, as recognised in the programme, contribute to reducing risks to
the sustainability of public finances. Overall, Ireland appears to be at medium risk with regard to the
sustainability of public finances.

(10)

The stability programme does not contain a qualitative assessment of the overall
impact of the
October 2006 implementation report of the national reform programme within the medium-term
fiscal strategy. In addition, it provides no systematic information on the direct budgetary costs or
savings of the main reforms envisaged in the national reform programme and its budgetary projec-
tions do not explicitly take into account the public finance implications of the actions outlined in the
national reform programme. The measures in the area of public finances envisaged in the stability
programme nevertheless seem consistent with those foreseen in the national reform programme. In
particular, both programmes envisage ongoing implementation of ambitious plans to upgrade infra-
structure, notably in the context of the National Development Plan published in January 2007, while
the stability programme complements the actions envisaged in the national reform programme with
detailed description of measures to improve the institutional features of the public finances, notably
measures to increase the efficiency of tax collection and achieve greater value for money in expendi-
ture management.

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(11)

The budgetary strategy in the programme is broadly consistent with the broad economic policy
guidelines included in the integrated guidelines for the period 2005-2008.

(12) As regards the data requirements specified in the code of conduct for stability and convergence

programmes, the programme provides all required and most optional data (1).

The Council considers that the medium-term budgetary position is sound and, the budgetary strategy
provides a good example of fiscal policies conducted in compliance with the Stability and Growth Pact.
Nonetheless,
it would be prudent to maintain room for manoeuvre against any reversal of the current
growth pattern which has been led by strong housing sector developments.

In view of the above assessment, in particular the projected increase in age-related expenditure, the Council
invites Ireland to continue to implement measures to improve the long-term sustainability of its public
finances and to avoid pro-cyclical policies in the years ahead.

Comparison of key macroeconomic and budgetary projections

Real GDP
(% change)

HICP inflation
(%)

SP Dec 2006

COM Nov 2006

SP Dec 2005

SP Dec 2006

COM Nov 2006

SP Dec 2005

2005

2006

2007

2008

2009

5,5

5,5

4,6

2,2

2,2

2,2

5,4

5,3

4,8

2,7

2,9

2,0

5,3

5,3

5,0

2,6

2,7

2,0

4,6

4,3

4,8

2,0

2,2

1,8

4,1

n.a.

n.a.

1,7

n.a.

n.a.

Output gap
(% of potential GDP)

SP Dec 2006 (1)

– 0,4

– 1,2

– 1,6

– 2,2

– 2,5

COM Nov 2006 (5)

– 0,5

– 1,4

– 1,9

– 2,7

SP Dec 2005 (1)

– 1,3

– 1,9

– 2,2

– 2,1

General government
balance
(% of GDP)

Primary balance
(% of GDP)

Cyclically-adjusted
balance
(% of GDP)

SP Dec 2006

COM Nov 2006

SP Dec 2005

SP Dec 2006

COM Nov 2006

SP Dec 2005

SP Dec 2006 (1)

COM Nov 2006

SP Dec 2005 (1)

1,1

1,1

0,3

2,1

2,1

1,5

1,3

1,3

0,8

2,3

1,2

1,2

0,9

0,9

0,4

– 0,6

– 0,8

– 0,8

3,3

2,2

0,6

2,8

1,7

0,2

2,3

1,9

0,4

1,8

1,6

0,1

1,8

1,4

0,5

1,8

1,5

0,1

n.a.

n.a.

0,6

n.a.

n.a.

1,6

n.a.

n.a.

1,6

n.a.

n.a.

(1) In particular, data are not provided for deflators for private consumption, public consumption and investment, net
lending/borrowing of the private sector, government expenditure by function and decomposition of the general govern-
ment debt stock-flow adjustment.

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Structural balance (2)
(% of GDP)

Government gross debt
(% of GDP)

SP Dec 2006 (3)

COM Nov 2006 (4)

SP Dec 2005

SP Dec 2006

COM Nov 2006

SP Dec 2005

2005

2006

2007

2008

2009

1,6

1,6

0,8

27,4

27,4

28,0

2,7

1,7

0,2

25,1

25,8

28,0

1,8

1,6

0,1

23,0

24,4

28,2

1,8

1,5

0,1

22,4

23,6

28,3

1,6

n.a.

n.a.

21,9

n.a.

n.a.

Notes:
(1) Commission services calculations on the basis of the information in the programme.
(2) Cyclically-adjusted balance (as in the previous rows) excluding one-off and other temporary measures.
(3) One-off and other temporary measures of - 0,3 % of GDP in 2005 (assumed: cf note 4) and 0,1 % of GDP in 2006 (indicated in the

programme); no information is given in the programme for 2007-09.

(4) One-off and other temporary measures taken from the Commission services' autumn 2006 forecast (- 0,3 % of GDP in 2005, i.e.

surplus-reducing).

(5) Based on estimated potential growth of 6,1 %, 6,3 %, 5,8 % and 5,2 % respectively in the period 2005-2008.

Source:
Stability programme (SP); Commission services' autumn 2006 economic forecasts (COM); Commission services' calculations