COMMUNICATION FROM THE COMMISSION TO THE COUNCIL Assessment of the action taken by Ireland in response to the Council Recommendation of 7 December 2010 with a view to bringing an end to the situation of excessive government deficit
Date: 2011-08-24
Institutions: European Commission
Subjects: Ireland, anti-crisis plan, economic recession, loss, public finance

EUROPEAN COMMISSION 

Brussels, 24.8.2011 
COM(2011) 509 final 

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL 

Assessment of the action taken by Ireland in response to the Council Recommendation 
of 7 December 2010 with a view to bringing an end to the situation of excessive 
government deficit 

 
 
 
 
  
 
1. 

IRELAND 

1.1. 

Excessive deficit procedure and most recent recommendations 

On  27  April  2009,  the  Council  decided,  in  accordance  with  Article  104(6)  of  the  Treaty 
establishing the European Community, that an excessive deficit existed in Ireland and issued 
recommendations to correct the excessive deficit by 2013 at the latest. The Council also set a 
deadline of 27 October 2009 for effective action to be taken.  

On  2  December  2009,  the  Council  concluded  that  the  Irish  authorities  had  taken  effective 
action  in  compliance  with  the  Council  recommendations  of  27  April  2009,  but  that 
unexpected adverse economic events with major unfavourable consequences for government 
finances  could  be  considered  to  have  occurred  in  Ireland.  The  Council  therefore  adopted  a 
revised Recommendation under Article 126(7) of the Treaty, postponing the deadline for the 
correction of the excessive deficit to 2014.  

On 13 July 2010, the Council concluded that the Irish authorities had taken effective action in 
compliance with the Council recommendations. 

On  7  December  2010,  the  Council  recognised  a  sharp  deterioration  of  Ireland's  budgetary 
position  resulting  from  the  impact  of  the  crisis  on  government  revenue  and  the  financial 
sector,  requiring  the  implementation  of  very  large  financial  sector  support  measures.  The 
Council  therefore  adopted  a  revised  Recommendation  under  Article  126(7)  of  the  Treaty, 
extending the deadline for the correction of the excessive deficit to 2015. At the same time, 
following  the  request  by  the  Irish  authorities  for  financial  assistance  from  the  European 
Union,  the  Member  States  whose  currency  is  the  euro  and  the  International  Monetary  Fund 
(IMF),  the  Council  granted  Union  financial  assistance  to  Ireland1.  The  Memorandum  of 
Understanding  on  Specific  Economic  Policy  Conditionality  (the  "Memorandum  of 
Understanding")  between  the  Commission  and  the  Irish  authorities  was  signed  on  16 
December 2010.  

The  Council  recommended  to  the  Irish  authorities  to  bring  the  general  government  deficit 
below 3% of  GDP  in a credible and sustainable  manner  by  taking  action  in  a  medium-term 
framework. Specifically, to this end, the Irish authorities should: (a) implement measures such 
that the general government deficit does not exceed 10.6% of projected GDP in 2011, 8.6% of 
GDP in 2012, 7.5% of GDP in 2013, 5.1% of GDP in 2014 and 2.9% of GDP in 2015, and 
where  the  projected  annual  deficit  path  does  not  incorporate  the  possible  direct  effect  of 
potential bank support measures in the context of the government's financial sector strategy as 
set out in the Memorandum of Economic and Financial Polices (MEFP) and specified in the 
Memorandum of Understanding signed by the Commission and the Irish authorities. Ireland 
should stand ready to take additional consolidation measures to ensure reducing the deficit to 
below 3% of GDP in 2015 in case downside risks to the deficit targets materialise. Further, 
this  path  should  achieve  an  improvement  in  the  structural  balance  of  at  least  9½%  of  GDP 
over the period 2011-20152. 

1 
2 

OJ L 30, 4.2.2011, p. 34. 
The  deficit  path  should  also  be  consistent  with  the  preliminary  view  of  Eurostat  on  the  ESA95 
accounting  treatment  at  the of  time of recording of  interest  payments  on  promissory  notes payable  to 
Anglo Irish Bank, such that a revision of that view would result in a revision of the deficit path. See 

EN 

2 

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In  addition,  the  Irish  authorities  should  seize  opportunities,  including  from  better  economic 
conditions, to accelerate the reduction of the gross debt ratio back towards the 60% of GDP 
reference value.  

To  limit  risks  to  the  adjustment,  Ireland  should  establish  a  budgetary  advisory  council  to 
provide  an  independent  assessment  of  the  Government's  budgetary  position  and  forecasts. 
Ireland  should  adopt  a  Fiscal  Responsibility  Law  introducing  a  medium-term  expenditure 
framework  with  binding  multi-annual  ceilings  on  expenditure  in  each  area.  To  reduce  the 
risks  to  the  long-term  sustainability  of  public  finances,  the  Irish  authorities  should  pursue 
further reforms to the social security system. 

The Council established the deadline of 7 June 2011 for the Irish government to take effective 
action to specify the measures that will be necessary to progress towards the correction of the 
excessive  deficit.  The  assessment  of  effective  action  will  take  into  account  economic 
developments  compared  to  the  economic  outlook  in  the  Commission  services'  autumn  2010 
forecast. 

1.2. 

Assessment of effective action taken 

The Council recommendations of 7 December 2010 were based on projections underlying the 
financial assistance programme for Ireland. These projections updated the Commission Staff 
Working Document "European Economic Forecast Autumn 2010" of 29 November 2010 with 
detailed measures in the 2011 budget announced on 7 December 2010.  

According  to  the  most  recent  Commission  services'  forecast  prepared  in  the  context  of  the 
summer 2011 review of the financial assistance programme  for Ireland, the outlook for real 
activity  in  Ireland  is  broadly  similar  to  that  expected  at  the  time  the  Council  issued  its 
recommendations in December 2010. Real GDP declined by 0.4% in 2010, but is projected to 
return  to  a  positive  growth  of  0.6%  of  GDP  in  2011  and  1.9%  in  2012.  The  projected 
composition  of  growth  has  however  been  adjusted  reflecting  more  pronounced  weakness  in 
domestic demand compensated by stronger external demand.  

The general government deficit ratio to GDP stood at 32% in 2010, the level also projected on 
7 December 2010. Subsequent general government data revisions reduced both revenues and 
expenditures of the general government by some 0.8% of GDP in 2009, while also changing 
its composition in 2009 and 2010, but had a limited effect on the overall balance. This was 
largely due to revisions in detailed accounts of the local authorities for 2009 included in the 
March  2011  EDP  notification,  showing  capital  receipts  and  capital  expenditure  lower  than 
estimated before, which broadly cancel out.  

The  budget  for  2011  introduced  fiscal  consolidation  measures  of  3.8%  of  GDP  including 
structural  revenue  measures  of  0.9%  of  GDP,  structural  expenditure  measures  of  2.5%  of 
GDP and one-off measures amounting to 0.4% of GDP. The government deficit is projected 
at  10.2%  of  GDP  –  below  the  target  set  by  the  Council  of  10.6%  of  GDP3.  A  positive  tax 
revenue surprise at the end of 2010 fed into 2011 and the performance in the first six months 

3 

http://epp.eurostat.ec.europa.eu/portal/page/portal/government_finance_statistics/methodology/advice_
member_states. 
The fiscal forecasts mentioned in this document do not incorporate any savings which would arise from 
the improvements in the terms of EU financial assistance for Ireland announced following the meeting 
of  the  Heads  of  State  and  Government  of  the  euro  area  and  EU  institutions  on  21  July  2011  (see 
http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/123978.pdf). 

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of 2011 suggests some 0.4% of GDP higher revenue than projected by Commission services 
at  the  time  the  Council  recommendations  were  issued.  This  reflects  somewhat  stronger 
income  and  indirect  tax  elasticities  despite  weaker-than-projected  labour  market  conditions 
and private consumption . A small negative denominator effect of 0.1% of GDP compared to 
December  2010  projections  is  offset  by  a  positive  effect  of  the  measures  included  in  the 
package  of  measures  that  the  new  government  announced  on  10  May  2011,  the  'Jobs 
Initiative'. The Jobs Initiative is designed to be budgetary neutral over the period 2011-2014, 
but it has a deficit-reducing effect of 0.1% of GDP in 2011, mostly on account of the levy on 
the stock of pension funds on 30 June in each year of 2011-14, which more than offsets the 
cost  of  temporary  reductions  in  some  tourism-related  VAT  rates  and  in  the  social  secturity 
contributions  on  low  wages.  One-off  capital  injections  into  the  financial  sector  may  have  a 
deficit-increasing effect of up to 12% of GDP in 2011, and this would be excluded from the 
deficit target in line with the Council recommendation. Classification of the injections will be 
established on case-by-case basis by the Irish Central Statistics Office, consulting Eurostat, if 
necessary.  

For 2012, the government deficit is projected to reach 8.6% of GDP – the target outlined in 
the EDP decision. This assumes a fiscal consolidation effort of 2.6% of GDP comprising the 
full-year effect of the 2011 budget measures of 0.7% of GDP and new measures of 1.9% of 
GDP  committed  under  the  financial  assistance  programme  and  presented  in  the  April  2011 
update  of  the  stability  programme.  As  compared  to  the  December  2010  forecast  underlying 
the  Council  Recommendation,  the  stronger-than-expected  tax  revenue  performance  in  2011 
will continue in 2012. After a positive contribution in 2011, the Jobs Initiative will have a net 
negative revenue effect in 2012, with a deficit-increasing effect of 0.3% of GDP as compared 
to  the  previous  year.  Higher  interest  expenditure  on  the  assistance  programme  financing 
amounts to 0.1% of GDP, based on the assumption of the continuation of average programme 
interest rates so far.  

The authorities' stability programme targets a gradual reduction of the deficit to below 3% of 
GDP  by  2015,  the  correction  deadline  set  by  the  Council.  To  reach  the  targets,  broad 
consolidation measures were originally specified by the previous government in the National 
Recovery Plan of November 2010 and committed to in the Memorandum of Understanding on 
Specific  Economic  Policy  Conditionality.  The  current  government  has  indicated  that  the 
detailed composition of the adjustment will be modified following the results of the ongoing 
Comprehensive  Review  of  Expenditure.  Under  the  conditionality  of  the  financial  assistance 
programme,  a  medium  term  fiscal  plan  for  2012-2015,  outlining  aggregate  revenue  and 
expenditure measures for each year and respecting the targets outlined by the Council, will be 
announced  to  parliament  by  end-October  2011  in  the  government's  Pre-Budget  Outlook. 
Further details will be provided in the 2012 budget in early December 2011. 

The  gross  debt-to-GDP  ratio  is  forecast  to  peak  at  just  below  120%  in  2013,  and  decline 
thereafter, somewhat lower than in the projections underlying the Council recommendations, 
due  to  lower-than-expected  costs  of  bank  recapitalisation  following  stress  tests  of  March 
2011. Debt dynamics are affected by several below-the-line operations, including the capital 
injection into banks in 2011 with net debt-increasing effect of around 6 percentage points of 
GDP,  assumptions  about  the  maintenance  of  higher  cash  reserves,  and  differences  between 
accrued and cash interest payments4. 

4 

Total one-off bank recapitalisation cost of up to 12% of GDP in 2011 is partly financed from the Irish 
existing resources, therefore an increase in the gross government debt is lower. 

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Regarding the Council's recommendation to limit risks to the adjustment, the Irish authorities 
have established a five-member Fiscal Advisory Council and a Fiscal Responsibility Bill will 
be submitted by the end of 2011. This will give the Fiscal Advisory Council a clear statutory 
mandate and independence and introduce fiscal rules aiming at safeguarding fiscal discipline 
over  the  cycle,  and  provide  a  basis  for  assessing  the  appropriateness  of  official  targets  and 
performance. 

Regarding the Council's recommendation to reduce the risks to the long-term sustainability of 
public finances, legislation was passed in June 2011 increasing the age at which one qualifies 
for a state pension to 66 years in 2014, 67 in 2021 and 68 in 2028. Moreover, a package of 
public service pension reforms for new entrants is expected to be submitted for parliamentary 
approval  by  end-September  2011.  This  will  include  a  review  of  accelerated  retirement  for 
certain  categories  of  public  servants  and  an  indexation  of  pensions  to  consumer  prices. 
Pensions will be based on career average earnings. New entrants' retirement age will also be 
linked to the state pension retirement age. 

1.3. 

Conclusions 

On current information it appears that Ireland has taken action representing adequate progress 
towards  the  correction  of  the  excessive  deficit  within  the  time  limits  set  by  the  Council.  In 
particular,  the  government  deficit  is  projected  to  be  below  the  target  of  10.6%  of  GDP  in 
2011, in line with the Council's recommendation. For the period beyond 2011, the authorities 
will  outline  a  medium  term  fiscal  plan  for  2012-2015  following  the  results  of  the  current 
Comprehensive  Review  of  Expenditure.  The  plan  will  present  the  overall  expenditure  and 
revenue  measures  for  each  year,  underpinning  a  path  for  the  fiscal  deficit  in  line  with  the 
Council recommendations. In order to enhance credibility of the medium term fiscal targets, it 
will  be  important  to  spell  out  the  specific  measures.  Implementation  of  the  measures  and 
correction  of  the  excessive  deficit  should  ensure  that  the  debt  ratio  will  embark  on  a 
downward path towards the 60%-of-GDP reference value. 

In  view  of  the  above  assessment,  the  Commission  considers  that  no  further  steps  in  the 
excessive deficit procedure of Ireland are needed at present. The Commission will continue to 
closely monitor budgetary developments in Ireland on quarterly basis in accordance with the 
Treaty  and  the  SGP,  and  conditionality  set  out  in  the  financial  assistance  programme  for 
Ireland.  

Comparison of key macroeconomic and budgetary projections 

Real GDP 
(% change) 
Output gap1 
(% of potential GDP) 
General government balance 
(% of GDP) 
Primary balance 
(% of GDP) 
Cyclically-adjusted balance1 
(% of GDP) 
Structural balance2 
(% of GDP) 

2008 
-3.0
n.a.
0.2 
n.a. 
-7.3 
n.a. 
-6.0 
n.a. 
-7.4 
n.a. 
-7.4 
n.a. 

COM  
SP 
COM  
SP 
COM  
SP 
COM  
SP 
COM  
SP 
COM  
SP 

2009 
-7.0
n.a.
-5.7 
n.a. 
-14.2 
n.a. 
-12.1 
n.a. 
-11.9 
n.a. 
-11.9 
n.a. 

5 

EN 

2010 
-0.4
-1.0
-5.2 
-6.1 
-32.0 
-32.4 
-28.8 
-29.2 
-29.9 
-30.1 
-10.1 
-10.1 

2011 
0.6
0.8
-3.3 
-4.2 
-10.2 
-10.0 
-6.3 
-6.2 
-8.9 
-8.3 
-9.2 
-8.3 

2012 
1.9
2.5
-0.8 
-1.2 
-8.6 
-8.6 
-3.9 
-3.9 
-8.3 
-7.7 
-8.3 
-7.7 

2013 
2.4 
3.0 
n.a. 
1.2 
-7.5 
-7.2 
-1.3 
-1.1 
-7.5 
-7.1 
-7.5 
-7.1 

2014 
3.0 
3.0 
n.a. 
3.1 
-4.6 
-4.7 
1.7 
1.7 
-4.6 
-5.1 
-4.6 
-5.1 

2015 
3.0
3.0
n.a. 

4.5 
-2.9 
-2.8 
3.3 
3.4 
-2.9 
-3.6 
-2.9 
-3.6 

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Government gross debt 
(% of GDP) 

COM  
SP 

44.4 
n.a. 

65.2 
n.a. 

94.9 
96.0 

109.9 
111.0 

116.2 
116.0 

119.4 
118.0 

117.6 
116.0 

113.9 
111.0 

Note:  
1 Output gaps and cyclically-adjusted balances according to the programme as recalculated by Commission services on the 
basis of the information in the programme. 
2 Cyclically-adjusted balance excluding one-off and other temporary measures. One-off and other temporary measures are 
20% of GDP in 2010 (deficit-increasing) according to the programme; and 0.6% of GDP (deficit-reducing) and 2.6% 
(deficit-increasing) in 2009; 0.7% of GDP (deficit-reducing) and 20.2% (deficit-increasing) in 2010, and 0.3% of GDP 
(deficit-reducing) in 2011 according to the Commission services' spring 2011 forecast. 
Source: Summer 2011 review of the assistance programme (COM) and April 2011 stability programme update 
(SP) 

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