COMMISSION STAFF WORKING DOCUMENT Economic Adjustment Programme for Ireland - Summer 2013 Review Accompanying the document Proposal for a COUNCIL IMPLEMENTING DECISION amending Implementing Decision 2011/77/EU on granting Union financial assistance to Ireland
Date: 2013-09-27
Institutions: European Commission
Subjects: Community loan, EU aid, Ireland, economic reform, economic stabilisation, financial aid, macroeconomics, reflation, tax reform













EUR-Lex - 52013SC0403 - EN











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52013SC0403

COMMISSION STAFF WORKING DOCUMENT Economic Adjustment Programme for Ireland - Summer 2013 Review Accompanying the document Proposal for a COUNCIL IMPLEMENTING DECISION amending Implementing Decision 2011/77/EU on granting Union financial assistance to Ireland /* SWD/2013/0403 final */









European Commission
Directorate-General
for Economic and Financial Affairs
Economic
Adjustment Programme for Ireland
Summer
2013 Review
EUROPEAN ECONOMY                                                                                                                
The report was prepared in the Directorate General for
Economic and Financial Affairs under the direction of István P. Székely,
Director and European Commission mission chief to Ireland, and Martin Larch,
Head of Unit for Ireland, Poland and Lithuania.
Contributors:
Davide Lombardo, Quentin Dupriez, Martin
Larch, Kristin Magnusson, Danila Malvolti, Jānis Malzubris, Joao Mederios,
Marie Mulvihill, Nigel Nagarajan, Wolfgang Pointner, Etienne Sail, Victor
Savin, Graham Stull, Stephanie Medina Cas, and Jacek Szelożyński.
Input and comments from Servaas Deroose (GE ECFIN), Uwe Boewer (DG ECFIN),
Ioana Diaconescu (DG ECFIN), Brigitte Brockmoeller (DG EMPL), Dirk Van Den
Steen (DG SANCO), and the financial crisis task force of the
Directorate General for Competition are gratefully acknowledged.
Comments
on the report would be gratefully received and should be sent, by mail or
e-mail to:
Martin
Larch
European
Commission
Head
of Unit responsible for Ireland, Lithuania and Poland
CHAR
14/174
B-1049
Brussels
E-mail:
martin.larch@ec.europa.eu
Executive
Summary  5
Introduction  7
1.     Recent economic developments and outlook  9
1.1.     Macro-fiscal and financial developments 9
1.2.     macroeonomic outlook  14
2.     Policy outlook  17
2.1.     Fiscal policy  17
2.2.     Financial sector reform   25
2.3.     Structural reforms 27
3.     Financing issues 35
4.     Risks 37
Abbreviations 39
A1.   Programme Implementation  41
A2.   Supplementary Tables 49
A3.   Updated programme documents 53
LIST OF Tables
1.1.     Revised macroeconomic framework  15
2.1.     Public finances, 2013  18
3.1.     Financing requirements 36
A1.1.  Compliance assessment 41
A2.1.  Use and supply of goods and services (volume) 49
A2.2.  Use and supply of goods and services (value) 49
A2.3.  Implicit price deflators 50
A2.4.  Labour market and cost 50
A2.5.  External balance  50
A2.6.  Fiscal accounts 51
A2.7.  Debt developments 52
LIST OF Graphs
1.1.     Recent economic indicators 10
1.2.     Banks funding developments 12
1.3.     Mortgage arrears 13
1.4.     Banks' lending developments 14
2.1.     Fiscal stance, Ireland   21
2.2.     Labor market developments 30
LIST OF Boxes
1.1.     Revisions to national accounts data in Ireland   11
2.1.     Protecting the most vulnerable  19
2.2.     Ageing costs and long-term fiscal sustainability  22
2.3.     Issues in relation with water charges 31
Under the
EU/IMF-supported economic adjustment programme, Ireland continues to make good
progress towards addressing the crisis legacy of high indebtedness in public
and private balance sheets. A number of developments, including European
decisions to extend loan maturities, have further reduced market financing
needs in the coming years. This, together with confidence in the Irish
authorities’ commitment to programme reforms, has supported improved funding
conditions for both the Irish sovereign and the banks. Programme implementation
remains strong overall: all milestones for 2013 Q2 were met, with the exception
of the publication of an e-Health strategy (which is delayed to the third
quarter), and some outstanding issues in relation to the medium-term budgetary
framework. 
Steadfast
programme implementation has been rewarded by an impressive turnaround in
investor sentiment. The decline in Irish government bond yields
since their peak in mid-2011 has been remarkable. Yet, challenges and risks
remain on the road to full recovery and sustained growth including a still
large government deficit and debt-to-GDP ratio, high unemployment, and banks'
growing non-performing loans. As the end of the programme is in sight, Ireland
needs to sustain regained market confidence by a steadfast implementation under
the programme and by continuing on the path of reform and fiscal consolidation.
Discussions on programme exit continue. The authorities have indicated that
they are assessing all options. 
A gradual
recovery for the second half of this year is expected, although the
national accounts release of the first quarter 2013  was lower than projected,
which has implications for the forecast of annual GDP growth rate in 2013.
Near-term real GDP growth forecasts were revised down accordingly. Key factors
underlying the changes are the negative statistical carry-over and a
reassessment of the buoyancy of exports, which now appear to be more closely
linked to foreign demand, the near-term forecast of which has been lowered
since the time of the last review. However, more recent high-frequency data are
more positive both in Ireland and abroad, and appear to support the expectation
of a measured  recovery during the second half of the year.
The
Commission's revised preliminary 2013 deficit forecast is 7.6% of GDP, just
slightly above the programme ceiling of 7.5% of GDP showing the need for
careful budget execution. This reflects mostly the effect of lower
economic growth and related downward reassessment of tax revenue. Other
deficit-increasing risks bear close monitoring, including potential overruns in
the health budget in the second half of 2013 due to delayed implementation of
certain budgetary measures. The authorities have reiterated their commitment to
manage budget execution proactively so as to ensure that overall expenditure
will remain within the budget ceilings, including by offsetting any overruns
with savings elsewhere. The introduction of the new property tax erepresents
key progress towards a broader and more stable tax base, and proved smoother
than had been the case with its precursor (the household charge) last year. 
The 2014
Budget will be key to secure durable and fair consolidation and put the debt
ratio on a downward path. During the July 2013 review mission, the
authorities were not yet in a position to discuss their precise intentions as
regards the 2014 Budget. The troika reiterated that, in order to underpin the
recent improved market confidence, it is essential that the 2014 Budget is in
line with the requirements of the EU "two-pack" regulation and be
fully consistent with the 2010 EDP Council recommendation. In particular, the
recommended structural consolidation effort should be maintained and interest
savings should be used to accelerate debt reduction. The authorities have
reiterated their commitment to meeting the targets in line with Council
recommendation under the EDP. The 2014 Budget should also set out the main
contours of structural reforms in key spending areas that could underpin
savings while safeguarding access to key services and protecting the most
vulnerable. 
Progress was
made with the recently agreed 2013 bank diagnostic exercise and with
fine-tuning the target-based approach of  the Central Bank of Ireland (CBI) to
deal with mortgage arrears: 
·     
Assessment of banks'
balance sheets: progress
has been made regarding methodological aspects of this all-important exercise.
The Central Bank of Ireland will be assisted in the execution of the exercise
by independent third parties, who will also independently validate the
exercise. 
·     
Targets for the
completion of sustainable mortgage solutions: given the delay in dealing decisively with mortgage
arrears there is a need for targets to ensure that banks deal with their
arrears in a timely fashion and so devote themselves to new credit extension in
support of the recovery. It is
important that a balance is achieved whereby the targets are appropriately
ambitious but do not result in the banks unduly relying on the legal route as a
way to reach them. Moreover,
the court system might not be adequately prepared and resourced to deal with
the resulting acceleration in legal cases. 
·     
Repossession
procedures: Legislation
removing the unintended legal impediments to repossession (from the so-called
Dunne judgment) was enacted at the end of July 2013. A review of the
effectiveness, length, predictability and costs of repossession procedures is
to be conducted by end-year by an expert group, based on terms of reference
agreed with the troika.  
·     
"Tracker"
mortgages: the authorities
continue to explore feasible options to lower the drag on banks' profits from
"tracker" mortgages. 
Structural
reforms continue to advance, though sometimes at a measured pace. The
authorities had identified the outsourcing of employment services as an option
for addressing capacity constraints in mid-2011. However, it will likely be
another year until private providers are in operation. In the meantime, some
progress is being made in increasing the number of case-workers within the
Department of Social Protection, even though the totals are still small. Two key
laws to reform the further education and training (FET) system have been
enacted in the past quarter. The reshaping of FET institutions and programmes
to improve the   skills of the unemployed remains to be completed. Collective
labour bargaining mechanisms (and the related statute) need to be re-considered
as a result of Court rulings and will need additional legal reform to be
re-established. The sale of Bord Gaís Energy and two assets of the Electricity
Supply Board should be completed by year-end. Progress with water reforms are
on track, with the installation of meters having commenced in August and good
progress in drafting the Water Services Bill. Some, albeit slow, progress has
also been done in moving the Legal Services Regulation Bill closer to enactment.
In the healthcare sector, key measures are being taken to reduce the cost to
the state of pharmaceuticals. If complemented by wider reforms underpinned by a
timely and well-executed e-Health strategy, these could help achieve much
needed value-for-money improvements in health spending. This should help to
mitigate against medium-term budgetary risks arising from demographics trends.
A successful
completion of the 11th review triggers a disbursement of
EUR 2.3 bn from the EFSF. The IMF will disburse
EUR 0.8 bn and Sweden and Denmark will disburse a combined
EUR 0.25 bn in the context of their bilateral loans to Ireland. This
will bring the total amount authorised for disbursement under the programme to
97.9% of the overall international assistance of EUR 67.5 bn. On top
of the loans from international lenders, the overall programme envelope also
includes EUR 17.5 bn of programme funds provided by the Irish authorities. At
the end of the second quarter of 2013 the cash balances of the sovereign amounted
to EUR 25.7 bn, compared to EUR 12.3 bn at the end of 2010 when the adjustment
programme was launched.
A joint
European Commission (EC)/European Central Bank (ECB)/International Monetary
Fund (IMF) (henceforth, the "troika") mission visited Dublin during
July 9-18 2013 for the 11th review of Ireland's EU/IMF‑supported
economic adjustment programme. Compliance with the programme milestones set for
the second quarter of 2013 remained strong overall though with a few delays—see
the compliance monitor in Annex 1 for a detailed account. 
The mission
discussed recent economic and financial developments as well as the outlook
(section 2), the main policy challenges (section 3), and the government
funding situation (section 4). ([1]) The updated
Memorandum of Understandings on Specific Economic Conditionality (MOU),
reflecting exchanges and agreements with the authorities, is included in Annex
IV, together with other updated programme documentation.
1.1.    Macro-fiscal
and financial developments
The first
national accounts estimates for Q1 2013 suggest that the economic recovery in
Ireland has been more fragile than previously thought, while Q2 data were not
available at the time of writing the report. Real GDP is currently
estimated to have shrunk by 0.9 % y-o-y in the first quarter, against consensus
expectations of positive growth of 0.3-0.5% y-o-y. Growth rates of all
expenditure components of GDP fell on annual terms, which especially for
private consumption is challenging to square with more positive high frequency
data as discussed further below. The large fall of investment (-19.6%) was
skewed by the timing of aircraft purchases (investment excluding this category
grew by 6.3%). Nominal GDP declined by 2.2% on the year as the terms-of-trade,
which has recently supported nominal output measures, turned negative. The
diverging developments between GDP and GNP, which measures the income accruing
to households and firms resident in Ireland, continued through the first
quarter, with the latter measure growing by 6.1%, although the issue of
re-domiciled firms outlined in previous reports complicate the assessment.([2]) Large
historical revisions to annual national accounts data have also been released,
as discussed further in Box 1. 
The "pharma
cliff" and weak trading partner demand have taken a toll on exports,
although the latest external indicators have been more supportive. The volume
of merchandise exports (which predominantly consist of pharmaceutical goods)
fell by 6.8% during the first six months of the year compared to the same
period in 2012, with a fall in the volume of merchandise imports of 1.6% over
the same period. Declines in exports growth rates were offset by even larger
ones of the import category, and as a result the current account surplus surged
to over 3% of GDP in the first quarter, compared to a deficit of 1.8% a year
ago. The relatively weak export performance appears to be driven by external
demand and structural factors such as expiring patents of pharmaceutical drugs
as harmonized competitiveness indicators continue to compare very favourably to
the pre-crisis years([3]) and
inflation pressures remain muted, with the latest reading of HICP inflation of
0.7% y-o-y in July compared to the euro area estimate of 1.6% y-o-y. Going
forward, the impact of the return to positive annual economic growth in the
euro area in the second quarter, the upwards revisions to US and UK growth
rates for the same period, and the two-year high Purchasing Managers Index
(PMI) for the euro area in August should eventually feed through to more robust
export performance. 
Recent
high-frequency data point to a more resilient performance of the domestic
economy through the second quarter of 2013. Q1 2013 marked the
second consecutive quarter of positive growth q-o-q in the construction sector,
though from a very low base, and house prices in Dublin continue to increase,
suggesting that the drag on prices from the expiration of mortgage interest
rate relief is petering out (house prices remain virtually flat in the rest of
the country). The services index grew by about 2.5% during the first half of
the year compared to the same period in 2012. The volume of retail sales was
virtually unchanged through the first seven months of the year compared to the
same period in 2012 (regardless of whether the motor trade category was
excluded or not). The Live Register measure of standardised unemployment has
resumed its steady downward trend after a period of stability in early 2013 and
dropped to 13.5% in July. The quarterly national household survey (QNHS)
confirmed this improved performance, with annual employment growth picking up
speed to 1.8% in the second quarter, up by almost a full percentage point
compared to the first quarter growth rate. The second quarter data also marked
the first positive annual growth rate in five years for full time jobs and for
the participation rate (as discouraged workers re-entered the labour force). At
the same time, nominal wage growth was only 0.1% during the first half of 2013
compared to the same period the previous year, meaning that real wage growth
has been negative since the last quarter of 2009. Consumer confidence has
however continued to improve, with the three-month moving average in August
reaching levels last seen during the autumn of 2007. The most recent survey
indicators such as manufacturing and services PMIs also suggest that a
relatively modest expansion can be expected going forward.
 Graph 1.1:     Recent economic indicators 
 Source: CSO 
The 2013
fiscal outturn so far has been broadly in line with plans, in part benefiting
from positive timing factors. Local property tax payments came in earlier
than expected, suggesting strong compliance (thus alleviating earlier concerns
about the implementation of this new tax, based on last year's experience with
its precursor, the household charge). Weaker-than-expected VAT revenue (0.1% of
GDP below plans) due to softer domestic demand developments is compensated by
stronger corporation tax revenue. Non-tax revenue to-date confirms the
expectation of higher surplus payment from the CBI and Eligible Liabilities
Guarantee (ELG) fee revenue. Current and capital spending was below plans (0.1%
of GDP each), but this is largely a timing issue.
 Graph 1.2:     Banks  funding developments 
 Deposits data covers BOI, AIB and PTSB. Deposit rates data covers all Irish resident banks and refers to deposits with agreed maturity up to 2 years.  HH=household; NFC=non-financial corporates; NBFI=non-bank financial intermediaries. Source: Central Bank of Ireland, Department of Finance 
Banks
continue to make progress towards a more sustainable funding position. Deposit
volumes remained stable in July (at EUR 152 billion), in spite
of the continued downward trend in interest rates (the rate on outstanding
household term deposits stood at 2.69% at end-June 2013, compared with 2.78% at
end-May 2013 and 3.64% at end- June 2012 (left panel in Graph 1.2). Funding by
the Eurosystem to domestically-owned banks also continued to decline (year on
year borrowing declined by EUR 27 billion in July and by more than
EUR 59 billion relative to January 2011), and now represents approximately
4.2% of total Eurosystem
funding, down from a peak of nearly 19% in early 2011. Total monetary
authority funding to domestically-owned Irish banks fell to approximately
EUR 34 billion at end July 2013 from a peak of EUR 156 billion in
February 2011 (right panel in Graph 1.2).
Nonetheless,
lending remains subdued and lending rates high. Credit advanced to
households decreased by 4.4% year-on-year (y-o-y) in July 2013 and have
contracted every consecutive month since November 2009, with lending for house
purchase down 2.2% y-o-y. ([4])
Furthermore, lending to SMEs and businesses continues to be quite constrained
(left panel in Graph 1.4) with
lending rates remaining higher than euro area average. In terms of new loans to
non-financial corporations (NFCs)([5]), at end
June the rate stood at 2.48%  compared to the euro area 12 month average of
2.28%. There has been considerable month-on-month volatility in lending rates
which, according to the CBI, is due to the particularly low volumes of new
lending currently being experienced for NFC loans (there was EUR 442 million
new lending in June 2013 in this category compared to a peak of EUR 10.2
billion in March 2009). 
 Graph 1.3:     Mortgage arrears 
 Source: Central Bank of Ireland 
While the
flow of new arrears continues to slow, the stock and the increased long-term
nature of the arrears remain a concern (Graph 1.3). At the end
of Q2 2013 there were over 128,000 primary dwelling house (PDH) and buy-to-let
(BTL) mortgages in arrears for more than 90 days, representing almost 14% of
the total number of mortgages and almost 20% of the outstanding loan balances.
Of these, over 76,000 were in arrears for more than one year and almost 30% of
accounts (over 39,000) were in arrears for more than two years, representing a
quarter on quarter increase of 12.1%. Loan balances in arrears more than 360
days continue to rise, reaching 12.4% of  the value of banks' aggregate
mortgage book at end Q2 2013 (from 11.7% at end Q1 2013), for PDH and BTL or
investment properties. 
The majority
of restructures in place continue to be of a short term nature. 337 split
mortgages, 320 permanent interest rate reductions and 9 trade-down mortgages
were in place at end of Q2 2013, whereas there were over 30,000 restructures on
interest‑only and over 5,700 on less than interest‑only
arrangements. The authorities have recently begun to provide the re-default
rates for restructured loans: 76% of restructured PDH accounts were deemed to
be meeting the terms of their arrangement. This means that the borrower is, at
a minimum, meeting the agreed monthly repayments according to the restructure
arrangement. However, as this covers both short-term and longer-term
restructures, this is not a clear measure of the sustainability of arrangements
in place.
 Graph 1.4:     Banks' lending developments 
 1/Data for households includes mortgage loans. Source: Central Bank of Ireland 
While
considerable resources have been deployed developing sustainable solutions such
as split mortgages, application of these remedies has been limited to date. According to
CBI published data, there were 337 split mortgages at end Q2 2013. It is
envisaged that split mortgage will be used as an effective treatment of arrears
by cooperating borrowers where considerable restructuring and adjustment is
required on both sides for the mortgage to return to sustainability. According
to the banks there has been some additional activity in this area in recent
months, with PTSB offering some 1,500 split mortgages to-date, of which roughly
1,000 have been accepted and AIB offering 1,600 split mortgages to-date. The
official figures do not fully reflect these numbers as the significant majority
of these offers are subject to the satisfactory establishment of a repayment
record over a six month period. Upon satisfactory completion of this term the
offer of the split mortgage is confirmed. 
1.2.    macroeonomic
outlook
The revised
national accounts data have prompted a downgrade of growth forecasts. Real GDP is
now expected to grow by 0.6% in 2013 and by 1.8% in 2014, compared with 1.1%
and 2.2% at the time of the last review (Table 1 below). A pick-up in economic
activity after the first quarter of 2013 is built into these projections, given
the Q1 negative carry-over of -1%, and appears to be borne out by the recent
high-frequency indicators in Ireland and abroad. The revised national accounts
also point to a weaker recovery after the first stage of the crisis, which
suggests less scope for a rebound effect going forward. Weaker HICP inflation
and worsening terms-of-trade have been reflected in a more subdued outlook for
the GDP deflator. Together with the downgrades of real GDP growth, the level of
nominal GDP is therefore projected to be somewhat lower going forward than
forecast in the previous review.
Growth is
still forecast to become more broad-based towards the end of the projection
period.
Private consumption has been revised down slightly in 2013 on account of the
weak performance during the first quarter, weak earnings data and headwinds
from the strong performance during the second half of 2012 (on account of
one-off effects such as house purchases brought forward to benefit from the
expiring mortgage interest rate relief, and the digital switchover). Near-term
investment projections have been increased somewhat as momentum in core
investment (excluding aircrafts) appears slightly stronger than thought,
although it continues to be dominated by the MNE sector. The recent data revisions
have shown that Irish exports, including services, are more attuned to trading
partner demand than previously thought. Effects of downwards revisions to
trading partner demand in the near term ([6]), and more
support from trading partner demand in the outer years, have therefore been
incorporated more explicitly in the projections. The so-called "pharma
cliff" also appears to have somewhat stronger effects than earlier
thought, which is especially thought to impact projections in 2013-2014.
There is substantial
uncertainty around the baseline scenario. Current export
projections rest on an assumption that the nascent recovery in trading partner
demand will become more solid, and will be hard to attain if the latter
disappoints. The effects of the "pharma cliff" are also expected to
gradually peter out, and some new patented pharmaceuticals to come on stream,
but the exact magnitude of these effects are still unknown. Risks to domestic
demand projections largely remain as in previous Commission Services' reports,
i.e. credit constraints curtailing SME investment ([7]) and hiring
and relatively rapid household deleveraging amid diverging cohort effects on
private consumption posing downside risks. There are however also upside risks
to labour market projections, as unemployment continues to fall and the latest
QNHS appear to suggest that the post-crisis trend of part-time employment for
new job creation could be coming to an end. If future job creation continues to
be in the form of full-time and permanent jobs, it would allow for an increase
in weak earnings, dispel uncertainty around future disposable income, and
support stronger private consumption developments than what is currently
projected. 
 Table 1.1:       Revised macroeconomic framework 
 Source: Commission Services 
Risks to the
outlook could be substantially reduced by consistent policy implementation, as
underlined in a new medium-term study. In their July 2013
medium-term review, the Economic and Social Research Institute (ESRI) formulate
three possible different future scenarios and illustrate the role of domestic
policies for improving macroeconomic outcomes by means of en estimated general
equilibrium model.([8]) They show
that for unemployment to return to the vicinity of the levels seen prior to the
crisis, a very strong recovery of trading partner demand and decisive financial
sector repair is needed. It would also relatively quickly restore public
finances, allowing public consumption to support growth from 2015 onwards to
reach on average 4% for the last five years of this decade. Another scenario
shows that even if these assumptions about the external environment were to be
realized, lack of progress on restoring the financial sector to healthy
operations would risk not delivering sufficiently high GDP growth to restore
the sustainability of public finances, with average growth for 2015-2020 below
1.5%. ([9]) 
2.1.    Fiscal
policy
Despite an
outstanding track record, there is a risk of slightly exceeding the general
government deficit ceiling of 7.5% of GDP for 2013, showing the need for
careful budgetary execution.. This is mainly due to the downward revision of
growth, delays in the implementation of structural measures in the healthcare
sector, and some one-off elements. Turning to the 2014 Budget, underpinning the
recent improvements in market confidence requires strictly adhering to
Ireland's commitments. Structural reforms in main spending areas and further
strengthening of the medium term expenditure ceilings would help ensure that
the remaining consolidation is achieved in a durable, fair, and as
growth-friendly as possible manner. 
The baseline
Commission Services forecast for the 2013 general government deficit has been
increased to 7.6% of GDP – just slightly above the 7.5% nominal ceiling (which was
also the forecast of the previous review). This reflects in broadly
equal parts a lower denominator effect, but also some downward reassessment of
tax revenue, mainly from a projected continued underperformance in VAT, in line
with the downward revision to the forecast for growth in private consumption
(Table 2.1 shows
updated forecast as compared to the 2013 budget estimates). Other items, such
as personal and corporate income tax revenue, non-tax revenue and overall
expenditure, have been kept largely unchanged as compared to the 10th
review. On the expenditure side, some pressures are expected to emerge in the
health sector in the second half of the year, given delayed implementation of
certain budget measures. The baseline forecast assumes, consistent with the
authorities' reiterated commitment, that contingency measures will be activated
if needed to keep overall spending within the aggregate envelope (in this
respect, the lower spending to-date may act as a buffer). 
The baseline forecast is
subject to several risks: 
-     Pointing to a potentially higher deficit: as mentioned above, the baseline forecast
assumes that delayed or partial implementation of some health sector
measures ([10]) will be offset by compensatory measures,
but both the size of the possible overruns and of the corrective actions is
uncertain. Moreover, previously identified risks remain, namely: 
-     The IBRC liquidation. The state is required to make up any
potential difference between the amount paid by NAMA for IBRC's assets and the
valuation of those assets made by the special liquidators ([11]) 
-     AIB dividends. The receipt by the government of ordinary shares as
a dividend payment from AIB (0.2% of GDP) may be reclassified as
deficit-increasing transfer by Eurostat ([12])
 Table 2.1:       Public finances, 2013 
 (1) Excludes Sinking Fund transfer from current to capital account and loan/repayment to/from the Social Insurance Fund which are the Exchequer deficit neutral. (2) The government balance excludes one-off deficit-increasing financial sector measures. Revised GDP forecast since the budget affects deficit ratio. Source: Commission services; Department of Finance. 
 (Continued on the next page) 
 Box (continued) 
-    
The so-called
Waterford Crystal case.
The European Court of Justice ruled that the state needs to have mechanisms in
place to ensure in excess of 49% of employees' pension benefits are protected
in a double insolvency situation – the bankruptcy of a company and its
pension fund. The case is back in the Commercial Court for hearing before the
end of 2013 and its judgment will determine the public finance implications. While the net present liabilities to the
state could amount to some 0.2% of GDP, it is likely that this amount would be
spread out over the lifetime of the pensions. The case could possibly still set
a precedent for few other instances of double insolvencies and expose the state
to further claims.
-    
Possible shortfalls
in the wage-bill savings from the negotiated agreement with the unions. It is not yet possible to determine
whether the Haddington Road Agreement will deliver in full the planned savings
of EUR 300 million for 2013 (0.2% of GDP)([13]). 
-    
Pointing to a
potentially lower deficit:
spending pressures in areas other than health seem to be under control and the
improving labour market situation should alleviate demand for welfare services.
Ireland's
fiscal stance has not been overtly pro-cyclical since the beginning of the
crisis.
Using conventional metrics, discretionary fiscal policy has been clearly
leaning against the wind in 2008 and 2009, and did not move openly or blatantly
into the wind in 2010 and after, in spite of the significant budgetary
adjustment efforts put in place by the Irish government (Graph 2.1). ([14]) Fiscal
policy remained, and is expected to remain broadly in line with the
stabilisation function of discretionary fiscal policy , or at least not to run
counter that function. In the early years (2008-2009) when fiscal policy was
incontrovertibly counter-cyclical, the fiscal policy strategy mainly consisted
of correcting previous policy commitments built on optimistic growth
projections accompanied by the fact that in a deflationary environment, nominal
expenditure freezes implied increases in real terms. Since 2011, the
improvement of the structural deficit has taken place in an environment of
slightly improving economic conditions. 
 Graph 2.1:     Fiscal stance, Ireland 
 Source: Eurostat for real GDP growth 2007-2011; Irish Stability Programme 2013 for real GDP growth 2012-2015 
The latest
official deficit targets for the coming years were outlined in the budget 2013
package and the 2013 Stability Programme. In April this year the
government adopted the 2013 Stability Programme which, for 2014 and 2015,
features deficit targets of 4.3% of GDP and 2.2% of GDP targets, respectively.
The stability programme essentially restated previous commitments to fiscal
adjustment presented in the November 2012 Medium-Term Fiscal Statement, as part
of the budget 2013, and allocated the dividend from the replacement of the
promissory notes with longer-dated government bonds to faster debt reduction.
If fully implemented, these commitments would be consistent with the
requirements under the programme and the Council recommendation under the EDP.
During the
July review mission, the authorities were not in a position to discuss the 2014
budget, as preparations were at an early stage. In order to underpin
the recent improvements in market confidence and put the debt ratio on a
declining path, it remains crucial for Ireland to adhere strictly to the
commitments undertaken under the programme and the EDP, thus enhancing
prospects for a sustained return to affordable market funding. The fiscal
adjustment presented in the 2013 Stability Programme is estimated to be
consistent with the nominal and structural adjustment recommended under the EDP
(see Box 1 of the previous review report). The Stability Programme
restates the commitment to the fiscal adjustment presented in the November 2012
Medium-Term Fiscal Statement of EUR 3.1 billion (1.8% of GDP) in 2014
and EUR 2 billion (1.1% of GDP) in 2015, as well as demonstrates that
savings from the replacement of the promissory notes with longer-dated government
bonds are used to accelerate debt reduction. To ensure that the remaining
adjustment is achieved in a sustainable, fair and growth-friendly matter, the
2014 budget should also spell out the key elements of reforms in the main
spending areas that increase efficiency while protecting access to services for
the most vulnerable. The remaining consolidation options identified in the 2011
Comprehensive Expenditure Review represent a good starting position in this
respect.
 (Continued on the next page) 
 Box (continued) 
 (Continued on the next page) 
 Box (continued) 
Significant
progress has been made from the beginning of the programme to strengthen
Ireland's medium-term fiscal framework. As highlighted in
previous Commission reports under the programme ([15]) and more
recently by the IMF Fiscal Transparency Assessment (FTA)([16]), several
important reforms have been introduced in recent years, including the passage
of the Fiscal Responsibility Act (FRA), the establishment of a new Fiscal
Advisory Council (IFAC), the introduction of a medium-term expenditure
framework (MTEF), and enhanced reporting (e. g. quarterly government finance
statistics and alternative presentation of Exchequer returns). 
Despite
important improvements, the multi-annual expenditure framework is not yet fully
consistent with the EU Fiscal Framework Directive, the recommendations of the
Economic Policy Committee, and international best practice([17]). In
particular, the recently legislated Ministers and the Secretaries (Amendment)
Act does not identify the specific circumstances and modalities in which the
multi-year expenditure limits can be changed by the government. Moreover, the
Irish multi-year expenditure ceilings cover a different aggregate than that
defined by the SGP's "expenditure benchmark" ([18]). 
These
remaining issues in the framework could be addressed through appropriate
legislative reforms. This would enhance the capacity of the
expenditure ceilings to serve as medium-term policy anchors, subject of course
to well defined escape clauses, and foster transparency and accountability  and
especially in light of the experience with fiscal policy making in the years
preceding the crisis. From this perspective, the authorities' intention to
specify the escape clauses in an administrative circular may  leave leeway for
ad-hoc modifications of the ceilings in the future.
The
authorities consider that the existing audit arrangements and reporting satisfy
the EU requirement for a comprehensive audit of public finances for Member
States under a macroeconomic adjustment programme ([19]). Existing
annual audits of public finances by the Office of the Comptroller and Auditor
General ensure legality and regularity of public finances. Also, public finance
data reporting has been continuously improved by more comprehensive
publications, streamlined data collection procedures and quality checks.
Dedicated reports by Regling and Watson (2010), Honohan (2010) and Nyberg
(2011) have analysed policy and market failures leading to the Irish financial
crisis. This satisfies one of the objectives of the comprehensive audit, going
beyond the traditional audit activities and assessing broader functions of the
public institutions, including government, and supervisory and regulatory
bodies. Moreover, the budgetary framework has been strengthened under the
EU-IMF programme with a move towards multi-annual budget planning and the
establishment of the Irish Fiscal Advisory Council.
2.2.    Financial
sector reform 
Progress has
been made regarding the resolution of mortgage arrears but, given the
increasingly long-term nature of arrears, more needs to be done. Appropriately
ambitious targets are required to ensure the vast majority of arrears cases are
effectively dealt with by end 2014. The recent regulatory and system changes
(remedying of the legal lacuna created by the "Dunne" judgment,
updating of the Code of Conduct on Mortgage Arrears), and the roll out of key
reforms such as the Personal Insolvency regime are welcome. The authorities now
need to ensure that the legal system is fully equipped to deal with the
expected increases in case loads, including by deploying additional resources
if required. Progress continues to be made regarding the methodology for the f
diagnostics of the Irish banking sector that will be completed in Q4 2013. 
Prompted by
the CBI target-based approach implemented in March 2013, banks have begun to
offer proposals to restructure mortgages in arrears, but the mix has not been ideal. All banks
report that they have met the end June target of offering sustainable solutions
to 20% of customers in arrears for more than 90 days. The CBI will monitor and
audit the banks' progress, assessing the sustainability of offered solutions
and will report the findings of this review to the troika in November. It
appears that the approach being undertaken by the banks is to deal with the extreme
arrears firstly i.e. the very early arrears through such options as arrears
capitalisation and appropriate lifestyle adjustment, and to deal with longer
dated arrears, where there has been no engagement for a sustained period, by
initiating legal proceedings. 
The
authorities need to set ambitious targets for concluding sustainable solutions
for a substantial proportion of loans in arrears by end 2013. During
September, the CBI will set public targets for the principal mortgage banks to
conclude sustainable restructurings for a significant share of problem loans by
year end to achieve the objective that the vast majority of loans in arrears
greater than 90 days will be sustainably treated by end 2014. It is important
that a balance is achieved whereby the target is appropriately ambitious but
does not result in the banks unduly relying on the legal route as a way to
reach the targets. A sustainable solution which does not include legal action
is usually in the best interest of both parties as legal actions are costly for
both sides and the revised payment terms under the new arrangement can in most
instances be more affordable than renting for the customer. Any further delays
in dealing decisively with mortgage arrears are a considerable drag on the
recovery of the domestic economy. 
Regulatory
and legislative reforms should facilitate the legal process with repossessions,
but there are concerns that the judicial system may be unprepared to deal with
an increase in cases. There have been several key advances on the
regulatory framework, such as the revision of the Code of Conduct on Mortgage
Arrears, which now provides greater clarity regarding non-cooperative borrowers
and allowable contact, and the enactment of the Central Bank (Supervision and
Enforcement) Act 2013, giving more supervisory powers to the CBI and of the
Land and Conveyancing Law Reform Act 2013([20]), which
removes unintended obstacles to repossessions. Furthermore, work continues on
ensuring the first personal insolvency applications are accepted from early
September. While all these steps are welcome and reflect the culmination of
work  under the programme, there are concerns regarding the ability of the
courts' system to deal with the expected increase in work load arising from the
various policy initiatives. While safeguards have been put in place to keep
co-operating borrowers in their homes, given the number of non-cooperating
borrowers, particularly in  investment properties, an increase in the number of
repossessions from the very low levels experienced in recent years is likely ([21]).
The
authorities have committed to examine by end October the merits of assigning
additional functions to the Specialist Judges  dealing with personal insolvency
cases,
which will enable them to deal with repossession cases as needed. Furthermore,
an expert group will be established to review by end-2013, the length,
predictability and cost of proceedings, including relative to peer
jurisdictions, and propose measures to deal with any problems arising. It is
important that there is a clear distinction between the family home and pure
investment properties; this distinction is evident with regards to the Code of
Conduct on Mortgage Arrears (CCMA), which only protects the family home, but
should also be made also more clearly in respect to legal proceedings. In light
of this, the authorities will examine the possibility of introducing expedited
proceedings, based on the experience of the Commercial Court ([22]), for
repossession cases relating to investment properties and will report to the
troika by end October. The introduction of such a fast-track scheme would
reduce the costs of BTL repossessions and would allow the banks to focus their
resources on working with co-operating borrowers to find sustainable solutions.

A framework
to facilitate multiple-creditor debt for borrowers with both secured and
unsecured loans will commence in September on a pilot basis. The scheme
for 750 multiple creditor will run for 3 months. This aims to achieve
sustainable and fair outcomes without the need for the borrower to enter the
statutory insolvency process. To be eligible for the framework, a borrower must
be cooperating with their lenders and have taken steps to adjust their
expenditure to established norms. The focus of the pilot is a protocol to
enhance cooperation between lenders of secured and unsecured debt at an early
stage. While the establishment of this protocol is welcome, banks report that
some customers in mortgage arrears continue to access new unsecured credit from
other lenders, which they then prioritise over their mortgage payments. This
acts as a disincentive for borrowers to engage with banks' efforts to restore
payment discipline, and could indicate that the financial system is not
allowing banks to recycle their capital efficiently. Restoring debt-servicing
priority is an essential condition for a well-functioning mortgage market and
is vital for ensuring that the strategy of addressing mortgage arrears can
ultimately succeed. 
Going beyond
mortgages, SME loans in arrears also need to be addressed with greater urgency. The
authorities have set restructuring targets for the two main banks involved in
SME lending, consistent with ensuring a migration from short term forbearance
measures to sustainable solutions. In order to ensure these restructurings are
sustainable, the CBI's on-site reviews in the second half of the year will
focus on the banks’ operational restructuring capabilities and strategies, the
durability of the solutions, and the appropriateness of collateral valuations.
The authorities are progressing with the necessary legal provisions to grant
the option for SME examinership to be considered by the Circuit Court, which
would reduce the associated costs. However, these provisions are provided for
in an extensive bill reforming the Company Law, which is not expected to be
passed until 2014. Given the importance of the issue, the authorities are
seeking to accelerate the adoption of the relevant provision by year-end. In
addition, the authorities are considering additional legislative amendments to 
enhance the SME examinership legal framework to reduce costs and achieve
efficiency gains, drawing on experience with the operation of the Insolvency
Service in the personal insolvency reform and recommendations in the Company
Law Review report. One key policy option is the potential for an administrative
body to facilitate SME restructuring out of courts, which would reduce the
costs and allow for a more efficient timely process. 
The credit
guarantee scheme for SMEs([23]) and the
microfinance fund([24]) should be
reviewed, in light of low levels of take-up([25]). As regards
the former, an external review of the scheme is due to be completed by end
August, and if legislative changes are recommended every effort should be made
to advance these through the legislative process. As regards the second, the
authorities have committed to reviewing this scheme. After two years of
operation and given the disappointing low levels of engagement, the authorities
should consider bringing forward the review. The recent Government decision to
dissolve the thirty five County Enterprise Boards and transfer their functions,
assets, and liabilities to Enterprise Ireland should enhance the delivery of
State support to micro and small businesses and thus should be implemented
soon.
Separately,
but importantly, progress continues to be made in terms of banks' diagnostics:
·     
Progress has been
made regarding methodological and practical elements of the forthcoming
assessments of the banks' balance sheets. In particular, external consultants will have an
active role in both aiding the CBI in executing the exercise and in
independently validating the exercise and the results. Furthermore, a roadmap
for the delivery of the exercise has been agreed with programme partners who
will be consulted regularly on progress and results. 
·     
The authorities
continue to explore feasible options to lower the drag on banks' profits from
"tracker" mortgages. 
2.3.    Structural
reforms
 Important
steps have been taken recently that will pave the way for additional reforms in
activation policies and further education and training. These steps are
strategic, and will still need to develop into operational strides to ensure
that improved services and support are provided to the unemployed as quickly as
possible. Further ground has been laid for the reorganisation of the water sector
and the introduction of domestic charges during the final quarter of 2014, and
the Legal Services Regulation Bill is t moving somewhat closer to enactment.
Further reforms should be pursued to reduce costs and increase efficiency in
the provision of health care, such as introducing a system of e-prescriptions,
lowering the cost of drugs, promoting the use of generics, and increasing the
recovery of costs from private patients in public beds.
2.3.1. Labor market
activation
The
Government has decided to outsource some activation services to private
providers.
The shortfall in activation resources has been evident for a long time and the
outsourcing option had been considered as early as mid-2011. In late 2012, the
Government commissioned a study by external experts to assess the options and
suggest a contracting model. The study, completed in early 2013, confirmed the
feasibility of outsourcing in Ireland and proposed key features for contract
design and the tendering procedure, including a focus on the long-term
unemployed, a payments-by-results approach, a four-year duration, and a
sub-division of the country in five areas with contractual exclusivity. Many
suggested features are expected to be maintained, but the Government indicated
that it intended to modify others in order to guarantee a high-level of service
delivery, appropriate coverage of different categories of unemployed and
adequate cost competition.
In spite of
recent measures, it will likely be at least a year before private activation
services are in place. A Prior Information Notice (PIN) was issued in
early July that specifies that the contracts could encompass the provision of
activation services (e.g. job searching, coaching, personal action plans and
preparation of CVs) to between 50,000 and 100,000 unemployed people. The
authorities indicated that they received significant expressions of interest,
and a formal request for tenders will be issued before the end of November
following final Government decision on the scope and structure of the outsourcing
contracts. Although the issuance of the PIN should accelerate the procedure,
the authorities expect that the procurement process and establishment
procedures will be such that service delivery will not start until late 2014,
in line with recommendation of the external experts
There is
scope for increasing the targets to engage the long-term unemployed in the
activation process. Three hundred public service staff members are
expected to be redeployed as case managers as targeted by end-2013, with an
additional 200 redeployments as soon as possible in 2014. These redeployed
officers will need to receive adequate training to take on their new functions.
The authorities intend to allocate a significant share of these additional
resources to provide activation support to the long-term unemployed. They are
committed to provide group engagement sessions for 15,000 long-term unemployed
people per quarter starting in Q4 2013 and to integrate 10,000 long-term
unemployed people in the process of regular one-to-one interviews each quarter.
They also intend to review these targets as the redeployment and training of
case workers progress; increasing them would be desirable given the scale of
the long-term unemployment problem and the amount of resources that have been
mobilised. In addition, these targets do not appear compatible with the
objective announced in August under the Pathways to Work 2013  to
provide one-on-one interviews to 185,000 for 2013([26]).
Strict
adherence to the roll-out targets for Intreo offices is essential. Despite the
outsourcing of some activation services to private providers, the Department of
Social Protection's (DSP) Intreo offices will remain the backbone of
Ireland's activation services. Additional delays in rolling-out Intreo
offices should therefore be avoided so as to provide an even level of services
across the whole country, and the targets of having 43 offices opened by
end-2013 should be adhered to. The authorities' willingness to consider
redeployments of staff beyond the DSP as case officers is a positive
development that could enhance the level of activation services and should
translate into prompt action.
Reforms of
the further education and training (FET) system are set to move to the
operational phase. The recent enactment of the Education and
Training Boards Act 2013 and Further Education and Training Act 2013 means that
the new institutional landscape for the FET sector is now formally in place. No
benefit will be reaped, however, until vocational education centres (VECs) and
FÁS training centres are consolidated into the 16 Education and Training Boards
(ETBs), a process that is projected to be finalised by the end of 2014 and that
should be speeded up.. In addition, the most critical aspects of FET reforms
lie ahead as training programmes and courses still have to be reviewed to
ensure their relevance for the needs of jobseekers and employers. A seamless
process between Intreo offices and ETBs will also need to be established to
ensure appropriate referrals and effective participation in training
programmes. SOLAS – the new institution tasked to channel funds to ETBs, and
monitor and guide their FET work – needs to lay out a credible strategy for the
sector  quickly  and make use of its powers to allocate funds among ETBs to
ensure efficiency and the relevance of programmes. The work to prepare the
strategic review of the training and education provision offered by ETBs by
end-September, a programme requirement, should guide and accelerate the
preparation of SOLAS' strategic plan, which is due by end-March 2014.
2.3.2. Wage setting
mechanisms
Collective
bargaining mechanisms have suffered some setbacks despite recent reforms. Employment
Regulation Orders (EROs) and Registered Employment Agreements (REAs) were
struck down by two Court rulings in 2011 and May 2013. The Industrial Relations
(Amendment) Act 2012 aimed to put in place a stricter legal framework for the
setting of the terms and conditions defined under EROs and REAs([27]), but now
appears inadequate to address the unconstitutionality of the two mechanisms
stemming from the excessive delegation of legislative powers to Joint Labour
Committees, labour Courts or the Minister. While the terms and conditions of
employees recruited prior to the Court rulings are not affected, as their
individual contracts remain valid, employers are not bound by the terms of past
EROs and REAs when it comes to new recruitments.
Further legal
reforms are needed to re-establish collective bargaining mechanisms. The
authorities aim to fill the legal vacuum by preparing a new Bill to further
reform EROs and REAs, potentially before end-2013. While employers strongly
oppose the Joint Labour Committees that underpin EROs, they are keen to
maintain the system of REAs as a channel for negotiations with trade unions in
sectors where labour representation is strong. Fast action on the new framework
is needed to reinstate a proper industrial relations management mechanism. Many
aspects of the 2012 reform ought to be preserved, including the increased flexibility
and consideration given to international competitiveness and relative wage
levels in the EU, while the scope of REAs ought to be reduced. The authorities
also aim to avail of the new reforms to reduce the number of sectors subject to
EROs, with some falling under the scope of REAs in the future([28]).
Nominal wages
have been sticky across all levels of skills, allowing for a gradual adjustment
of real wages. The reforms introduced under the Industrial Relations
(Amendment) Act 2012 do not appear to have had an impact on e.g. nominal wages
so far. In part, this can be attributed to the continuity of individual
contracts and nominal wage rigidity due to efficiency wage and skill-retention
policies among firms([29]). The legal
uncertainty and recent vacuum on EROs and REAs, however, is also likely a
contributing factor, as firms may be unwilling to re-negotiate wages and
benefits in light of new labour market conditions in an uncoordinated manner,
and new collective agreements at the sectoral level cannot be concluded. This
phenomenon is likely to be more prevalent at the low-end of the skills range
and in selected sectors subject to EROs and REAs, where nominal hourly wages
have either fallen only marginally in the post-crisis period or increased
slightly, despite the sharp increase in unemployment (Graph 2.2). Given
accumulated inflation, this however translates into falling real wages as
outlined earlier in the report. Composition effects and rising productivity
have also generated improvements in unit labour costs relative to most other EU
countries.
 Graph 2.2:     Labor market developments 
 Source: CSO 
2.3.3. Reform of water
sector
The
definitive legal basis for reforming the water sector is being introduced. The
authorities are on target to publish the Water Services (No. 2) Bill 2013 by
the end of September, having prepared a General Scheme of the Bill and published
a summary of it in July. The Bill, which the authorities aim to have enacted
before the end of 2013, will achieve several key objectives, including: (1) the
transfer of water services functions from local authorities to Irish Water; (2)
the transfer of assets and liabilities related to water services; (3) the
imposition of charges to domestic and non-domestic users in accordance with the
cost-recovery principles set in the EU Water Framework Directive; (4) the
assignment of economic regulatory powers, including the approval of tariffs
submissions by Irish Water, to the Commission for Energy Regulation (CER); and
(5) the delivery of water services by local authorities on behalf of Irish
Water and under service level agreements for an initial period of 12 years,
with reviews after 2 and 7 years.
Operational
milestones are being reached in view of reforming the sector and introducing
domestic charges. Irish Water was incorporated in July, and all
contracts for the installation of water meters have been awarded, with work
commencing in mid-August. The company has put together a two-step communication
campaign in order to foster social acceptance of the metering programme and
minimise disruptions in the process. In addition, the Irish Water customer contact
centre was established in July and the company is in the process of recruiting
about 300 workers, mostly from local authorities and Bord Gáis Eireann.
Key decisions
on the funding model remain to be made.. The authorities are
committed to make Irish Water self-funded over time, which implies the gradual
phasing-in of charges at a level sufficient to cover operating and capital
costs. They are making progress in developing the funding model for Irish Water
and are keen to ensure that Eurostat classifies the company outside the general
government sector from the onset, which would require that a credible plan be
presented to guarantee that the company covers over 50% of operating costs from
water charges. Definitive plans on the level of Exchequer support to Irish
Water, the level of charges and the precise timeframe under which the company
will become self-funded still have to be drawn and communicated to the public.
These decisions will be part of the budgetary process, but CER-led
consultations on the structure and level of charges (Box 2.4) ought to start
sooner rather than later to prepare the ground for the announcement of a
definitive time-plan for the introduction of domestic water charges, an
end-year commitment under the Memorandum of Understanding. The finalisation of
the funding model is also needed to ensure that the reform of the sector is in
compliance with EU State-aid rules.
2.3.4. Asset disposals
Privatisation
proceeds will soon become available for debt reduction and growth-enhancing
projects.
The sale of Bord Gáis Energy is the largest and closest forthcoming
transaction, with short-listed companies involved in the final bidding stage.
The disposal process of two of the Electricity Supply Board's overseas power
plants is slightly less advanced, although transactions are expected to be
completed before the end of 2013. While proceeds will at first accrue to the
parent companies, the authorities should already draw up their strategy on how
to use at least half of the revenue for eventual debt reduction and start
identifying specific growth-enhancing projects of a commercial nature. As far
as Coillte (the State-owned company operating in the forestry sector) is
concerned, the authorities have determined that appropriate conditions for the
sale of harvesting rights are not currently met, and that the priority should
be on restructuring the company. The privatisation issue will be re-considered
at a future date, and it is important that adequate measures be put in place to
refocus the company on its core functions and business and to avoid the further
build-up of contingent liabilities.
2.3.5. Legal service
reforms
Legal
services reforms have progressed but still need to be  completed. The Legal
Services Regulation Bill 2011 moved to Committee stage in July, following the
completion of proposed amendments to Parts 1 to 4 of the bill. These included
amendments that  address concerns about the independence of the Legal Services
Regulation Authority and were approved by the Committee. Proposed amendments to
Parts 5 to 12 of the bill remain to be completed, however, even though it was
initially planned that they would be published by early July. The critical
issues dealt with in Parts 5 to 12 of the bill are: (1) complaints and
disciplinary hearings; (2) alternative business structures; and
(3) legal costs. The proposed amendments will determine the effectiveness
of the bill in reducing legal services costs and therefore need to be
considered carefully and without fear of confronting narrow vested interests.
In particular, alternative business structures should not be victim of the
amendments, and careful consideration should be given to the concerns raised by
the Competition Authority of Ireland regarding how legal fees are to be
determined. It is also essential that the Committee stage resume as quickly as
possible after the summer recess to avoid further delays in enacting the bill.
2.3.6. Healthcare sector
Several important
reforms are being implemented, though more work is still needed: 
·     
The new "Health (pricing
and supply of medical goods)" Act ([30]) affords the authorities significant new scope to
achieve important savings on the state's pharmaceutical bill. In particular, as
recommended by the recently published ESRI study ([31]), significant savings could be obtained by, for
example, setting the maximum ex-factory price of in-patent pharmaceuticals at
the lowest price of the current basket of nine EU Member States, rather
than at the average (as is the case at present) and update these prices more
frequently, i.e. every six or at maximum twelve months. The authorities have
undertaken by end-October 2013 to: (i) provide a plan for the mid-term review
of the IPHA agreement to be conducted by mid-2014 at the latest, under which
they will carry out a comprehensive pricing re-alignment exercise, including in
the hospital sector; and (ii) conduct a comprehensive exercise to realign
downwards the prices of off-patent listed items.
·     
A national e-Health
strategy, originally due by end-June, is now expected to be submitted by the
authorities at end-September. Legislation necessary to allow for the
introduction of health identifiers for individuals and professionals is being
finalised and will be introduced to the Oireachtas in the autumn ([32]).
·     
Work to enable the cost
recovery for private use of public hospitals has started. Progress is being
made on the HSE enhanced financial and accounting framework and the case-based
payment system linked to the principle of cost recovery for private use of
public hospitals. Work has also started to develop a new IT platform (through
external consultants) enabling the break-down of the full hospital budget,
including outpatients, by clinical cost drivers. 
Improving
prescriber and dispenser practices would complement important work underway to
reduce pharmaceutical costs. Two important needed reforms in this area are
the compulsory use of active ingredient names (so called International
Nonproprietary Name, or INN) by prescribers, and clear rules for the display of
retail drugs prices by pharmacists. Both these measures would help ensure
consumers gain the full benefits of greater generic penetration. The
authorities have, however, committed to make arrangements for compulsory
prescription by INN, where appropriate, and this should be in place by the end
of 2013. The regulatory body for pharmacists has also been asked to examine how
greater price transparency can be achieved at the retail pharmacy level. 
The programme
remains well financed. Earlier in the year the authorities have issued
some EUR 7.5 bn in medium-to-long term bonds. The authorities
sustained their T-bill programme by selling EUR 500 mn of 3-months
bills on a regular basis, at low yields and high bid-to-cover ratios([33]). Cash
balances have been further strengthened by some asset sales (e.g., the state's
holdings of convertible contingent bonds in Bank of Ireland). 
The Irish
sovereign debt market also weathered well recent negative events, although
short-term volatility is indicative of limited liquidity. Despite
recent bouts of higher volatility in international bond markets, yields on
Irish sovereign bonds have stayed low. After falling steadily through April to
record lows of around 3.4% in the 10-year maturity, Irish sovereign yields rose
somewhat over the summer in line with international market dynamics on
heightened concerns that the US FED could taper its quantitative easing over
the next few quarters, as well as specific factors such as poor liquidity and
lack of domestic buying. By the end of the summer 10-year yields appeared to
have stabilized around 4%, while spreads to German bond yields had narrowed to
around 200 basis points (less than half of the spreads prevailing a year ago).
These developments are in line with recent research suggesting that
developments in euro area bond yields are beginning to return to pre-crisis
patterns, as opposed to the broad-based systemic concerns dominating the market
up the summer of 2012. ([34])
Standard and Poor's upgraded its outlook on Ireland's credit rating
to positive from stable on 12 July 2013, noting that Ireland’s general
government debt may decline faster than previously expected. 
The
authorities are on track to achieve their funding objectives by the end of the
programme.
By the end of 2013, Ireland is expected to have accumulated a cash buffer of
EUR 22.8 billion, sufficient to cover the total financing needs for 15 months.
This includes disbursements of EUR 2.3 billion from the EFSF, EUR 0.8 billion
from the IMF and EUR 0.25 billion from Sweden and Denmark following the
completion of this 11th review. ([35]) This
sizeable cash reserve has been a stable feature of the authorities' funding
strategy as a key tool to underpin market confidence. Compared to the 10th
review, cash reserves are now larger, because contingencies did not materialize
and the retail bond sales were stronger than expected. In July 2013, the
authorities redeemed EUR 750 million of the 4% Treasury bond due to mature on
15 January 2014, which together with the maturity extensions of official EU
loans agreed earlier in the year will reduce future funding needs considerably.
For 2014, the cash buffer at the end of the year is also forecasted to cover
the financing needs for the following 15 months.
 Table 3.1:       Financing requirements 
 1/ Includes promissory note payments 2/ Includes long-term bonds, T-bills, commercial paper and others 3/ Include contingencies 4/ UK, Sweden and Denmark. Source: Sources: Commission services; NTMA. 
As
underscored also in previous reviews, and discussed above, Ireland continues to
face important challenges and risks, which require close monitoring and
determined policy action:
·     
On the real side, weak
growth remains a key risk. The latest revisions of the recent export
performance underscore that Ireland's prospects are closely linked to those of
its key trading partners. These remain uncertain, and thus represent a key
source of risks in the short term. Domestic demand could also fail to produce
the envisaged support to economic activity, especially if financial sector
reform stalls and unemployment remains high. In the latter respect, there is a
risk that, barring a marked increase in activation resources and a timely
reform of the training programs, the large cohort of long-term unemployed could
find it difficult to return to the labour market, which would have serious
adverse consequences for long-term potential growth and the sustainability of
public finances. 
·     
Fiscal risks persist.
Commission services' best forecast at present is that the programme ceiling on
the 2013 general government deficit might be exceeded, albeit by possibly small
amounts. Although data through June suggest that expenditure is being contained
below the budgeted profile, some pressures are expected to become apparent in
the health sector. Additional risks are linked to the IBRC liquidation, the
reclassification of AIB shares received by government as a dividend payment and
difficulties to achieve full savings from the new public service wage agreement
(Haddington Road Agreement). As the more lumpy expenditure (mostly in
the capital budget) are completed by the end of the year, these
pressures—unless proactively managed—could result in overruns. Moreover, at
around 7½% of GDP, the deficit remains high, implying that considerable further
fiscal consolidation is necessary going forward to bring public debt firmly
back on a sustainable path, even if real economic growth returns to around 3%
per year in the medium to long term. It is important that the authorities
maintain the set policy course, and that they identify measures that are as
much as possible equitable, durable and growth-friendly.
·     
Financial sector risks
remain prevalent.  On the one hand, an overly lengthy and protracted resolution
of banks' still growing non-performing loans could hinder banks'
capacity/willingness to extend new loans which would threaten a sustained
recovery, and undermine their profitability and attractiveness to private
funding. On the other hand, a speedier resolution could run into administrative
and system bottlenecks, especially as far as the court system is concerned,
unless procedures are appropriately streamlined and additional resources timely
mobilized. Thus, there is a need to mobilize additional resources for the
judicial system. It is also essential to preserve and, where possible, improve
on the basic institutional framework underpinning the local credit market, to
avoid costlier and/or scarcer credit in the post-crisis steady state. From this
perspective, reports that unsecured debt is effectively serviced prior and in
detriment of secured debt are concerning. Similarly, a functional credit
registry, enabling a system-wide picture of a borrower's total indebtedness,
should be established without further delays. 
AIB      Allied Irish Bank
BOI      Bank of Ireland
BGE    Bord Gáis Energy
BTL     Buy-to-Let
CBI      Central Bank of Ireland
CCMA  Code of Conduct on Mortgage Arrears
CER    Commission for Energy Regulation
CPI      Consumer Price Index
CSO    Central Statistics Office
dpd      Days Past Due
EBA     European Banking Authority
EC       European Commission
ECB    European Central Bank
EDP    Excessive Deficit Procedure
EFSF  European Financial Stability Fund
EFSM  European Financial Stabilisation
Mechanism
ELG     Eligible Liabilities Guarantee
ERO    Employment Regulation Order
ESRI   Economic and Social Research
Institute
ETB     Education and Training Board
FAS     Foras Áiseanna Saothair
FET     Further Education and Training
GDP    Gross Domestic Product
GNP    Gross National Product
GP       General Practitioner
GVA     Gross Value-Added
HICP   Harmonised Indices of Consumer
Prices
HSE    Health Service Executive
IBEC   Irish Business and Employers'
Confederation
IBF      Irish Banking Federation
IBRC   Irish Bank Resolution Corporation
IMF      International Monetary Fund
LTV     Loan-to-Value ratio
ma       Moving average
MEFP  Memorandum of Economic and Financial
Polities
MOU    Memorandum of Understanding
MTFS  Medium Term Financial Statement
NAMA  National Asset Management Agency
NBFI    Non-Bank Financial Intermediary
NFC    Non-Financial Corporation
PDH    Primary dwelling house
PCAR  Prudential Capital Assessment Review
PTSB  Permanent TSB
qoq      Quarter-on-quarter
REA    Registered Employment Agreement
REER Real Effective Exchange Rate
sa        Seasonally Adjusted
SGP    Stability and Growth Pact
SOLAS           An tSeirbhís Oideachas
Leanúnaigh Agus Scileana (Further Education and Training Authority)
SME    Small and Medium Enterprise
SSM    Single Supervisory Mechanism
y-o-y    Year-on-year
WHO   World Health Organisation
 Table A1.1:     Compliance assessment 
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 Table (continued) 
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 Table (continued) 
 Source: 
 Table A2.1:     Use and supply of goods and services (volume) 
 Source: Commission services 
 Table A2.2:     Use and supply of goods and services (value) 
 Source: Commission services 
 Table A2.3:     Implicit price deflators 
 Source: Commission services 
 Table A2.4:     Labour market and cost 
 Source: Commission services 
 Table A2.5:     External balance 
 Source: Commission services 
 Table A2.6:     Fiscal accounts 
 Source: Commission services 
 Table A2.7:     Debt developments 
 The projections assume no borrowing for precautionary contingencies foreseen in the programme's financing plan. Stock-flow adjustments include a reduction in cash balances from around 14% of GDP at end-2013 to around 4% by end-2016 and other and other financial transactions. Source: Commission services 
([1])  This report reflects information available
as of 31 August 2013.
([2])  See discussion in the Commission
Services' Compliance Report for the 10th review building on the work
available at http://www.esri.ie/UserFiles/publications/RN20130102.pdf
([3])  Appreciation of the euro vis-à-vis the
GBP might however have adverse effects on Irish exports to the UK. 
([4])  Some positive signs are offered by the July
2013 Euro Area Bank Lending Survey, available here: http://www.centralbank.ie/mpolbo/mpolicy/Documents/Comment%20on%20Results%20July%202013.pdf.
This shows that loan demand from households for house purchases increased
during Q2 2013, for the fifth successive quarter. According to the survey the
increase in mortgage demand was linked to more favourable housing market
prospects and higher levels of consumer confidence.  An increase in loan demand in respect of household lending is also expected during Q3 2013.
([5])  New NFC loans refers to loans above €1
million with floating rate and up to one year fixed
([6])  Downgrades to expected euro area demand
for Irish exports dominate upgrades to the corresponding U.S. forecasts. 
([7])  The magnitude and timing of effects
stemming from the new lending vehicles formed by the National Pensions Reserve
Fund and Blue Bay Asset Management in July 2013 are still to too uncertain to
be factored into the forecast. 
([8])  http://www.esri.ie/UserFiles/publications/MTR12.pdf. Assumptions regarding the external
environment were generated by the NiGEM model from the National Economic and
Social Research Institute, London. 
([9])  It should be noted that while the
forecasting performance of the model in question has been very good, it has
tended to overestimate growth and underestimate unemployment since the crisis,
and there growth numbers quoted above should therefore be seen as an upper
bound.
([10]) Certain 2013 budget saving measures
have been delayed or only partially implemented. These mainly relate to the reduction
of professional fees, pay-bill savings under the Employment Control Framework
and the introduction of charges to private patients for the use of public
hospital beds.
([11]) Work continues on the liquidation of
IBRC, but the volume of loans that may ultimately transfer to NAMA is still
unclear. The Special Liquidators of IBRC have been directed to complete the
valuation of IBRCs assets by 30 November 2013. This valuation is being
undertaken by independent third parties. For the purposes of the valuation,
loan assets are valued using discounted cash flow analysis applying a specified
discount rate (4.5%). In line with the approach announced in February 2013
there is an obligation on the Special Liquidators to ensure that the assets of
IBRC are sold at a price that is equal to or in excess of the independent
valuations that are being obtained. Should a bid not be received that is in
excess of the independent valuation obtained, the loan asset will transfer to
NAMA at the independent valuation price. Any shortfall between the valuation of
these assets and NAMA's claim on IBRC will be made up by the State. Any
possible such compensation to NAMA is likely to be treated as a financial
sector measure, given its one-off nature and the viability of NAMA, and would
thus be excluded the EDP and programme deficit target. The statistical
treatment of the operations continues to be discussed between the CSO and
Eurostat.
([12]) In April 2013, Eurostat decided that
the ordinary shares received by the government from AIB as dividends in 2012
(0.2% of GDP) do not represent a financial investment by the state in AIB, but
rather an equivalent capital transfer from the state to the bank. This transfer
offset the deficit-reducing impact of the dividends. The baseline forecast for
2013-16 assumes only the deficit-reducing effect of the dividend payments, i.e.
acquisition of the ordinary shares is assumed as a financial transaction. This
is based on an assessment by the CSO that the one-off higher-than-expected AIB
losses last year, which triggered the 2012 Eurostat reclassification, are
likely not to emerge this year. The statistical treatment of the 2013 dividend
payment continues to be discussed with the Irish authorities.
([13]) For example, longer working hours
should allow reducing agency and overtime costs in the heath sector, but there
has been some resistance from the unions of the affected medical personnel. 
([14]) The structural changes of the economy
during the economic crisis are beyond normal business cycle fluctuations.
Therefore, potential growth and structural government balance estimates need to
be treated with caution.
([15]) See http://ec.europa.eu/economy_finance/publications/occasional_paper/2013/pdf/ocp127_en.pdf,
p. 29
([16]) The Fiscal Transparency Assessment (FTA)
report for Ireland was carried out by the IMF at the request of the Irish
Government. The FTA highlighted several weaknesses in the Irish fiscal
reporting system. In particular: (i) cash-based budget execution reports are
published monthly but cover only the Exchequer and use a classification which
does not correspond to the ESA95 rules; (ii) fiscal statistics cover all
general government entities, but still exclude public corporations; and (iii)
multiple and inconsistent charts of accounts are used by different general
government entities. It therefore recommended a series of actions over five
years to: (i) expand the institutional coverage of budgets, statistics, and
accounts; (ii) recognize all assets, liabilities, and associated fiscal flows
in fiscal reports; (iii) modernize and harmonize accounting standards across
the public sector; (iv) accelerate the timetable for submission and approval of
the annual budget and financial statements; and (v) improve the analysis
forecast changes, long-term trends, and fiscal risks. (See http://www.imf.org/external/np/sec/pr/2013/pr13258.htm)
([17]) This has been pointed out in previous
reports, see for example:  http://ec.europa.eu/economy_finance/publications/occasional_paper/2013/pdf/ocp131_en.pdf,
p. 21 and http://ec.europa.eu/economy_finance/publications/occasional_paper/2013/pdf/ocp127_en.pdf
p. 27
([18]) Specifically, “government expenditure”
in the context of the abovementioned Act is defined as the expenditure voted by
the Dáil each year and excludes: (i) debt service costs; (ii) non-voted
expenditure financed directly from the "central fund" (judges' pay,
and the budgets of the Houses of Oireachtas and the Fiscal Advisory Council);
and (iii) expenditure by local governments and non-market public corporations.
In contrast, the EU expenditure benchmark is set for general government sector
excluding interest expenditure, non-discretionary changes in unemployment
benefit expenditure and discretionary expenditure increase fully offset by
discretionary revenue-increasing measures.
([19]) Art. 7(9) of Regulation (EU) No
472/2013: "A Member State subject to a macroeconomic adjustment programme
shall carry out a comprehensive audit of its public finances in order, inter
alia, to assess the reasons that led to the building up of excessive levels of
debt as well as to track any possible irregularity."
([20]) The Act removes the unintended
constraints on banks' ability to realise the value of loan collateral in
certain instances while providing additional new safeguards for the family home
in repossessions proceedings.
([21]) The bank took possession of
approximately 1300 residences in the period Q1 2012- Q2 2013 with the vast
majority of these coming through voluntary surrender.
([22]) The Commercial
Court is a division of the High Court that was established in 2004 to provide efficient and effective
dispute resolution in commercial cases. The court deals with disputes of a
commercial nature between commercial bodies where the value of the claim is at
least EUR 1 million. The Court uses a detailed case management system that is
designed to streamline the preparation for trial, remove unnecessary costs and
stalling tactics, and ensure full pre-trial disclosure. 
([23]) The scheme was introduced in October
2012 and provides a Government guarantee to the lender of
75% on individual loans to viable businesses, which is paid to the lender on
the unrecovered outstanding balance on a loan in the event of an SME defaulting
on the loan repayments.
([24]) The Microenterprise Loan Fund was
introduced in October 2012 to provide loans  of up to EUR 25,000 to businesses and sole traders employing up to ten people who have been
refused credit by the banks. 
([25]) The intention was for the credit
guarantee scheme to provide EUR 150 m in additional credit to companies per
year for a three year period and it was intended to benefit 5,600 businesses.
However at end August only 59 loans have been granted, worth a total of EUR 8,6
m. Similarly, for the microfinance fund, only 280 applications were received,
with a 44% approval rate. This limited take-up is particularly disappointing, given
that 96% of SMEs in Ireland employ less than 10 people and the average lending
to SMEs is EUR 40,000. 
([26]) See http://www.welfare.ie/en/downloads/Pathways-to-Work-2013.pdf.
([27]) See Economic
Adjustment Programme for Ireland, Autumn 2012 Review, page 37.
([28]) The authorities recently published a
review of all Joint Labour Committees, with the view to streamlining them where
necessary. 
([29]) A survey
of Irish firms indicates that 87% invoke reduced effort or morale as a reason
not to cut nominal wages, with 83% indicating a fear of seeing their best staff
leave as another reason. This survey was conducted during late-2007 and
early-2008, however, a period during which only 1% of Irish firms reported
having cut wages.
([30]) See: http://www.dohc.ie/press/releases/2013/20130624.html
([31]) The report, titled "Ireland:
Pharmaceutical Prices, Prescribing Practices and Usage of Generics in a
Comparative Context", was an MoU commitment. It finds that drugs prices
remain high in comparative terms (including for generic drugs), despite the recent
realignments, and generic penetration low.
([32]) The relevant provisions were originally
included in the Health Information Bill—which dealt with a wider range of
issues—but will now be introduced separately to ensure the roll-out of the
identifiers is not unduly delayed.
([33]) The yields of the T-bills were at 0.2%
at the latest auction on 18 July, with a cover ratio of 3.6.
([34]) Conefrey, Thomas and Cronin, David
(2013) "Spillover in Euro Area Sovereign Bond Markets", CBI Research
Technical Paper 05/RT/13, http://www.centralbank.ie/publications/Documents/Research%20Technical%20Paper%2005RT13.pdf
([35]) This will bring the released
disbursements to EUR 66.1 billion, representing 97.9% of the total
international assistance of EUR 67.5 billion available under the programme.