Recommendation for a COUNCIL RECOMMENDATION on Ireland’s 2014 national reform programme and delivering a Council opinion on Ireland’s 2014 stability programme
Date: 2014-06-02
Institutions: European Commission
Subjects: Ireland, budget deficit, economic convergence, economic disparity, economic growth, economic stabilisation, financial control, job creation, public debt, social situation, stability programme, structural adjustment













EUR-Lex - 52014DC0408 - EN











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52014DC0408

Recommendation for a COUNCIL RECOMMENDATION on Ireland’s 2014 national reform programme and delivering a Council opinion on Ireland’s 2014 stability programme /* COM/2014/0408 final */









 
 
Recommendation for a
COUNCIL RECOMMENDATION
on Ireland’s 2014 national reform
programme
and delivering a Council opinion on Ireland’s 2014 stability programme

THE COUNCIL OF THE EUROPEAN UNION,
Having regard to the Treaty on the
Functioning of the European Union, and in particular Articles 121(2) and 148(4)
thereof,
Having regard to Council Regulation (EC) No
1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary
positions and the surveillance and coordination of economic policies[1], and in particular
Article 5(2) thereof,
Having regard to Regulation (EU) No
1176/2011 of the European Parliament and of the Council of 16 November 2011 on
the prevention and correction of macroeconomic imbalances[2], and in particular
Article 6(1) thereof,
Having regard to the recommendation of the
European Commission[3],
Having regard to the resolutions of the
European Parliament[4],
Having regard to the conclusions of the
European Council,
Having regard to the opinion of the
Employment Committee,
Having regard to the opinion of the
Economic and Financial Committee,
Having regard to the opinion of the Social
Protection Committee,
Having regard to the opinion of the
Economic Policy Committee,
Whereas:
(1)                   
On 26 March 2010, the European Council agreed to
the Commission’s proposal to launch a new strategy for growth and jobs, Europe
2020, based on enhanced coordination of economic policies, which will focus on
the key areas where action is needed to boost Europe’s potential for
sustainable growth and competitiveness.
(2)                   
On 13 July 2010, the Council, on the basis of
the Commission's proposals, adopted a recommendation on the broad guidelines
for the economic policies of the Member States and the Union (2010 to 2014)
and, on 21 October 2010, adopted a decision on guidelines for the employment
policies of the Member States, which together form the ‘integrated guidelines’.
Member States were invited to take the integrated guidelines into account in
their national economic and employment policies.
(3)                   
On 29 June 2012, the Heads of State or
Government decided on a Compact for Growth and Jobs, providing a coherent
framework for action at national, EU and euro area levels using all possible
levers, instruments and policies. They decided on action to be taken at the
level of the Member States, in particular expressing full commitment to achieving
the objectives of the Europe 2020 Strategy and to implementing the
country-specific recommendations.
(4)                   
Ireland was subject to a macroeconomic
adjustment programme until December 2013. Under Article 12 of Regulation (EU)
No 472/2013 it was thus exempt from the monitoring and assessment of the
European Semester for economic policy coordination for the duration of that
programme. In view of the successful completion of the Irish macroeconomic adjustment
programme, Ireland should now be fully integrated in the European Semester
framework.
(5)                   
On 13 November 2013, the Commission adopted the
Annual Growth Survey[5],
marking the start of the 2014 European Semester of economic policy
coordination. On the same day on the basis of Regulation (EU) No 1176/2011, the
Commission adopted the Alert Mechanism Report[6].
(6)                   
On 20 December 2013, the European Council
endorsed the priorities for ensuring financial stability, fiscal consolidation
and action to foster growth. It underscored the need to pursue differentiated,
growth-friendly fiscal consolidation, to restore normal lending conditions to
the economy, to promote growth and competitiveness, to tackle unemployment and
the social consequences of the crisis, and to modernise public administration.
(7)                   
On 5 March 2014, the Commission published the
results of its in-depth review for Ireland[7],
under Article 5 of Regulation (EU) No 1176/2011 and taking into account the
successful completion of the Irish economic adjustment programme and thus the
fact that Ireland should now be fully integrated in the European Semester
framework. The Commission's analysis leads it to conclude that Ireland's
recently completed macroeconomic adjustment programme was instrumental in
managing economic risks and reducing imbalances. However, the remaining
macroeconomic imbalances require specific monitoring and decisive policy action.
In particular, financial sector developments, private and public sector
indebtedness, and, linked to that, the high gross and net external liabilities
and the situation of the labour market mean that risks are still present.
(8)                   
On 17 April 2014, Ireland submitted its 2014 national
reform programme and on 29 April 2014 its 2014 stability programme. In order to
take account of their interlinkages, the two programmes have been assessed at
the same time.
(9)                   
The main objectives of the budgetary strategy
outlined in the 2014 Stability Programme are to correct the excessive deficit
by 2015 and reach the medium-term objective by 2018. The programme targets a
deficit below 3 % of GDP by 2015, in line with the Excessive Deficit Procedure
recommendation. The programme confirms the medium-term objective of a balanced
budgetary position in structural terms, which is consistent with the provisions
of the Stability and Growth Pact. Beyond 2015, the programme sets a reduction
in the headline fiscal deficit of around 1 pp. of GDP per annum in 2016–2018. It
aims to reduce debt from close to 124 % of GDP in 2013 to 107 % of GDP in 2018.
The macroeconomic scenario underpinning the budgetary projections in the
programme is broadly in line with Commission forecasts for 2014 and 2015, with
some differences in the contributions of the demand components. It was endorsed
by an independent body (the Irish Fiscal Advisory Council). However, the
authoritiesʼ forecast for the later years of the programme are optimistic.
Moreover, the achievement of the budgetary targets is not supported by
sufficiently detailed measures for 2015. As a result, the Commission deficit forecast
for 2015 is higher than the target recommended by the Council. Based on the
assessment of the programme and the Commission forecast, pursuant to Council
Regulation (EC) No 1466/97, the Council is of the opinion that the programme's
targets are consistent with the requirements of the Stability and Growth Pact,
but need to be supported by specific measures from 2015 onward. There have been
significant steps to improve important aspects of the Irish fiscal framework
and the quality and timeliness of data provision. However, medium-term
budgetary plans are not supported by well specified adjustment measures and are
subject revisions at the time of annual budget decisions. The medium-term
expenditure ceilings are not sufficiently constrained by legally binding
specific adjustments.
(10)               
Tax reforms have contributed to the fiscal
adjustment, but there is further scope to improve the efficiency and
growth-friendliness of the tax system. Property taxation has been shifted from
a transaction tax to a recurrent tax based on residential property values, but
the tax base is still relatively narrow as certain properties remain outside of
the tax net. Labour taxation is fragmented and complex; and the tax bases for
consumption and environment taxes are narrowed by reduced rates and exemptions,
while such taxes are more growth-friendly. Zero and reduced VAT rates result in
a VAT efficiency below the EU average. Reduced VAT rates are widely used to
achieve redistribution objectives even though they are not an efficient and
well-targeted policy tool to protect vulnerable groups. There is scope to
improve the effectiveness of environmental tax instruments and removing
environmentally harmful subsidies.
(11)               
Even though Ireland has a relatively young
population, public healthcare expenditure was among the highest in the EU in
2012 at 8.7% of GNI, significantly above the EU average of 7.3%. Given the
current difficulties in managing the health budget, expected demographic
pressures due to an ageing population mean that current service levels can be
maintained only if value-for-money gains are achieved over the medium to long
term. The increase in health-related spending to 2060 due to demographic
pressures is projected at 1.2 percentage points of GDP. Challenges to the
health sector are multifaceted. Financial management and accounting systems and
processes are fragmented across healthcare providers. This causes delays and
hurdles in collecting and processing information. It also hinders the
monitoring of healthcare expenditure and efforts to achieve value-for-money and
an appropriate allocation of resources. The high level of pharmaceutical
expenditure is another challenge, with expenditure on out-patient drugs being
comparatively high.  
(12)               
Ireland faces challenges relating to unemployment,
particularly long-term and youth unemployment, and there is still a large working
age population with low skills, resulting in inequality and skills mismatches.
Long-term unemployment has fallen gradually with the recent strengthening of
the labour market, but it remains high and continues to increase as a
proportion of overall unemployment, representing over 61% of the total at the
end of 2013. The unemployment rate among young people peaked above 30% in late
2012 and early 2013. Additionally, the proportion of young people not in
employment, education or training increased by eight percentage points between
2007 and 2012 to 18.7% before ebbing to 16.1%, but still among the highest in
the EU. There is a need to cover all young people in
need within a 4-month period, in line with the objectives of a youth guarantee.
Skills mismatches have emerged with the rebalancing of
the economy, making re-skilling and up-skilling a challenge for the education
and training system. In addition, participation in lifelong learning is lower
than the EU average (7.3%, as compared with 10.7% in 2013). 
(13)               
Ireland has one of the highest proportions of
people living in households with low work intensity in the EU, which generates
serious social challenges. The proportion was higher than the EU average prior
to the crisis and surged from 14.3% in 2007 to 24.2% in 2011. Low work
intensity is particularly severe among single-parent households with children.
This has contributed to a growing risk of poverty or social exclusion of children
in Ireland and exacerbates the issue of the unequal labour market participation
of women which stood at 67.2% in 2013, as compared with 83.4% for men. As a
result, attention has turned to access to and affordability of childcare, a
significant barrier to parents finding employment and avoiding the risk of
poverty. The labour market is also affected by pockets of unemployment traps. The
flat structure of unemployment benefits under the Jobseeker's Benefit and Jobseeker's
Allowance system, the unlimited duration of the Jobseeker's Allowance and the
loss of supplementary payments (in particular rent supplement and medical
cards) upon return to employment mean that replacement rates are relatively
high for the long-term unemployed with low income potential and other
categories of workers depending on family circumstances.
(14)               
Lending to SMEs remains weak, reflecting a
combination of subdued credit demand and supply constraints, as SMEs continue
to be affected by excess leveraging and weak domestic demand while banks need
to make further progress in achieving sustainable resolutions in their SME
non-performing loans book. The latest Red C survey indicates that, of the 40%
of SMEs that requested bank credit between October 2012 and March 2013, 19%
were declined a loan. The Credit Review Office was established at the end of
2009 to mediate disputes between lenders and prospective SME borrowers who have
been refused credit. Although positive, the impact of the Credit Review Office appears
to have been rather limited to date, partly because the number of appeals has
been quite small. SMEs rely heavily on bank financing for investment, and non-bank
sources of finances are relatively underdeveloped, although some alternatives,
including loan funds, are currently being examined. As the recovery gathers
momentum, however, and as domestic demand recovers supply constraints are
likely to increase unless credit channels are adequately repaired, which is
crucial for the growth outlook. Dedicated schemes and funds have been put in
place to improve access to finance for SMEs, such as the Credit Guarantee
Scheme, the Microenterprise Loan Fund Scheme and three SME funds put in place,
but so far take-up has been low. 
(15)               
Despite banking sector reforms undertaken under
the recently completed programme of financial assistance, there are still
significant challenges. These challenges were analysed in detail in the
Commission's 2014 in-depth review of Ireland. Non-performing loans represented
almost 27 % of the total as of June 2013 for the three main domestic banks. Private
sector indebtedness is still among the highest in the EU in spite of recent
deleveraging and this remains a risk to financial stability and a burden on the
economy. Household and SME deleveraging is incomplete, and bank and SME balance
sheet repair are critical to restore credit channels. Bank lending continues to
fall and the banking sector still struggles with profitability, in part because
of the high number of tracker mortgages (low-yielding legacy assets) on banks'
balance sheets.
(16)               
The cost of enforcing contracts is high. Lawyer
fees represent the majority of these costs, at 18.8 pp and high legal services
costs affect the cost structure of all businesses, including SMEs. In addition,
unlike for other professional services, legal services costs have failed to
adjust downwards since the onset of the crisis, in part due to insufficient
competition. The authorities have committed themselves to introducing reforms
to the legal services sector as part of the macroeconomic adjustment programme.
They published a Legal Services Regulation Bill in 2011 that remains to be
enacted. Judicial and court administrative resources to implement active
pre-trial case management are very limited, which may be contributing to delays
in the delivery of justice and raise costs. In addition, there are significant
gaps in Ireland's ability to collect data on the quality and efficiency of the
justice system.
(17)               
In the context of the European Semester, the
Commission has carried out a comprehensive analysis of Ireland’s economic
policy. It has assessed the stability programme and the national reform
programme. It has taken into account not only their relevance for sustainable
fiscal and socio-economic policy in Ireland but also their compliance with EU
rules and guidance, given the need to reinforce the overall economic governance
of the European Union by providing EU-level input into future national
decisions. Its recommendations under the European Semester are
reflected in recommendations (1) to (7) below.
(18)               
In the light of this assessment, the Council has
examined Ireland’s stability programme, and its opinion[8] is reflected in
particular in recommendations (1) and (2) below.
(19)               
In the light of the Commission's in-depth review
and this assessment, the Council has examined the national reform programme and
the stability programme. Its recommendations under Article 6 of Regulation (EU)
No 1176/2011 are reflected in recommendations (1), (3), (5) and (6) below.
(20)               
In the context of the European Semester the
Commission has also carried out an analysis of the economic policy of the euro
area as a whole. On the basis of this analysis, the Council has issued specific
recommendations for the Member States whose currency is the euro. Ireland should
also ensure the full and timely implementation of these recommendations.
HEREBY RECOMMENDS that Ireland take
action within the period 2014-2015 to:
1.                      
Fully implement the 2014 budget and ensure the
correction of the excessive deficit in a sustainable manner by 2015 through
underpinning the budgetary strategy with additional structural measures while achieving
the structural adjustment effort specified in the Council recommendation under
the Excessive Deficit Procedure. After the correction of the excessive deficit,
pursue a structural adjustment towards the medium-term objective of at least
0.5% of GDP each year, and more in good economic conditions or if needed to
ensure that the debt rule is met in order to put the high general government
debt ratio on a sustained downward path. Enhance the credibility of the fiscal
adjustment strategy, effectively implement multi-annual budgetary planning and
define broad budgetary measures underlying the medium-term fiscal targets. Make
the government expenditure ceiling more binding by limiting the statutory scope
for discretionary changes. To support fiscal consolidation, consideration
should be given to raising revenues through broadening the tax base. Enhance
the growth and environmental friendliness of the tax system.
2.                      
Advance the reform of the healthcare sector
initiated under the Future Health strategic framework to increase
cost-effectiveness. Pursue additional measures to reduce pharmaceutical spending,
including through more frequent price realignment exercise for patented
medicines, increased generic penetration and improved prescribing practices.
Reform the financial management systems of the national health authority to
streamline systems across all providers and to support better claims
management. Roll out individual health identifiers starting in January 2015.
3.                      
Pursue further improvements in active labour
market policies, with a particular focus on the long-term unemployed, the
low-skilled and, in line with the objectives of a youth guarantee, young
people. Advance the on-going reform of the further education and training (FET)
system, employment support schemes and apprenticeship programmes. Offer more
workplace training; improve and ensure the relevance of FET courses and
apprenticeships with respect to labour market needs. Increase the level and
quality of support services provided by the Intreo labour offices. Put
in place a seamless FET referrals system between Intreo offices and
Education and Training Boards. 
4.                      
Tackle low work intensity of households and address
the poverty risk of children through tapered withdrawal of benefits and
supplementary payments upon return to employment. Facilitate female labour
market participation by improving access to more affordable and full-time
childcare, particularly for low income families.
5.                      
Develop further policy initiatives for the SME
sector including policy initiatives to address the availability of bank and
non-bank financing and debt restructuring issues. Advance initiatives to
improve SME's access to bank credit and non-bank finance. Introduce a monitoring
system for SME lending in the banking sector. In parallel, work to ensure that
available non-bank credit facilities, including the three SME funds co-funded
by the National Pensions Reserve Fund, Microfinance Ireland and the temporary
loan guarantee scheme, are better utilised. Promote the use of these and other
non-bank schemes by SMEs. Enhance the Credit Review Office's visibility and
capabilities in mediating disputes between banks and prospective SME borrowers
who have been refused credit.   
6.                      
Monitor banks' performance against the mortgage
arrears restructuring targets. Announce ambitious targets for the third and
fourth quarters of 2014 for the principal mortgage banks to propose and
conclude restructuring solutions for mortgage loans in arrears of more than 90
days, with a view to substantially resolving mortgage arrears by the end of 2014.
Continue to assess the sustainability of the concluded restructuring
arrangements through audits and targeted on-site reviews. Develop guidelines
for the durability of solutions. Publish regular data on banks' SME loan
portfolios in arrears to enhance transparency. Develop a strategy to address
distressed commercial real-estate exposures. Establish a central credit
registry.
7.                      
Reduce the cost of legal proceedings and
services and foster competition, including by enacting the Legal Services
Regulation Bill by the end of 2014, including its provision allowing the
establishment of multi-disciplinary practices, and by seeking to remove the
solicitor's lien. Monitor its impact, including on the costs of legal services.
Take executive steps to ensure that the Legal Services Regulatory Authority is
operational without delay and that it meets its obligations under the
legislation, including in terms of publishing regulations or guidelines for
multi-disciplinary practices and the resolution of complaints. Improve data
collection systems to enable quality and efficiency of judicial proceedings.
Done at Brussels,
                                                                       For
the Council
                                                                       The
President
[1]               OJ L 209, 2.8.1997, p. 1.
[2]               OJ L 306, 23.11.2011, p. 25.
[3]               COM(2014) 408 final.
[4]               P7_TA(2014)0128 and P7_TA(2014)0129.
[5]               COM(2013) 800 final.
[6]               COM(2013) 790 final.
[7]               SWD(2014) 79 final.
[8]               Under Article 5(2) of Council Regulation (EC) No
1466/97.