Recommendation for a COUNCIL RECOMMENDATION on the 2016 national reform programme of Ireland and delivering a Council opinion on the 2016 stability programme of Ireland
Date: 2016-05-18
Institutions: European Commission, Secretariat-General
Subjects: Ireland, budget deficit, budgetary expenditure, credit policy, economic policy, economic reform, employment policy, social policy, social-security benefit, stability programme

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   EUROPEAN COMMISSION  Brussels, 18.5.2016  COM(2016) 328 final   Recommendation for a COUNCIL RECOMMENDATION on the 2016 national reform programme of Ireland  and delivering a Council opinion on the 2016 stability programme of Ireland  
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2016 national reform programme of Ireland 

and delivering a Council opinion on the 2016 stability programme of Ireland 

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 
policies1, 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 
imbalances2, and in particular Article 6(1) thereof, 
Having regard to the recommendation of the European Commission3, 
Having regard to the resolutions of the European Parliament4, 

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 November 2015,  the  Commission  adopted  the  Annual  Growth  Survey5, 
marking  the  start  of  the  2016  European  Semester  of  economic  policy  coordination. 
The priorities of the Annual Growth Survey were endorsed by the European Council 
on  17-18 March 2016.  On  26 November 2015,  on  the  basis  of  Regulation  (EU)  No 
1176/2011,  the  Commission  adopted  the  Alert  Mechanism  Report6,  in  which  it 
identified Ireland as one of the Member States for which an in-depth review would 
be  carried  out.  On  the  same  day,  the  Commission  adopted a  recommendation  for a 

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OJ L 209, 2.8.1997, p. 1. 
OJ L 306, 23.11.2011, p. 25. 
COM(2016) 328 final. 
P8_TA(2016)0058, P8_TA(2016)0059, and P8_TA(2016)0060. 
COM(2015) 690 final. 
COM(2015) 691 final. 

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(2) 

(3) 

(4) 

(5) 

Council  recommendation  on  the  economic  policy  of  the  euro  area7.  This 
recommendation was endorsed by the European Council on 18-19 February 2016 and 
adopted by the Council on 8 March 2016. As a country whose currency is the euro 
and  in  view  of  the  close  interlinkages  between  the  economies  in  the  economic  and 
monetary  union,  Ireland  should  ensure  the  full  and  timely  implementation  of  those 
recommendations. 
The 2016 country report for Ireland8 was published on 26 February 2016. It assessed 
Ireland’s  progress  in  addressing  the  country-specific  recommendations  adopted  by 
the Council on 14 July 2015 and Ireland’s progress towards its national Europe 2020 
targets. It also included the in-depth review under Article 5 of Regulation (EU) No 
1176/2011. On 8 March 2016, the Commission presented the results of the in-depth 
review.9 The Commission’s analysis leads it to conclude that Ireland is experiencing 
macroeconomic imbalances. In particular, it is essential to tackle the large stocks of 
net external liabilities and of public and private debt which constitute vulnerabilities, 
despite improvements. 

On  29  April  2016,  Ireland  submitted  its  2016  national  reform  programme  and  its 
2016  stability  programme.  To  take  account  of  their  interlinkages,  the  two 
programmes have been assessed at the same time. 

recommendations  have  been  addressed 

the 
Relevant  country-specific 
programming  of  the  European  Structural  and  Investment  Funds  for  the  2014-2020 
period.  As  foreseen  in  Article  23  of  Regulation  (EU)  No  1303/2013,  where  it  is 
necessary  to  support  the  implementation  of  relevant  Council  recommendations,  the 
Commission may request a Member State to review and propose amendments to its 
Partnership  Agreement  and  relevant  programmes.  The  Commission  has  provided 
further  details  on  how  it  would  make  use  of  this  provision  in  guidelines  on  the 
application of the measures linking the effectiveness of the European Structural and 
Investment Funds to sound economic governance10. 

in 

[Following  the  abrogation  of  the  excessive  deficit  procedure,  Ireland  is  in  the 
preventive arm of the Stability and Growth Pact and subject to the transitional debt 
rule.]  In  its  2016  stability  programme,  which  is  based  on  a  no-policy-change 
assumption,  the  government  plans  gradual  improvements  of  the  headline  balance 
until  reaching  a  surplus  of  0.4%  of  GDP  in  2018.  The  revised  medium-term 
budgetary objective  a structural deficit of 0.5% of GDP – is expected to be reached 
in 2018. However, the annual change in the recalculated11 structural balance of 0.1% 
of  GDP  in  2016  does  not  ensure  sufficient  progress  towards  the  medium-term 
budgetary objective. According to the stability programme, the government debt-to-
GDP ratio is expected to fall to 88.2% in 2016 and to continue declining to 85.5% in 
2017.  The  macroeconomic  scenario  underpinning  these  budgetary  projections  is 
plausible. However, the measures needed to support the planned deficit targets from 
2017 onwards have not been sufficiently specified. Based on the Commission 2016 
spring  forecast,  there  is  a  risk  of  some  deviation  from  the  recommended  fiscal 
adjustment  in  2016,  while  Ireland  is  projected  to  be  compliant  in  2017  under 

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COM(2015) 692 final. 
SWD(2016) 77 final. 
COM(2016) 95 final. 
COM(2014) 494 final. 
The structural balance as recalculated by the Commission based on the information in the convergence 
programme, following the commonly agreed methodology. 

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(6) 

(7) 

(8) 

(9) 

unchanged  policies.  Ireland  is  forecast  to  comply  with  the  transitional  debt  rule  in 
2016 and 2017. Based on its assessment of the stability programme and taking into 
account  the  Commission  2016  spring  forecast,  the  Council  is  of  the  opinion  that 
Ireland is expected to broadly comply with the provisions of the Stability and Growth 
Pact. Nevertheless, further measures will be needed to ensure compliance in 2016.  

Efforts  to  broaden  the  tax  base  have  been  limited  and  recent  tax  measures  have 
focused on cuts and reliefs. Further progress should be made towards making the tax 
system  more  efficient  and  growth-friendly.  The  Irish  authorities  conduct  a  rolling 
programme  of  tax  expenditure  reviews,  the  results  of  which  are  published  in  an 
annual  report.  However,  the  review  process  does  not  cover  VAT-related  tax 
expenditures and there is still scope to broaden the tax base through increases in the 
least distortionary taxes.  

Cost-effectiveness,  equal  access  and  sustainability  remain  critical  challenges  to  the 
healthcare  system.  Specific  strands  of  reforms  are  progressing,  but  spending  on 
pharmaceuticals,  in  particular  owing  to  the  high  cost  of  single-supplier  medicines, 
continues  to  weigh  on  cost  effectiveness.  Financial  management  and  information 
systems  remain  weak  and  unequal  access  to  primary  care  is  still  an  issue. 
Approximately 40 % of the population has free access to general practitioners, while 
the rest bear the full cost. Significant uncertainty surrounds the broad reform of the 
healthcare system as the universal health insurance model is in a quandary.  

Infrastructure  needs  should  be  addressed  in  order  to  promote  durable  and  balanced 
growth in the future. Following a peak of 5.2 % of GDP in 2008, public investment 
fell to a low of 1.8 % of GDP in 2013 before slightly recovering in 2014, when it was 
still  well  below  the  EU  average.  In  addition,  the  crisis  appears  to  have  led  to  a 
structural  shift  in  the  composition  of  general  government  expenditure  away  from 
investment  towards  current  spending.  In  2010-2013,  capital  expenditure  averaged 
only 4.8 % of the total, less than half the long term average during 1995-2008. Seven 
years of sharply reduced government investment have had a negative impact on the 
quality  and  adequacy  of  infrastructure  and  the  government  support  for  intangible 
investments.  There  are  key  weaknesses  in  housing,  water,  public  transport  and 
climate  change  mitigation  capacity.  Demand  for  new  housing  currently  exceeds 
supply  by  a  wide  margin  in  the  country's  main  urban  areas.  As  a  result,  residential 
property  prices  and  rents  in  urban  areas  increased  sharply  in  2014,  before  growth 
slowed  in  2015.  There  is  currently  no  evidence  of  over-valuation,  but  constraints 
limiting the construction sector and the supply of housing, including some linked to 
public infrastructure, could generate risks of imbalances if they are not resolved. The 
shift in government expenditure has also affected public sector support to R&D and 
innovation, which was below 2007 levels in 2014. Currently, in terms of public R&D 
as a percentatge of GDP, Ireland ranks 22nd in the EU. This has a negative impact on 
the competitiveness of SMEs. 

Unemployment has fallen below the EU average and in March 2016 stood at 8.6%. 
However, long-term unemployment and the low work intensity of households remain 
sources of concern. In particular, the proportion of the long-term unemployed in total 
unemployment  remains  high  at  56.3%  in  the  fourth  quarter  of  2015,  above  the  EU 
average of 48.3%. In 2014 (latest comparable data), the percentage of the population 
living in  very low work intensity (VLWI) households was the highest in the  EU at 
21.1% and was especially prevalent for single-parent households. The proportion of 
children (aged 0 to 17) at risk of poverty or social exclusion (AROPE) fell to 30.3% 
in  2014  but  remains  higher  than  the  EU  average  of  27.8%.  The  corresponding 

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(10) 

(11) 

(12) 

AROPE figure for single-parent households (62.5% in 2014) is much higher than the 
EU average (48.2%).  

including  people  with  a  disability  and 

Ireland has begun rollout of the JobPath Programme to address the needs of the long-
term unemployed and is developing an activation approach to encourage those with 
the potential and desire to play a more active role in the labour force. The challenge 
remains  to  expand  job  support  services  to  those  traditionally  excluded  from  the 
labour  market, 
those  with  caring 
responsibilities. Overall, the welfare system has worked well to contain the effects of 
the  crisis  on  poverty  and  inequality,  but  barriers  to  inclusive  growth  remain.  Some 
progress has been achieved in tapering benefits, but concerns persist about inactivity 
traps for certain households. As a percentage of wages, net childcare costs in Ireland 
are among the highest in the EU, the second highest for couples and the highest for 
single  parents.  Concerns  remain  over  the  quality  of  childcare  provisions.  For 
example,  in  2014  the  percentage  of  graduates  working  in  the  early  childhood 
education and care sector (15%) remained well below the recommended level. Skills 
mismatches  remain  and  skills  shortages  have  emerged  in  certain  areas,  while 
upskilling  and  reskilling  opportunities  remain  insufficient,  and  the  decrease  in 
education expenditure could have a negative impact on educational outcomes in the 
future. 

The high leverage of the private sector reflects ongoing loan impairment issues. At 
the end of June 2015, private sector non-consolidated debt stood at 266.3 % of GDP, 
well above the euro area average. Although the non-performing loans ratio has been 
declining  due  to  the  economic  recovery  and  restructuring  activities,  at  the  end  of 
2015  it  remained  among  the  highest  in  the  euro  area,  at  over  16%  of  all  domestic 
banks' loans. In addition, 14.7 % of the mortgage stock was in arrears at the end of 
2015, while accounts in arrears of over two years represented almost 10% of the total 
mortgage loan balance. Most mortgage restructuring is temporary, highlighting a risk 
of  re-default,  especially  in  the  event  of  macroeconomic  deterioration  or  external 
shock. Commercial real estate loans held by domestic banks and SME and business 
loans  also  remain  areas  of  concern,  with  non-performing  loan  ratios  of  37.3%  and 
13.8%  respectively.  It  will  take  much  more  time  and  effort  to  restructure  these 
accounts  sustainably.  Personal  insolvency  procedures,  bankruptcy,  examinership 
(court  protection  under  Irish  law  for  companies  in  difficulty)  and  other  means  of 
partial  debt  relief  intended  to  restore  households  and  business  to  viability  remain 
under-utilised. The introduction of the central credit registry has been slow, despite 
being critical to support prudent lending.   

The Legal Services Regulation Act 2015 has been signed into law, but at a late stage 
in  the  process,  concessions  were  made  to  the  legal  professions  that  significantly 
reduced the initial ambition of the reform. Implementation of the new framework is 
only just starting and it is too early to be fully confident that it will boost competition 
and reduce costs. Legal services are an input to all sectors of the economy and their 
cost has a bearing on Ireland's competitiveness. An actual reduction in costs can be 
achieved  only  if  the  competition-enhancing  and  cost-reducing  provisions  of  the 
planned  regulatory  framework  are  made  into  law  following  public  consultation 
processes  or  incorporated  in  regulations  to  be  issued  by  the  Legal  Services 
Regulatory Authority.  

(13) 

In  the  context  of  the  European  Semester,  the  Commission  has  carried  out  a 
comprehensive  analysis  of  Ireland’s  economic  policy  and  published  it  in  the  2016 
country report. It has also assessed the stability programme and the national reform 

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programme and the follow-up given to the recommendations addressed to Ireland in 
previous  years.  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 strengthen the EU's overall economic governance of 
the European Union by providing EU-level input into future national decisions. The 
recommendations under the European Semester are reflected in recommendations 1 
to 3 below. 

(14) 

(15) 

In  the  light  of  this  assessment,  the  Council  has  examined  the  stability  programme, 
and its opinion12 is reflected in particular in recommendation 1 below. 

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 and 3 below. 

HEREBY RECOMMENDS that Ireland take action in 2016 and 2017 to: 

1. 

2. 

3. 

Following the correction of the excessive deficit, achieve an annual fiscal adjustment 
of 0.6 % of GDP towards the medium-term budgetary objective in 2016 and in 2017. 
Use  windfall  gains  from  strong  economic  and  financial  conditions,  as  well  as  from 
asset  sales,  to  accelerate  debt  reduction.  Reduce  vulnerability  to  economic 
fluctuations and shocks, inter alia by broadening the tax base. Enhance the quality of 
expenditure,  particularly  by  increasing  cost-effectiveness  of  healthcare  and  by 
prioritising  government  capital  expenditure  in  R&D  and  in  public  infrastructure,  in 
particular transport, water services and housing.  

Expand and accelerate the implementation of activation policies to increase the work 
intensity of households and address the poverty risk of children. Pursue measures to 
incentivise  employment  by  tapering  the  withdrawal  of  benefits  and  supplementary 
payments. Improve the provision of quality, affordable full-time childcare.    

Finalise durable restructuring solutions to lower non-performing loans, to ensure debt 
sustainability  of  households  and  to  encourage  lenders  to  reduce  the  debt  of 
excessively  leveraged  yet  viable  businesses.  Accelerate  the  phasing-in  of  a  fully 
operational central credit registry covering all categories of lenders and debtors. 

Done at Brussels, 

For the Council 
The President 

12 

Under Article 5(2) of Council Regulation (EC) No 1466/97. 

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