Recommendation for a COUNCIL RECOMMENDATION on the 2017 National Reform Programme of Ireland and delivering a Council opinion on the 2017 Stability Programme of Ireland
Date: 2017-05-22
Institutions: European Commission, Secretariat-General
Subjects: Ireland, budget deficit, credit policy, economic policy, economic reform, employment policy, public expenditure, social policy, stability programme

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   EUROPEAN COMMISSION  Brussels, 22.5.2017  COM(2017) 507 final   Recommendation for a COUNCIL RECOMMENDATION on the 2017 National Reform Programme of Ireland  and delivering a Council opinion on the 2017 Stability Programme of Ireland   
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2017 National Reform Programme of Ireland 

and delivering a Council opinion on the 2017 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 
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  16 November  2016,  the  Commission  adopted  the  Annual  Growth  Survey,5 
marking  the  start  of  the  2017  European  Semester  of  economic  policy  coordination. 
The priorities of the Annual Growth Survey were endorsed by the European Council 
on  9-10 March  2017.  On  16 November  2016,  on  the  basis  of  Regulation  (EU) 
No 1176/2011,  the  Commission  adopted  the  Alert  Mechanism  Report,6  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 also adopted a recommendation for 
a  Council  Recommendation  on  the  economic  policy  of  the  euro  area.  That 

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OJ L 209, 2.8.1997, p. 1. 
OJ L 306, 23.11.2011, p. 25. 
COM(2017) 507 final. 
P8_ TA(2017)0038, P8_ TA(2017)0039, and P8_ TA(2017)0040. 
COM(2016) 725 final. 
COM(2016) 728 final. 

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Recommendation  was  endorsed  by  the  European  Council  on  9-10 March  2017  and 
adopted by the Council on 21 March 2017.7  

As a Member State 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 the Recommendation for the euro area which is 
reflected in recommendations 1 to 3 below. 
The 2017 country report for Ireland8 was published on 22 February 2017. It assessed 
Ireland’s  progress  in  addressing  the  country-specific  recommendations  adopted  by 
the Council on 12 July 2016, the follow-up given to the recommendations adopted in 
previous  years  and  Ireland’s  progress  towards  its  national  Europe 2020  targets.  It 
also included an in-depth review under Article 5 of Regulation (EU) No 1176/2011, 
the results of which were also published on 22 February 2017.9  

The  Commission’s  analysis  leads  it  to  conclude  that  Ireland  is  experiencing 
macroeconomic  imbalances.  In  particular,  these  imbalances  are  characterised  by  a 
large stock of external, public and private debt (both of households and non-financial 
corporations),  which  makes  Ireland  vulnerable  to  adverse  shocks.  Banks  are  still 
facing  a  high  level  of  non-performing  loans  but  are  well  capitalised  and  their 
profitability, although still low, is improving gradually. Housing prices are increasing 
and supply constraints persist. Non-financial corporations' debt stock decreased over 
2015,  but  was  still  higher  than  it  was  at  the  end  of  2014.  Household  debt  stock 
decreased  in  2015  and  public  debt  is  on  a  firm  downward  trajectory.  Ireland’s 
negative net international investment position had been falling at a fast pace before 
2015, but it then reversed, partly due to a level shift in 2015. However, the external 
sustainability of the domestic sector does not seem to be at risk. The stock of non-
performing loans has been declining over the last year but the pace of reduction was 
slowing down somewhat by the end of 2016. Property prices continued to increase in 
2015,  but  as  of  now  there  is  no  significant  evidence  of  overvaluation.  Policy 
measures  have  been  taken  in  recent  years  to  address  all  imbalances  highlighted, 
including  in  the  banking  sector  (improved  regulatory  framework,  measures  to 
address the high level of non-performing loans). The government has taken several 
relevant measures to address the undersupply in the housing market, but it will take 
time for them to generate effects. 

On 13 April 2017, Ireland submitted its 2017 National Reform Programme and on 2 
May 2017 Ireland submitted its 2017 Stability Programme. To take account of their 
interlinkages, the two programmes have been assessed at the same time. 

The relevant country-specific recommendations have been taken into account in the 
Member States’ programmes for the European Structural and Investment Funds (ESI 
Funds) covering the 2014-2020 period. As foreseen in the legislation governing the 
ESI Funds,10 where it is necessary to support the implementation of relevant country-

OJ C92/01, 24.3.2017, p. 1. 
SWD(2017) 73 final. 
COM(2017) 90 final. 
Article  23  of  Regulation  (EU)  No  1303/2013  of  the  European  Parliament  and  of  the  Council  of  17 
December  2013  laying  down  common  provisions  on  the  European  Regional  Development  Fund,  the 
European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and 
the  European  Maritime  and  Fisheries  Fund  and  laying  down  general  provisions  on  the  European 
Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime 
and  Fisheries  Fund  and  repealing  Council  Regulation  (EC)  No  1083/2006,  OJ  L  347,  20.12.2013,  p. 
320. 

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specific  recommendations,  the  Commission  may  request  a  Member  State  to  review 
and  amend  its  relevant  ESI  Funds  programmes.  The  Commission  has  provided 
further guidelines on the application of those rules.11 

Ireland  is  currently  in  the  preventive  arm  of  the  Stability  and  Growth  Pact  and 
subject to the transitional debt rule. In its 2017 Stability Programme, the government 
expects  the  headline  deficit  to  decline  slightly  to  0.4%  of  GDP  in  2017  and  to 
continue to gradually decrease thereafter, turning into a surplus of 1.0% of GDP in 
2021. The medium-term budgetary objective — a structural deficit of 0.5 % of GDP 
— is expected to be met from 2018 onwards. According to the Stability Programme, 
the general government debt-to-GDP ratio is expected to fall to 72.9% in 2017 and to 
continue  declining  to  65.2%  in  2020.  The  macroeconomic  scenario  underpinning 
these  budgetary  projections  is  plausible.  At  the  same  time,  the  measures  needed  to 
support  the  planned  deficit  targets  from  2018  onwards  have  not  been  sufficiently 
specified. 

On  12  July  2016,  the  Council  recommended  Ireland  to  achieve  an  annual  fiscal 
adjustment of 0.6% of GDP towards the medium-term budgetary objective in 2017. 
Based  on  the  Commission  2017  spring  forecast,  there  is  a  risk  of  a  significant 
deviation  from  the  recommended  fiscal  adjustment  over  2016  and  2017  taken 
together.  

In  2018,  in  light  of  its  fiscal  situation  and  notably  of  its  debt  level,  Ireland  is 
expected  to  further  adjust  towards  its  medium-term  budgetary  objective  of  a 
structural  deficit  of  0.5%  of  GDP.  According  to  the  commonly  agreed  adjustment 
matrix  under  the  Stability  and  Growth  Pact,  that  adjustment  translates  into  a 
requirement  of  a  nominal  growth  rate  of  net  primary  government  expenditure12  
which  does  not  exceed  2.4%  in  2018.  It  would  correspond  to  an  annual  structural 
adjustment of 0.6 % of GDP. The expenditure benchmark reflects an adjustment to 
correct for a distortion to the 10-year reference rate of potential growth caused by the 
exceptionally high surge in real GDP growth in 2015. Following the approach taken 
by the Irish authorities in their Budget 2017 calculations, the Commission has taken 
the average  of potential growth  rates in  2014 and  2016. Under unchanged policies, 
there  is  a  risk  of  some  deviation  from  the  requirement  over  2017  and  2018  taken 
together.  At  the  same  time,  Ireland  is  forecast  to  comply  with  the  transitional  debt 
rule in  2017 and 2018. Overall, the Council is of the opinion that further measures 
will be needed, notably in 2017, to comply with the provisions of the Stability and 
Growth  Pact.  In  view  of  Ireland's  current  cyclical  conditions  and  the  heightened 
external risks, the use of any windfall gains to further reduce the general government 
debt ratio would be prudent. However, as foreseen in Regulation (EC) No 1466/97, 
the  assessment  of  the  budgetary  plans  and  outcomes  should  take  account  of  the 
Member State’s budgetary balance in light of the cyclical conditions. As recalled in 
the  Commission  Communication 
country-specific 
recommendations, the assessment of the 2018 Draft Budgetary Plan and subsequent 
assessment  of  2018  budget  outcomes  will  need  to  take  due  account  of  the  goal  to 

accompanying 

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COM(2014) 494 final. 
Net  government  expenditure  is  comprised  of  total  government  expenditure  excluding  interest 
expenditure,  expenditure  on  Union  programmes  fully  matched  by  Union  funds  revenue  and  non-
discretionary  changes  in  unemployment  benefit  expenditure.  Nationally  financed  gross  fixed  capital 
formation  is  smoothed  over  a  4-year  period.  Discretionary  revenue  measures  or  revenue  increases 
mandated by law are factored in. One-off measures on both the revenue and expenditure sides are netted 
out. 

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achieve a fiscal stance that contributes to both strengthening  the ongoing recovery 
and  ensuring  the  sustainability  of  Ireland's  public  finances.  In  that  context,  the 
Commission intends to make use of the applicable margin of appreciation in light of 
the cyclical situation of Ireland. 

Although the economic recovery is robust and output is expected to grow at a solid 
pace  in  the  years  ahead,  the  outlook  has  become  more  uncertain,  creating  risks  for 
the  still  fragile  public  finances.  Therefore,  more  efforts  should  be  taken  to  make 
revenue more resilient to economic fluctuations and adverse shocks. To this end, the 
proposal  to  introduce  a  Rainy-day  fund  should  be  advanced  and  reliance  on  highly 
concentrated  and  volatile  revenue  sources  should  be  reduced.  A  balanced 
composition of different tax sources and broader tax bases improve revenue stability 
in  the  face  of  economic  volatility.  However,  efforts  to  broaden  the  tax  base  have 
been  limited  and  recent  tax  measures  have  focused  on  cuts  and  reliefs.  The 
announced  systematic  evaluation  of  the  costs  and  benefits  of  reduced  VAT  rates, 
which apply to an extensive range of sales, is pending. Recurrent property taxation is 
considered  to  be  one  of  the  most  growth-friendly  revenue  sources.  However,  Irish 
revenues  from  immovable  property  only  amounted  to  1.0 %  of  GDP  in  2014, 
compared  to  the  EU  average  of  1.6 %.  A  gradual  indexation  of  property  values 
would help to smooth the local property tax profile by preventing a sudden increase 
in tax liabilities when properties are revalued in 2019. The differences in the taxation 
of diesel and gasoline for road users are environmentally unjustified. 

In the past, comprehensive expenditure reviews have focused primarily on reducing 
government spending to meet overall fiscal targets. There has been little evaluation 
of the effectiveness and efficiency of expenditure programmes, which has ultimately 
weakened  the reliability of multi-annual spending  plans. An appropriately designed 
spending  review,  in  line  with  the  common  Eurogroup  principles,  would  improve 
expenditure control and could free up resources for much needed public investment 
to  boost  growth.  The  spending  review  should  particularly  address  the  cost-
effectiveness of the health sector. Ireland has introduced some important efficiency 
measures,  such  as  a  cost-saving  agreement  with  the  pharmaceutical  industry,  a 
financial management system, eHealth and activity-based funding. However, more could 
be  done,  for  example  by  strengthening  the  role  of  primary  care  as  a  gatekeeper  for 
Ireland’s overburdened hospitals. Steps towards a universal single-tier health service are 
fragmented and lack an overarching vision. 

Promoting  sustainable  and  inclusive  growth  that  benefits  all  groups  in  society 
remains  a  challenge.  Unemployment  was  below  the  EU  average  at  6.4 %  in 
March 2017. However, the low work intensity of many households creates concerns 
that some people are left behind as the recovery continues. From 2013 to 2015, the 
percentage of the population living in low or very low-work-intensity households fell 
by just 15 %, whereas the overall unemployment rate over the same period dropped 
by  28 %.  Overall,  the  welfare  system  has  worked  well  to  contain  poverty  and 
inequality and Ireland has taken measures to incentivise employment by tapering the 
withdrawal of benefits and supplementary payments. However, barriers to inclusive 
growth  still  exist.  The  disparities  between  the  employment  rates  of  low-,  medium- 
and highly-skilled workers are among the highest in the EU. Skills mismatches and 
skills  shortages  have  emerged  in  certain  areas,  while  upskilling  and  reskilling 
opportunities  are  insufficient.  The  labour  market  and  social  challenges  point  to  the 
importance  of  an  integrated  approach  to  training  and  labour  market  activation  for 
those furthest from the labour market. Moreover, concerns remain over the quality of 

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childcare provisions, including the availability of fulltime services. As a percentage 
of  wages,  net  childcare  costs  in  Ireland  are  among  the  highest  in  the  EU.  The 
availability  and  cost  of  quality  fulltime  childcare  present  barriers  to  female  labour 
market  participation  and  hinder  efforts  to  reduce  child  poverty,  which  has  fallen 
slightly but remains higher than the EU average.  

Infrastructure  needs  should  be  addressed  in  order  to  promote  durable  and  balanced 
growth. The economic crisis led to a shift in the composition of general government 
expenditure  away  from  investment  and  towards  current  spending.  Years  of  sharply 
reduced  government  investment  have  had  a  negative  impact  on  the  adequacy  and 
quality  of  infrastructure.  The  shift  in  government  expenditure  has  also  affected 
public sector support for research and development with possible implications for the 
competitiveness  of  SMEs.  Ireland  ranks  25th  in  the  EU  in  public  research  and 
development  investment  as  a  percentage  of  GDP.  The  most  severe  infrastructure 
shortcomings are in transport, water services and housing. 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  continue  to  increase  rapidly,  in  turn 
resulting in a recent high increase in housing exclusion and homelessness. There is 
currently no evidence of overvaluation, but constraints limiting the supply of housing 
could generate macro-financial risks if they are not resolved. A coherent and timely 
spatial plan would help to deliver new homes in the right areas. 

The Irish economy presents a division between the mostly small and medium-sized 
Irish-owned firms and large multinational companies operating in Ireland. Linkages 
between multinational companies and Irish-owned firms remain limited. Their export 
performances  and  profiles  are  significantly  different,  while  the  productivity  gap 
between  them  is  growing  wider.  Irish-owned  firms  present  a  weaker  exporting 
profile  than  multinationals  established  in  Ireland.  Their  exports  are  heavily 
concentrated  by  sector  and  destination,  making  them  more  vulnerable  to  shocks. 
Investing in innovation would foster the productivity and exporting potential of Irish 
firms at a time when diversifying exports and export destinations could help stabilise 
the performance of Irish firms. Public research and development expenditure remains 
low.  Fully  implementing  measures  to  increase  public  research  and  development,  in 
particular  measures  to  support  the  innovation  capacity  of  SMEs,  depends  on  the 
return  to  a  trend  of  sustained  investment.  To  stimulate  innovation  by  SMEs, 
innovation  policies  could  be  rebalanced  towards  more  direct  forms  of  funding. 
Support  from 
the  government  for  business  research  and  development  has 
increasingly  relied  on  research  and  development  tax  credits.  More  targeted  policy 
mixes  with  more  direct  funding  may  better  address  the  needs  of  Irish  young 
innovative  firms  and  exploit  opportunities  from  the  strong  investing  power  of 
multinational companies. This would serve to facilitate access to global value chains 
and accelerate knowledge spillovers. 

In  an  environment  of  heightened  external  uncertainty,  further  progress  in  reducing 
non-performing  loans  is  important  to  ensure  the  stability  of  the  financial  sector. 
Although progress has been made, high non-performing loans ratios remain a drag on 
banks’ profitability and an obstacle to the full economic recovery of households and 
firms.  The  deleveraging  of  households  and  domestic  firms  continues,  but  their 
indebtedness  remains  one  of  the  highest  in  the  EU  at  276.8  %  of  GDP  (September 
2016). High corporate debt may hinder firms from borrowing for investment, which 
in turn also limits banks’ ability to improve their own profitability. 

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According to the Central Bank of Ireland, the average non-performing loans ratio of 
the domestic Irish banks was 14.2 % in September 2016. This is substantially above 
the  EU  average  of  5.3 %.  The  pace  of  resolution  of  arrears  has  slowed  down 
somewhat  as  the  remaining  long-term  arrears  are  also  the  most  difficult  to 
restructure.  The  momentum  should  not  be  lost:  arrears  restructuring  should  be 
sustainable  in  the  long-term  and  different  forms  of  debt  reduction  need  to  be 
considered. 14 % of the mortgage stock was in arrears at the end of September 2016, 
while  accounts  in  arrears  of  over  2  years  represented  around  70 %  of  the  total 
mortgage  loan  balance.  Commercial  real  estate  loans  held  by  domestic  banks  and 
business  loans  also  remain  areas  of  concern,  with  non-performing  loans  ratios  of 
32.6 %  and  11.8 %  respectively.  The  use  of  personal  insolvency,  bankruptcy, 
examinership  and  out-of-court  arrangements  intended  to  restore  households  and 
business  to  viability  remains  low  and  should  be  better  incentivised.  After  several 
delays,  the  central  credit  register  is  expected  to  enter  the  final  phase  of  its 
implementation.  Its finalisation should  be a  priority  as it will serve  as the basis for 
adequate credit risk assessment of borrowers and ensure prudent future lending. 

Implementation of the 2015 Legal Services Regulation Act started in late 2016. The 
full  implementation  of  this  act  will  be  crucial  in  Ireland’s  efforts  to  increase 
competition  in  the  sector  because  it  will  allow  barristers  direct  access  to  the 
profession,  the  creation  of  corporate  groups  by  multidisciplinary  practices  and  the 
operation  in  Ireland  of  alternative  business  models  used  in  other  Member  States. 
Independent legal services are an input to all sectors of the economy and their cost 
has  a  bearing  on  Ireland’s  competitiveness.  Therefore,  it  is  paramount  that  the 
implementation  of  the  act  introduces  competition-enhancing  and  cost-reducing 
provisions following public consultation processes, or incorporates these provisions 
in regulations to be issued by the Legal Services Regulatory Authority so as to boost 
competition and reduce costs. 

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  2017 
country report. It has also assessed the Stability Programme and the National Reform 
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 socioeconomic policy in Ireland, but also their compliance with EU rules 
and guidance, given the need to strengthen the EU’s overall economic governance by 
providing EU-level input into future national decisions.  

In  the  light  of  this  assessment,  the  Council  has  examined  the  Stability  Programme 
and its opinion13 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  made  under  Article  6  of  Regulation  (EU)  No 1176/2011  are 
reflected in recommendations 1 and 3 below, 

HEREBY RECOMMENDS that Ireland take action in 2017 and 2018 to: 

1. 

Pursue  its  fiscal  policy  in  line  with  the  requirements  of  the  preventive  arm  of  the 
Stability and Growth Pact, which translates into a  substantial fiscal effort for 2018. 
Use any windfall gains, such as proceeds from asset sales, to accelerate the reduction 

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

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of  the  general  government  debt  ratio.  Limit  the  scope  and  the  number  of  tax 
expenditures and broaden the tax base.  

Better target government expenditure, by prioritising public investment in transport, 
water  services,  and  innovation  in  particular  in  support  of  SMEs.  Enhance  social 
infrastructure,  including  social  housing  and  quality  childcare;  deliver  an  integrated 
package  of  activation  policies  to  increase  employment  prospects  of  low-skilled 
people and to address low work intensity of households. 

Encourage  a  more  durable  reduction  in  non-performing  loans  through  resolution 
strategies that involve write-offs for viable businesses and households, with a special 
emphasis on resolving long-term arrears.  

Done at Brussels, 

For the Council 
The President 

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