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# 52015SC0027

**COMMISSION STAFF WORKING DOCUMENT Country Report Ireland 2015 Including an In-Depth Review on the prevention and correction of macroeconomic imbalances {COM(2015) 85 final} This document is a European Commission staff working document . It does not constitute the official position of the Commission, nor does it prejudge any such position. /\* SWD/2015/0027 final \*/**

  

Executive summary  1

1.       Scene
setter - economic situation and outlook  3

2.       Imbalances,
risks and adjustment 10

2.1.   Indebtedness
and deleveraging  11

2.2.   Financial
sector challenges 20

2.3.   Competitiveness
and external sustainability  25

2.4.   Structural
challenges in the labour market and skills mismatches 33

3.       Other
structural issues 40

3.1.   Healthcare
system   41

3.2.   Improving
access to finance and SME development 43

3.3.   Taxation and
fiscal framework  50

3.4.   Legal
services and justice reforms 54

3.5.   Infrastructure
and climate  56

3.6.   Social
policies 59

AA.   Overview
Table  62

AB.   Standard
Tables 70

LIST OF Tables

1.1.     Key
economic, financial and social indicators - Ireland   8

1.2.     Macroeconomic
Imbalance Procedure: Scoreboard - Ireland   9

2.1.1.  Government
contingent liabilities 19

2.2.1.  Results of the
comprehensive assessment 21

3.2.1.  Overview of
SME credit policy initiatives 49

AB.1.  Macroeconomic
indicators 70

AB.2.  Financial
market indicators 71

AB.3.  Taxation
indicators 71

AB.4.  Labour market
and social indicators 72

AB.5.  Expenditure on
social protection benefits (% of GDP) 73

AB.6.  Product market
performance and policy indicators 74

AB.7.  Green Growth  75

LIST OF Graphs

1.1.     Real GDP,
Ireland vs euro area   3

1.2.     Contributions
to GDP growth  4

1.3.     Retail
sales in Ireland   4

1.4.     HICP
inflation  4

1.5.     Real estate
prices 5

1.6.     Unemployment
rates, employment growth  5

1.7.     Bank
profitability  6

1.8.     Ten-year
spreads over German bonds 7

2.1.1.  Private sector
debt 11

2.1.2.  Debt build-up
and deleveraging trends 11

2.1.3.  Corporate
leverage indicators 12

2.1.4.  Components of
the household deleveraging process 13

2.1.5.  Household debt
sustainability  14

2.1.6.  Household net
worth  14

2.1.7.  Contribution
to change in gross government debt 15

2.1.8.  Breakdown of
gross government debt (end of December 2014) 16

2.1.9.  Average
effective interest rates on government debt (2014) 16

2.1.10.          Maturity
profile of Ireland’s long-term marketable and official debt (end of December
2014) 17

2.1.11.          Gross
government debt projections 18

2.1.12.          General
government balance and real GDP growth  18

2.2.1.  Loan-to-deposit
ratio (LDR) 20

2.2.2.  Eurosystem
borrowing  20

2.2.3.  Components of
domestic bank profitability  21

2.2.4.  Domestic bank
capital positions 21

2.2.5.  Mortgage
arrears 23

2.2.6.  Mortgage
restructuring  24

2.3.1.  Current
account balances 25

2.3.2.  Exports of
goods and services 25

2.3.3.  Real effective
exchange rate, 2005=100  26

2.3.4.  Demand
composition of GDP and GDP growth  26

2.3.5.  Exports of
pharmaceutical products 27

2.3.6.  Difference in
net exports (balance of payments vs. customs) 27

2.3.7.  Services
exports, imports and balance  28

2.3.8.  International
Financial Services Centre and non-International Financial Services Centre trade
in services, primary and secondary income flows 28

2.3.9.  Current
account balance  29

2.3.10.          Net
international investment position by institutional sector 29

2.3.11.          Target
2 balances 30

2.3.12.          External
assets and liabilities of domestic banks 30

2.3.13.          International
investment position of non-financial companies and non-bank financial
intermediaries (outside the International Financial Services Centre) 31

2.3.14.          International
investment position of non-financial companies 31

2.3.15.          International
investment position of International Financial Services Centre  32

2.3.16.          International
investment position of non-International Financial Services Centre sectors 32

2.4.1.  Unemployment
rate, long-term unemployment rate and youth unemployment rate  33

2.4.2.  Working-age
population, active and employed people  33

2.4.3.  Nominal unit
labour costs, total economy  34

2.4.4.  Labour market
participation rates (ages 15-64) 35

2.4.5.  Employment by
educational attainment 35

2.4.6.  Unemployment
rate by educational attainment (ages 15-64) 36

3.1.1.  Public
healthcare expenditure, Ireland and EU   41

3.2.1.  Outstanding
credit to SMEs 43

3.2.2.  Bank products
requested by SMEs 44

3.2.3.  Interest rates
on SME loans - comparative overview   44

3.3.1.  Tax burden  50

3.3.2.  Revenues from
property taxes (2012) 52

3.3.3.  Expenditure
ceiling reconciliation for 2015  53

3.5.1.  Public sector
gross fixed capital formation by area   56

LIST OF Boxes

1.1.     Economic
surveillance process 7

2.4.1.  Policy
responses to labour market challenges and skills mismatches 38

3.2.1.  Regulating
loan origination by investment funds 46

The economic outlook has improved
markedly. Exceptionally strong net exports made
Ireland the fastest growing economy in the EU in 2014. Although the
contribution from net exports is likely to moderate, strong investment growth
and the recovery in private consumption should underpin real GDP growth of
about 3.5% in 2015 and 2016. The recovery has been job-rich and unemployment
fell to 10.6 % at the end of 2014. The better macroeconomic environment
has buoyed tax revenue and helped achieve fiscal targets despite expenditure
overruns compared to budget profiles. It has also helped improve bank
performance and ease the deleveraging process. Market perceptions of Ireland
have improved significantly amid a general improvement in financial market
conditions. The spread over 10-year German bunds fell to about 80 basis points
in early 2015, bolstering sovereign debt and banks.

This country report assesses Irelandʼs
economy against the background of the Commissionʼs Annual Growth Survey
which recommends three main pillars for the EUʼs economic and social
policy in 2015: investment, structural reforms, and fiscal responsibility. In
line with the Investment Plan for Europe, it explores ways to maximise the
impact of public resources and unlock private investment. Finally, it assesses
Ireland in the light of the findings of the Alert Mechanism Report 2015, in
which the Commission found it useful to examine further the persistence of
imbalances or their unwinding. These are the main findings of the in-depth
review in this country report:

· Private sector indebtedness declined in 2014 but is still high and
well above the EU average. Corporate debt levels
are inflated by the presence of multinationals, and SMEs have borne the brunt
of the deleveraging among corporates. Deleveraging needs vary significantly
among SMEs. High levels of debt are concentrated in a relatively small
proportion of firms, while the majority are now either debt-free or able to
service their debt. Debt repayments by households still outpace new borrowing
as they continue to actively deleverage against a backdrop of resurgent
economic growth and rising property prices.

· Public sector debt remains above GDP, but is expected to fall
pending continued budget consolidation efforts and sustained economic growth. One-off factors accounted for most of the 12.5 percentage
point drop in the debt-to-GDP ratio to 110.8 % in 2014. Public debt is
mostly long-term and carries low interest rates reducing refinancing risks.

· Financial sector challenges are diminishing as domestic banks have
been restructured, downsized and recapitalised.
Profitability is still a problem, but it continues to improve and the banks'
strengthened position was reflected in the results of the European Central
Bank's comprehensive assessment. The regulatory and supervisory systems have
been strengthened. However, the high share of non-performing loans is falling
slowly, in particular in the mortgages and commercial loans.

· The external accounts have strengthened considerably over the past
few years. The economy has regained competitiveness
and the rebalancing between the tradable and non-tradable sectors seems to be
nearing completion. Irelandʼs external accounts need to be interpreted
with care, however, and although the net international investment position is
falling, it remains highly negative.

· The labour market situation has improved, but long-term unemployment
remains a problem. While the unemployment rate is
now below the euro area average, the share of structural unemployment risks
increasing. The adjustment need is compounded by the skills mismatches that
have emerged with the rebalancing of the economy between the non-tradable and
tradable sectors and by the difficulties in re-skilling or up-skilling workers.

This country report also analyses other
macroeconomic and structural issues and the main findings are:

· The healthcare sector is facing sustainability challenges. Expenditure overruns have been recurrent in the past few years,
which shows that while efficiency gains have been achieved in recent years, the
health system may have reached a point beyond which containing expected cost
increases would imply deeper structural reforms.

· SME access to finance remains heavily reliant on bank lending and the use of non-bank financing options is yet to develop.

· The high proportion of people living in households with low work
intensity generates social challenges. Limited
access to affordable and quality childcare is a barrier to increased female
labour market participation.

Ireland has made some progress in
addressing the country-specific recommendations the Council issued in 2014. Some progress was made in the areas of fiscal consolidation, the
labour market, and non-performing loans restructuring. Budget 2015 complies
with the Stability and Growth Pact, but the 2015 and 2016 deficit targets could
have been more ambitious given strong economic growth, and expenditure ceilings
still need to be strengthened. The introduction of training and activation
programmes is progressing. Initiatives have been put in place to improve the
financing conditions for SMEs. The restructuring of SMEs and household loans in
arrears is ongoing. Some progress has been made in the area of healthcare,
including in reducing public spending on pharmaceuticals. Limited progress has
been made in tackling the low work intensity of households, with no progress on
improving access to affordable and full-time childcare. Limited progress has
been made towards reducing the cost of legal services, but some progress has
been made on improving data collection systems in courts.

The country report reveals the policy
challenges stemming from the analysis of macro-economic imbalances:

· Private and public sector deleveraging has a further way to go. Further deleveraging is necessary to ensure that debt levels are
sustainable and do not weigh on the growth prospects. Strict adherence to the
planned fiscal adjustment under the Excessive Deficit Procedure and subsequent
progress towards achieving the medium-term budgetary objective would ensure
that public finances are firmly set on a sustainable path. Further
growth-friendly tax reforms, including broadening the tax base, would support
the adjustment process.

· Lowering the still high level of non-performing loans would imply
further loan arrears resolution. In particular,
this would entail a constant monitoring of the sustainability of the solutions
agreed between lenders and debtors. Making the credit registry operational in
2016 as planned would be an important step towards enabling lenders to make
informed lending decisions.

· Improving SME access to bank and non-bank finance is important for
growth and promoting jobs and investment.
Accessible information about financing options is crucial for an increased use
of public support schemes.

· The labour market will continue to face adjustment needs for years
to come, even though employment growth has been
sustained lately. Tackling skills mismatches fully would avoid higher
structural unemployment, contribute to the sustainability of Ireland's growth
model and improve social indicators.

Other challenges are:

· Untapped efficiency gains can be reaped in the health system to meet
future increases in demand for care. Such gains
would enable favourable health outcomes at an affordable cost to society.

· The proportion of people living in low work intensity households is
high. The improved labour market situation alone is
unlikely to solve the problem.

· The cost of legal services remains high.
A new regulatory framework is in Parliament. Its final design and
implementation will determine its effectiveness.

· Weaknesses in network industries persist. Addressing them in the current environment could prove challenging,
particularly as far as the water sector is concerned.

Growth and external position

Ireland becomes the fastest growing
economy in the EU. The Irish economy reached a
turning point in the latter part of 2013 and grew strongly in 2014, driven
primarily by net exports and a strong recovery in investment (Graph 2.1 below).
In the first three quarters of 2014, real GDP was up 4.9 % year-on-year,
with net exports contributing 3.4 percentage points. Ireland’s current account
surplus was 5.7 % of GDP in the first nine months of 2014, underlining
the strength of the country’s competitiveness. The strength of these figures
has taken observers by surprise. Both in bad and good times, Irish GDP has
exhibited higher amplitude than the euro area. In 2015, Irish output could be
back to its peak of 2007, one year earlier than that of the euro area as a
whole.

Graph 1.1:     Real GDP, Ireland vs euro area

Source: European Commission

Some uncertainty underlies net export
figures and their contribution to the local economy. Economic dynamism remains reliant on multinational companies and
connected exports. Competitiveness gains since the crisis coincided with a
favourable business environment. Some of the strength in net exports is linked
to a surge in contracted production ([1]), which has little impact on employment and tax revenues in
Ireland. The future evolution of this form of production is uncertain, because
it depends on the evolution of global value chains. This means that the
exceptionally strong contribution from net exports may not be sustained.

Sustained growth is expected for
2015–16, albeit more moderate than the previous year. Real GDP growth is forecast to be resilient in 2015–16 at around
3.5 % each year ([2]). This
will be lower than the exceptional growth rate achieved in 2014 but still above
the EU average. Consumption is forecast to pick up from 2015, helped by rising
employment, moderate wage growth and big drops in energy prices. However,
exports and investment will remain important drivers of GDP growth over the
period. Ireland will also continue to benefit from its strong trade links with
the more dynamic US and UK markets and a weaker euro exchange rate.

Investment has picked up sharply as
business confidence continues to recover. Real GDP
growth has also been driven by the recovery in gross fixed capital formation.
Aircraft purchases and intellectual property transactions by multinationals
generate significant volatility in investment. Excluding these, investment has
been strong across the board (up by 19.7 % year-on-year in the first
three quarters of 2014) signalling improved business sentiment among small and
medium-sized enterprises (SMEs) and continued expansion by multinationals. The
purchasing managers index (PMI) has been above 55 since March 2014.

Consumption has remained subdued so far,
in the context of ongoing deleveraging. Household
spending, weaker than expected, did not pick up significantly in 2014 as high
debt levels continued to weigh on the Irish private sector. However, some of
this sluggishness is also explained by statistical effects on the split between
volumes and prices. Positive trends in retail sales, tax receipts and
employment all point to an underlying recovery in consumption — still limited
but apparent in the nominal figures. Retail sales have been increasing since
mid-2013 (Graph 2.2 below), and consumer confidence improved sharply to a
historic peak in December 2014.

Graph 1.2:     Contributions to GDP growth

Source: Central Statistics Office of Ireland

Graph 1.3:     Retail sales in Ireland

Source: Central Statistics Office of Ireland

The Investment Plan for Europe should
give Ireland additional opportunities. The
implementation of the Investment Plan for Europe should provide an additional
boost to investment and growth from 2016 onwards. The impact of the plan for
Ireland will depend on a number of factors. They include the volume of any
contributions of Ireland to the Plan, the degree of participation by private
investors and the characteristics of the specific projects selected by the
European Fund for Strategic Investments.

Inflation and asset prices

Inflation remains subdued. Inflation remained lower than in the euro area for the sixth
consecutive year in 2014 at 0.3 %, compared to 0.4 % in the euro
area. Low energy prices have also put downward pressure on inflation recently
and the harmonised index of consumer prices (HICP) fell by 0.3 %
year-on-year in December 2014 (Graph 2.4 below). The increase in domestic
demand and moderate wage increases should dispel inflationary expectations.
Core inflation is forecast to exceed somewhat the euro area average in 2015–16,
marking an end to the process of internal devaluation. That said, changes to
the expected evolution of oil prices and unconventional monetary policy
measures could alter this outlook.

Graph 1.4:     HICP inflation

Source: European Commission

House prices have increased
significantly but are still far from pre-crisis levels. In the housing market, pent-up demand and the low level of new
construction have pushed up prices significantly, especially in urban areas.
Residential property prices rose by 16.2 % year-on-year in November 2014
(Graph 2.5 below), with greater increases in Dublin than in the rest of Ireland
— although the number of transactions remains small. The national property
price index remains 37.9 % below its 2007 peak but if supply constraints
persisted, they could exert significant upward pressure on residential prices.
Commencement notices for new works and house completions have begun to rise
from low levels but are not yet sufficient to satisfy demand. High
accommodation prices in Dublin could also ultimately affect Ireland's position
as an international business hub.

Graph 1.5:     Real estate prices

Source: Central Statistics Office of Ireland

Labour market and social inclusion

Growth has been rich in jobs although
the unemployment rate remains high. The
standardised unemployment rate has fallen steadily to 10.6 % in December
2014 from a peak of 15.1 % in February 2012. Long-term unemployment has
also fallen significantly but remains very high at 46 % of all
unemployment benefit claimants. Employment increased by 1.7 %
year-on-year in the third quarter of 2014, with nearly 95 % of jobs
created being full-time positions. This trend is expected to persist, albeit at
a more moderate pace, given skills mismatches. SMEs and construction are
expected to provide job opportunities for people with less sophisticated
skills. Average unemployment is forecast to fall further to around 9.5 %
in 2015 and remain above 8 % in 2016, putting a lid on wage inflation
despite rising wage demands.

Graph 1.6:     Unemployment rates, employment growth

Source: Central Statistics Office of Ireland

Social protection has helped to
alleviate the rise in poverty that followed the crisis. Ireland is one of the countries where net social expenditure
increased the most (as a share of the aggregate level of economic activity)
following the 2007 crisis. In 2011, it amounted to nearly 22 % of GDP,
according to the latest available data. As a result, the country did not
experience the rise in inequality some other Member States did. Nevertheless,
deprivation rates have continued to rise in the year to 2013, driven by sharp rises in rural areas. This suggests that improving
labour market conditions in Dublin and other urban areas have yet to spread to
the rest of the country. The risk of social exclusion is heightened by the high
proportion of people living in households with low work intensity, which remains the highest in the EU.

Fiscal developments and taxation

Buoyant tax revenues have helped Ireland
reach its fiscal targets despite expenditure overruns. The general government deficit is forecast to drop to 4.0 %
of GDP in 2014, below the Excessive Deficit Procedure target for that year and
down from 5.7 % in 2013. This reflects the effects of remarkable economic
growth in 2014, additional windfall revenues and lower interest expenditure.
Tax revenues increased by 9.2 % in 2014. Receipts from personal income
tax and VAT also increased, mirroring improvements in the labour market and
consumer confidence. While total government expenditure increased only very
moderately in 2013, spending pressures intensified further at the end of 2014,
mainly in healthcare, compared to the budget profile. Unlike in previous years,
healthcare budget overruns were not offset by savings in other areas.

The fiscal position is expected to
improve further in 2015, but some risks remain. Taking into account tax cuts and expenditure increases of around
0.5 % of GDP, the general
government deficit is projected to bet 2.9 % of
GDP in 2015. In 2016, it is forecast to be 3.1 %
under a no-policy-change assumption. Risks associated with the deficit
projections for 2015 and 2016 mainly relate to the
sustainability of the favourable economic outlook and to persisting spending
pressures linked to demographics and the public service payroll. The structural
deficit is expected to decrease to around 2.4 % of GDP in 2016, from
3.5 % in 2013.

Public debt is high but falling. Gross general government debt is projected to fall to 106.6 % of GDP in 2016, down from
123.3 % in 2013. This marked improvement largely reflects the liquidation
of the Irish Banking Resolution Corporation, along with ongoing economic
growth. Starting in 2014, small primary surpluses should also help maintain the
debt trajectory on a consistent downward path. Nonetheless, the high level of
public debt continues to be one of the main vulnerabilities of the Irish
economy.

Financial sector and credit supply

Bank performance has continued to
improve but there are still considerable difficulties (Graph 2.7 below). Almost all of the participating Irish banks
passed the asset quality review and the stress tests of the ECB’s comprehensive assessment. Only
Permanent TSB (PTSB) had a EUR 855 million capital shortfall in the adverse
scenario of the test, which it is expected to fill with private capital. The
results of the comprehensive assessment were in line with expectations and PTSB
remains now the only loss-making domestic bank. The reliance of domestic banks
on central bank funding has continued to decline, down to 3.9 % in
September 2014, near the euro area average.

Graph 1.7:     Bank profitability

(1) RoE: Return on Equity, RoA: Return on Assets Source: IMF (refers to the whole banking sector in Ireland)

Net lending to the private sector
remains weak, given mostly low demand for credit.
Lending to businesses (non-financial corporations) declined by 8.1 % year-on-year in October 2014. Lending to
households, for consumption and house purchases, also fell by 3.3 %
year-on-year in the third quarter of 2014. Demand for credit remains subdued as
deleveraging by the private sector continues. Though still at very high levels,
private sector non-consolidated debt fell by 3.9 percentage points in the first
quarter of 2014, to 298.3 % of GDP. In addition to demand issues, there
might also be credit supply constraints, as lending rates are higher in Ireland
than in the rest of the euro area.

The number of non-performing loans
remains high but is gradually decreasing. In the
three main domestic banks, it fell to 24.9 % of total loans in the third
quarter of 2014, from a high of 27.1 % at the end of 2013. The number and
value of mortgage accounts in arrears for over 90 days decreased by 4.5 %
and 3.8 % respectively quarter-on-quarter. However, mortgage arrears
stood at 19 % of total mortgage loan balances in Q3-2014. The increase in
the build-up of longest-term arrears persisted, up to 9.6 % of total loan
balances in Q3, from 9.2 % at the end of June.

Positive market conditions have
bolstered the sovereign and the banks. Bank of
Ireland successfully tapped the markets and raised EUR 750 million of tier 2
capital in June 2014. In January 2015, the yield on 10-year Irish government
bonds hit new lows of 1.03 % and the spread over German bonds fell to 63
bps (Graph 2.8 below). In early November 2014, the sovereign issued EUR 3.75
billion of 15-year bonds, the first such issuance since 2009. The yield of
2.49 % was a record low for this issuance. Also in December 2014,
Standard & Poor’s upgraded Ireland’s long-term sovereign credit rating to A
(from A-). The rating agency also confirmed its ratings of the Irish banks,
upgrading Bank of Ireland’s outlook to positive. In January 2015, amid strong
demand, Allied Irish Banks issued EUR 750 million of a 7-year covered bond at a
yield of 0.75 %, as funding costs for Irish banks continue to improve.

Graph 1.8:     Ten-year spreads over German bonds

Source: iBoxx

Table 1.1:       Key economic, financial and social indicators - Ireland

(1) Domestic banking groups and stand-alone banks. (2) Domestic banking groups and stand-alone banks, foreign-controlled (EU and non-EU) subsidiaries and branches. (3) Real effective exchange rate. (\*) Indicates BPM5 and/or ESA95. Source: European Commission, 2015 winter forecast, ECB.

Table 1.2:       Macroeconomic Imbalance Procedure: Scoreboard - Ireland

Figures highlighted are the ones falling outside the threshold established by EC Alert Mechanism Report. For REER and ULC, the first threshold concerns Euro Area Member States. (1) Figures in italic are according to the old standards (ESA95/BPM5). (2) Export market shares data: the total world export is based on the 5th edition of the Balance of Payments Manual (BPM5). (3) Current account balance has been revised downwards following methodological changes in the treatment of FDI investment income. Source: European Commission.

Private sector debt and deleveraging

Private sector debt started to decline
but is still considerably higher than the euro area average. Private sector non-consolidated debt amounted to EUR 515.3 billion
(283.5 % of GDP) in the third quarter of 2014, down 10.6 % from a
peak of EUR 576.6 billion in mid-2012. The correction begun since 2013 follows
the excessive build-up between 2002 and 2011, when private indebtedness rose
from about 120 % of GDP to over 320 %  of GDP (Graph 2.1.1). Most of this increase can be
attributed to the corporate sector amid expanding activity of multinationals
and a growing number of SMEs taking on property-related debt. It grew by almost
EUR 300 billion between 2002 and 2012 (a 276  % increase), while
that of the household sector increased by about half of that amount (a
218  % increase).

Graph 2.1.1:   Private sector debt

(1) Quarterly Financial Accounts release on an ESA 2010 basis with reference from Q1 2012 to Q3 2014. Figures for the Non-Financial Corporation (NFC) sector are the sum of loans and securities other than shares. Figures for households are the sum of loans and other accounts receivable/payable. Data are non-consolidated. MIP threshold: threshold of the scoreboard used under the Macroeconomic Imbalances Procedure. Source: Central Bank of Ireland, Central Statistics Office, European Commission

The deleveraging process started earlier
among private households than in the corporate sector. The household debt-to-GDP ratio started declining in early 2010
while corporate indebtedness continued to rise for another two years (Graph 2.1.2). By the end of the third quarter of
2014, household debt had fallen to EUR 171.1 billion, down 19.5 % from its
peak in late 2008. In contrast, corporate debt amounted to EUR 344.4 billion,
down about 11.7 % from its peak in the second half of 2012. Despite
notable improvements, the Irish private sector remains highly indebted. The
estimated remaining deleveraging need is above 30 % of GDP, with obvious
implications for the speed of recovery of private consumption and investment ([3]).

Graph 2.1.2:   Debt build-up and deleveraging trends

(1) Quarterly Financial Accounts release on an ESA 2010 basis with reference from Q1 2012 to Q3 2014. Source: Central Bank of Ireland, Central Statistics Office

Corporate deleveraging is accelerating
but overall debt levels remain high, even excluding multinationals. Since Ireland’s economy has a large multinational corporate sector,
intra-group cross-border lending inflates corporate debt-to-GDP levels. The
difference between consolidated and non-consolidated debt reflects this. In
Ireland’s case the difference is 26.3 % ([4]). According to the Commission’s analysis ([5]), multinationals account for over 50 % of the increase in
corporate sector indebtedness. Since multinationals have access to
international capital markets, they do not depend on domestic banks for
financing. This decreases overall deleveraging pressure amid favourable market
conditions and reduces economic and financial stability risk. However, even
taking this into account, Irish corporate debt levels as a percentage of GDP
continue to exceed the euro area average by about 80 %.

Improvements in corporate debt levels were
achieved by reducing nominal debt and increasing the value of company assets. Among other things, the latter is due to valuation effects stemming
from the surge in real estate property prices. Company assets measured by total
liabilities ([6]) have
increased by 20 % over the past two years, while the debt stock, albeit
more volatile, has decreased by 4 % (Graph 2.1.3). Although falling, debt servicing
costs are still comparatively high compared to the rest of the euro area,
making further debt reduction difficult.

Graph 2.1.3:   Corporate leverage indicators

(1) Total liabilities are used as a proxy for total assets. Source: Central Bank of Ireland

SMEs seem to have borne the brunt of the
deleveraging in the corporate sector. This is
because SMEs were under greater financial stability pressure than
multinationals. In contrast with the Irish-resident multinationals that
maintain their intra-group funding practices and market borrowing practices,
Irish companies, in particular SMEs, are focusing on loan repayments.

Indebtedness levels vary considerably
depending on SME type and exposure to the property market. With high levels of debt concentrated in a relatively small
proportion of companies, most do not suffer from excess leverage. According to
the Central Bank of Ireland, a third of domestic SMEs have no debt at all and
over 80 % can comfortably meet their debt servicing requirements, as their
reasonably low debt-to-turnover ratios show. This means that much of the
further corporate deleveraging need will have to be undertaken by those SMEs
with high levels of debt. These companies are often exposed to property-related
risks. This makes them vulnerable and more susceptible to default, especially
in cases of negative equity. Even though the main lenders have stepped up
their SME loan resolution efforts in line with the country-specific
recommendation, this loan portfolio remains heavily impaired. About a quarter
of all SME loans are in default (the third highest rate in the euro
area). The wholesale and retail sector is the most exposed to loans in terms of balance ([7]). Defaults occur most often in the construction and
hotel/restaurant sectors. SMEs are now allowed to apply for creditor protection
(“examinership” under Irish law) in the Circuit Court rather than the High
Court, which lowers their procedural costs – albeit take-up has been low so
far. The proposed Consumer Protection (Regulation of Credit Servicing Firms)
Bill aims to include SMEs and ensure that their rights as borrowers are
protected even in the case of loan portfolio sales to unregulated entities.

Investment growth is mainly financed by
corporate foreign borrowing and retained profits, not domestic banks. The diversity of the corporate sector in Ireland means that
different companies use different strategies. On one side, national account
data show a strong recovery in investment over the past few quarters. On the
other side, negative credit flows show that the financing is not coming from
domestic banks. This means that most of the pick-up in investment so far can be
attributed to the multinational sector that borrows abroad. In addition, since
the turnaround in the economy has boosted business revenues, companies have
also used growing profits for working capital purposes and to reduce debt.

Negative credit flow partly masks a
pick-up in demand for new credit. In spite of the
continued balance sheet repair, deleveraging pressures on the Irish
non-financial corporate sector remain high due to the still elevated
indebtedness levels. However, some domestic corporates seem to have stabilised
their businesses and could be more likely to borrow for investment.

Household debt repayments still outpace
new borrowing as they continue to pay down debt.
Negative credit flows are the single largest contributor to household debt
reduction (Graph 2.1.4). In spite of that, the sector remains
among the most indebted in the euro area at 91.5 % of GDP. Survey data
show that 56.8 % of Irish households are indebted, and 33.9 % of them
have a mortgage on their main residence.

Graph 2.1.4:   Components of the household deleveraging process

(1) D/GDP, change: change in the debt-to-GDP ratio Source: European Commission

The impetus to further reduce household
debt should continue with continued improvement in economic growth. Households have increased their savings to reduce debt. Household
liabilities have been decreasing slowly but constantly since the onset of the
crisis. At the end of 2014 they were at EUR 176 billion, a 19 % drop since
their peak at the end of 2008. However, this was not matched by an increase in
disposable income: as it remains subdued and consumption is still recovering,
overall debt levels remain high (Graph 2.1.5). This is partly because average
earnings remain relatively flat. Two thirds of all Irish mortgage holders
continue to benefit from favourable ’tracker’ interest rates that keep the cost
of mortgage servicing low.

Graph 2.1.5:   Household debt sustainability

(1) Debt - to total loans of households. GDI - gross disposable income of households including non-profit institutions serving households. Source: Central Bank of Ireland, European Central Bank

Cooperation between lenders and
borrowers on debt restructuring improved.
Initiatives such as the Central Bank of Ireland’s Mortgage Arrears Resolution
Targets and the regulatory reforms introduced during the programme helped
improve cooperation between banks and debtors. Ambitious targets for concluded restructuring solutions for mortgages in
arrears have been set for banks. Agreements continue to be monitored to ensure
their sustainability. The restructuring solutions that banks have proposed
generally offer more favourable repayment conditions and sometimes partial debt
write-offs. The debt solutions offered by the Insolvency Service of
Ireland represent another useful avenue for the most distressed debtors.
However, little use is still being made of personal insolvency procedures and
the reformed bankruptcy system, possibly on account of enhanced cooperation
between debtors and lenders.

The increase in residential property
prices increases households’ net worth. Houses make
up almost 53 % of the total value of all household assets. In 2014
national house prices, as measured by the residential property price index,
increased by 16.3 % compared to the previous year. This upward trajectory brought household net worth to EUR 574
billion in the third quarter of 2014 (Graph 2.1.6), rising for the ninth consecutive
quarter (an increase of 5 % over the quarter).

Graph 2.1.6:   Household net worth

(1) Net worth is measured as the difference between the households’ assets (housing and financial) and their liabilities. Source: Central Bank of Ireland, Central Statistics Office

The recovery in property prices is
particularly strong in Dublin. Residential property
prices in Dublin rose 22.3 % in the year to December 2014, with sharp
price rises in Dublin slowly spreading to the rest of the country. Supply shortages
are driving these price rises. Household formation rates suggest an equilibrium
level of new house construction of approximately 25 000 units a year ([8]), with demand strongest in Dublin. Only an estimated 11 000 units
were completed nationally in 2014.  New measures have been introduced by the Central
Bank of Ireland to increase the resilience of the financial and household
sectors to future credit-fuelled property price rises. Failing a stronger
supply response however, prices look set to increase further. This could hamper
competitiveness and make it difficult to afford housing. In May 2014 the
authorities launched Construction 2020, a strategy for the construction sector.
It addresses aspects such as planning, financing, taxation, standards and enforcement.
Legislative proposals include a special levy on vacant sites in urban areas and
’use it or lose it’ planning permissions for developers. The government has
also released additional funding to increase the supply of social and
affordable housing and committed itself to earmarking EUR 2.2 billion for this
purpose in the next three years. The introduction of real estate investment
trusts ([9]) as
investment vehicles whose shares can be traded freely also seems to have
attracted new funds. This provides additional liquidity for the commercial real
estate sector.

General government debt and deleveraging

Government gross debt is very high but
has started to decline. For the first time since
2007, gross general government debt is estimated to have fallen to 110.8 %
of GDP in 2014, down from 123.3 % of GDP a year before. The sharp drop is
largely due to the liquidation of the Irish Bank Resolution Corporation ([10]). Based on the European Commission winter 2015 forecast, the
debt-to-GDP ratio is projected to further decrease to around 110.3 % in
2015 and to 107.9 % in 2016 (Graph 2.1.7). This assumes robust economic growth
of more than 3 % and a sizeable primary surplus of around 0.9 % of
GDP in 2015 and 0.8 % of GDP in 2016. The debt projections are sensitive
to variations in economic growth and to the expected size of the budgetary
adjustment. Interest rate risks are low due to prudent debt management and low
future refinancing needs.

Graph 2.1.7:   Contribution to change in gross government debt

(1) Stock-flow adjustments include Irish Bank Resolution Corporation consolidation, banks supports funded by the National Pension Reserve Fund and bank support measures Source: European Commission

Gross government debt is largely
long-term and at low interest rates. Of gross
government debt, 89.3 % has a residual maturity of more than one year.
Around 33.4 % of that represents official loans from the EU-IMF programme
partners (Graph 2.1.8). As of the end of 2014, average
debt maturity was about 12 years ([11]). The average effective interest rate on government debt is
estimated to be around 3.5 %. Compared to that of other EU Member States,
this low rate reflects the high share of official debt and the currently very
favourable market conditions in combination with long-dated government bonds at
floating interest rates.

Graph 2.1.8:   Breakdown of gross government debt (end of December 2014)

(1) Short-term debt is debt with a residual maturity of less than one year Source: Irish Department of Finance

The maturity profile and the interest
burden are expected to improve further with the refinancing of IMF loans. In 2014, the Irish authorities requested a
waiver of the proportional early repayment clause in its loan agreements with
the IMF and EU lenders to make an early repayment of
XDR 15.7 (EUR 19.6 billion) of IMF loans. The request was motivated by the fact
that market rates had fallen well below the interest costs on existing IMF
loans (Graph 2.1.9). The EU lenders granted the waiver in
December 2014. Ireland repaid EUR 9 billion of IMF loans in December 2014 and
EUR 3.5 billion in February 2015. The Irish authorities expect to conclude the
planned reimbursement by the end of 2015.

Graph 2.1.9:   Average effective interest rates on government debt (2014)

Source: European Commission

The authorities estimate savings on
interest expenditure to be over EUR 1.5 billion
over the lifetime of the reimbursed IMF loans, including hedging costs. The IMF
loans are being replaced by government bonds with longer maturities (Graph 2.1.10). The National Treasury Management
Agency raised EUR 3.75 billion from a new 15-year bond in November 2014 and EUR 4 billion in 30-year bonds in February 2015, at a yield close to 2 per cent. It plans to issue an additional EUR 8-11 billion of long-term bonds
in 2015, including provisions for the remaining early repayment of IMF loans.

Graph 2.1.10: Maturity profile of Ireland’s long-term marketable and official debt (end of December 2014)

(1) \*Bilateral loans were provided by the United Kingdom, Sweden and Denmark. \*\*European Financial Stability Facility loans reflect the maturity extensions agreed in June 2013. \*\*\*European Financial Stabilisation Mechanism (EFSM) loans are also subject to a seven year extension. It is not expected that Ireland will have to refinance any of its EFSM loans before 2027. However, the revised maturity dates of individual EFSM loans will only be determined as they approach their original maturity dates. The original EFSM maturities are reflected in the table above. Source: NTMA

Sustained economic growth and further
improvement of the budget balance are needed to keep the debt-to-GDP ratio on a
firm downward path. The European Commissionʼs
latest debt sustainability analysis ([12]) shows that in the absence of further consolidation measures in
2016 and beyond, the general government debt-to-GDP ratio would stabilise at
above 107 % (Graph 2.1.11). Under the Stability and Growth Pact
scenario ([13]), i.e.
assuming that the Irish Government complies with all the requirements of the
Pact, gross government debt is projected to decline to around 80 % of GDP
by 2025. Though still high, this is an improvement on earlier forecasts, mainly
because of a stronger growth outlook and higher primary budget balances.

Long-term sustainability of public debt
implies achieving significant primary surpluses.
The Stability and Growth Pact scenario under the debt sustainability analysis
is contingent upon Ireland sustaining structural primary surpluses of about
3 % of GDP (Graph 3.1.12). A robust fiscal framework would support such a
path.  While it did much to improve the fiscal framework and the quality and
timeliness of fiscal data under the EU-IMF financial assistance programme,
multi-annual expenditure ceilings are still open to discretionary changes
(Section 4.3).

The sustainability of government debt
remains vulnerable to macro-shocks. The European
Commission’s debt sustainability analysis also assesses the sensitivity of debt
projections to changes in key economic variables. It shows that a negative
shock to nominal GDP growth of 0.5 percentage points would increase the public
debt-to-GDP ratio to about 114 % by 2025 under the no-policy-change
assumption. By contrast, the sensitivity of government debt to a rise in
interest rates on new borrowing is estimated to be low, given low future
refinancing needs.

Graph 2.1.11: Gross government debt projections

(1) The Stability and Growth Pact scenario assumes a structural adjustment path in accordance with the fiscal effort recommended by the Council until the excessive deficit is corrected, and then an annual structural consolidation effort of 0.6 percentage points until the medium-term objective is reached. Source: European Commission

Graph 2.1.12: General government balance and real GDP growth

(1) The Stability and Growth Pact scenario assumes a structural adjustment path in accordance with the fiscal effort recommended by the Council until the excessive deficit is corrected, and then an annual structural consolidation effort of 0.6 percentage point until the medium-term objective is reached. Source: European Commission

Costs associated with demographic trends
will put pressure on public finances. A
progressively ageing population will be a feature of the next few decades. The
proportion of Irish people aged 65 and over is expected to almost double by
2045. The combination of higher numbers of older people and falling numbers of
people entering the working-age population should result in an increase in the
old-age dependency ratio, even though the ratio will be sensitive to migration
trends that are difficult to predict in the long run ([14]). These projected changes in the composition of the population
could put pressure on public finances, with increasing demands to finance
pensions, healthcare and long-term care needs. Pension reforms ([15]) have been implemented since the last age-related expenditure
projections carried out jointly by the European Commission and the Economic
Policy Committee. They are likely to have a positive impact on the long-term
sustainability analysis, which will be updated later this year.

Government contingent liabilities remain
significant but are declining. State guarantees
were still substantial at 41.4 % of GDP in 2013, compared to the EU
average of 9.8 % of GDP. Of these guarantees, 31.1 % of GDP in 2013
were contingent liabilities of the general government related to support granted
to financial institutions (Table 2.1.1), compared to 6.4 % of GDP in the
EU as a whole. Nonetheless, the ongoing repayment of the government-guaranteed
bonds the National Asset Management Agency issued means that contingent liabilities
are decreasing.

Table 2.1.1:     Government contingent liabilities

Source: Irish Department of Finance

Overall, while the debt-to-GDP ratio has
started to decline there are still challenges to the long-term sustainability
of public finances. Based on current information,
the Irish Govermentʼs budgetary targets for 2015 and beyond are in line
with the Council Recommendation, and would ensure a declining debt-to-GDP
ratio. However, debt projections are fairly sensitive to growth shocks and
possible deviations from the fiscal adjustment path. An ageing population is
also projected to increase health care and long-term care costs.

Banking sector restructuring

Ireland has made good progress in
restructuring, downsizing and recapitalising its domestic banks. It has made good progress in addressing the significant imbalances
in the banking sector. Since the end of 2010, two banks were merged and two
others resolved. The European Commission has approved the restructuring plans
of the two largest main domestic banks, Allied Irish Bank (AIB) and Bank of
Ireland (BOI). All the domestic banks fulfilled stringent conditions to
downsize their balance sheets to sustainable levels under the EU-IMF financial
assistance programme which ended at the end of 2013. Their total assets have
come down from around 220 % of GDP at the end of 2010 to about
158 % of GDP in 2014, with a greater focus on the domestic market.
Average loan-to-deposit ratios have decreased from 155 % in late 2010 to
99.5 % in November 2014 (Graph 2.2.1). As a result, banks’ funding profiles
have normalised, with stable deposits, full access to markets funding and less
reliance on central bank funding (Graph 2.2.2).

Graph 2.2.1:   Loan-to-deposit ratio (LDR)

Source: Central Bank of Ireland

Graph 2.2.2:   Eurosystem borrowing

(1) Data up to December 2014 (for ES and EL: data up to Nov 2014)          (2) \*related to monetary policy operations denominated in EUR   \*\*total to domestic monetary financial institutions or not further specified     Source: National central banks

The profitability of domestic banks
continues to improve. In the first half of 2014,
Allied Irish Banks and Bank of Ireland became profitable, with post-provision
profits of EUR 437 million and EUR 399 million respectively. Over the same
period, Permanent TSB reduced its losses before one-off exceptional items to
EUR 172 million. Tracker mortgages ([16]) continue to weigh on the bank’s profitability however. Impairment
charges have decreased; while operating expenses stayed relatively flat (Graph
3.2.3).

Graph 2.2.3:   Components of domestic bank profitability

(1) 2014 figures are annualised Source: Annual and semi-annual reports of Irish domestic banks

The results of the ECB’s comprehensive
assessment reflected the domestic banks’ strengthened position (Graph 2.2.4). All the Irish banks passed the asset
quality review and the three-year baseline stress tests scenario of the
assessment (Table 2.2.1). Only Permanent TSB showed a EUR 855
million capital shortfall in the adverse scenario of the stress test. The
adjustments identified in the asset quality review for the Irish banks were
modest, since the banks’ balance sheets had already
been assessed towards the end of the EU-IMF financial assistance programme. Nevertheless, despite recent declines, the high share of
non-performing loans and incidence of mortgage arrears continues to weigh on
the Irish banking sector.

Table 2.2.1:     Results of the comprehensive assessment

(1) \*Static balance sheet approach   \*\*Dynamic balance sheet approach (2) CET stands for Common Equity Tier Source: Central Bank of Ireland

Graph 2.2.4:   Domestic bank capital positions

(1) CT1 Ratio: Regulatory Core Tier 1 capital to risk-weighted assets Source: Central Bank of Ireland

The restructuring of Permanent TSB
continues. To fill the capital gap the
comprehensive assessment identified, the bank submitted its capital plan to the
Single Supervisory Mechanism for review. Permanent TSB has nine months from the
date of publication of the results of the comprehensive assessment to implement
the capital plan. The bank has publically stated that recapitalisation will
draw on private sources. The Commission is also currently reviewing the bank’s
updated restructuring plan. Permanent TSB, 99.2 % state-owned, is taking
advantage of the existing strong demand for Irish assets to attract private
investors. It is improving its lending margins and prospects for write-backs as
the Irish economy continues to recover ([17]). Nonetheless, the bank will have to pay back some of its EUR 2.3
billion of state aid over the coming years and its structural balance sheet
issues, with a large amount of low-yielding tracker mortgages, will be
difficult for the bank’s management to deal with. Overall, it is expected to
tap into the private capital markets in the first half of 2015. However, unlike
the other large Irish banks, Permanent TSB’s capital structure will not be very
much affected by the gradual phasing out of existing capital instruments such
as preference shares or deferred tax assets.

Banking regulation and supervision

The regulatory and supervisory systems
have been reformed to address imbalances in banks.
In addition to many other key regulatory reforms implemented under the EU-IMF
financial assistance programme, 2013 legislation gave the Central Bank of
Ireland extensive powers to source information, conduct on-site inspections,
issue regulations and take direct remedial and enforcement action. The Central
Bank Supervision and Enforcement Act 2013 also gave the Central Bank power to
request an independent auditor assessment on banks’ financial accounts. Under
the Single Supervisory Mechanism, joint supervisory teams will do the routine
supervision of major institutions. The teams will be made up of staff from the
ECB and the Central Bank of Ireland.

The phasing in of new capital
requirements will challenge the main domestic banks. This is due to their low profitability and the fact that Bank of
Ireland, and particularly Allied Irish Banks, have large holdings of deferred
tax assets and government preference shares that will gradually be deducted
from capital ([18]). Rapid
improvements in profitability will be crucial to enable banks to use their
deferred tax assets and generate internal capital. Converting existing
preference shares into common equity tier 1 (CET 1) eligible instruments (i.e.
common shares) could also improve Allied Irish Banks’ and Bank of Ireland’s
fully-loaded Basel III capital ratios.

New prudential measures by the Central
Bank of Ireland aim to contain mortgage and housing risks. While the national property price index remains 37.9 % below
its 2007 peak, house prices are increasing rapidly in Ireland (by
16.2 % year-on-year in November 2014), and especially in Dublin. This is
mainly due to supply shortages. The number of loans issued at high
loan-to-value ratios has also been increasing recently. The amount of loans
issued at over 80 % loan-to-value has increased to 50 % of new
loans issued in 2013. Against this background, the Central Bank of Ireland
introduced proportionate limits on the amount of new lending at high
loan-to-value and loan-to-income levels. It did so to make banks and households
more resilient to potential future credit-induced housing bubbles and reduce
the risk of borrower default. Following extensive consultation, the final set
of rules made certain concessions to first-time buyers ([19]). In the short-term these measures may curtail lending volumes and
thus possibly keep bank profitability down. However, over the medium to long
term, the housing market should adjust and credit risk should decline.

The setting up of a central credit
register continues and will help supervision and credit decisions. The lack of a statutory central credit register in Ireland makes
supervision, credit underwriting and internal risk management more difficult in
the run-up to a crisis, contributing to the build-up of severe imbalances. The
planned introduction of a central credit register continues to progress, albeit
slowly. The Credit Reporting Act 2013 was enacted in December 2013. The current
timeline envisages the register’s being operational in the latter part of 2016.
It will enable lenders to carry out a more thorough evaluation of a borrower’s
ability to pay back by providing a database on the total amount of individual
and SME debt. The availability of borrowers’ total indebtedness data would also
enable the potential introduction of macro-prudential measures involving
debt-to-income and debt-service-to-income ratios.

Non-performing loans

The high stock of non-performing loans
is slowly declining. They fell to 24.9 % of
total loans of the three main domestic banks in the third quarter of 2014, from
a high of 27.1 % at the end of 2013. The decrease reflects the improved
macroeconomic environment, in particular reduced unemployment, better GDP
growth prospects and the improved net wealth of households and companies amid
growing asset prices, especially property prices. These variables are generally
considered to be the main drivers of non-performing loans.

Mortgage arrears continue to fall
steadily. Central Bank of Ireland data for the
third quarter of 2014 show that the number of accounts in arrears for over 90
days decreased by 4.5 % quarter-on-quarter. Their value decreased by
3.8 % quarter-on-quarter. However, mortgages in arrears stood at
19 % of total mortgage loan balances in the third quarter of 2014, down
from 19.9 % in the third quarter of 2013 (Graph 2.2.5). The persistent increase in the
build-up of longest-term arrears (over 720 days) continued, increasing to 9.6 %
of total loan balances in the third quarter (from 9.2 % at the end of
June 2014). The buy-to-let sub-category remains more problematic with
30.8 % of total balances in arrears in the third quarter. This is higher
than principal dwelling houses arrears that stood at 15.7 % in the same
period. After recent increases, however, buy-to-let accounts in arrears
decreased by 0.4 % quarter-on-quarter in the third quarter of 2014.

The banks continue to meet their
mortgage arrears resolution targets. In September 2014,
all banks had met and exceeded the target of proposing sustainable
restructuring solutions to at least 80 % of mortgage holders in arrears
of more than 90 days and concluding 40 % of them. More than the minimum
required, in 75 % of concluded solutions, mortgage holders were meeting
the terms of the new arrangement. Half of the proposed solutions involved
restructuring, while the other half involve legal proceedings that may end in
repossession. The number of restructured accounts increased in the third
quarter of 2014 by 7.8 % quarter-on-quarter for principal dwelling
housing, and 4.8 % quarter-on-quarter for buy-to-let. The number of
repossessions in the third quarter increased by almost 7.5 %
quarter-on-quarter to 2027 properties (Graph 2.2.6), but remains relatively low, with a
greater proportion of buy-to-let properties than primary dwelling housing being
repossessed.

Graph 2.2.5:   Mortgage arrears

(1) PDH: primary dwelling housing; BTL: buy-to-lets; dpd: days past due Source: Central Bank of Ireland

Ireland has made progress in
implementing sustainable restructuring solutions.
There are still some discrepancies in the way banks classify restructured
loans. An audit was carried out on the Q4-2013 arrears resolution targets
outcomes and another audit is being carried on the Q2-2014 outcomes of two
banks. They show that there has been a reliance on standard forbearance
techniques involving rescheduling principal or interest payments rather than
lowering both. Examples include temporary switches to interest-only mortgages,
extending the term of the mortgage and arrears capitalisation. The latter type
of restructuring has displayed a high propensity to re-default. Banks continue
to rely heavily on legal proceedings in concluded solutions as a way of
convincing customers in arrears to engage with them. As a result, there have
been indications that the courts system is experiencing some backlogs, as shown
by the more frequent adjournments and prolonged proceedings. Finally, rising
rents have led to more use of rent receivership solutions for buy-to-let loans
in arrears.

Graph 2.2.6:   Mortgage restructuring

Source: Central Bank of Ireland

Commercial loan restructuring and
disposal continue, though they still make up most non-performing loans. The banks are making progress in reaching their non-public
commercial loan (including SME) restructuring targets. They aimed to have had
almost all of them restructured by the end of 2014. Lenders have noted a
recovery of cash-flows in certain SME sectors. The distressed commercial
portion of the banks’ loan books is slowly decreasing, through a combination of
asset sales, restructures and write-offs. The National Asset Management Agency
(the bad bank tasked with the
work-out of distressed commercial real estate exposures transferred by banks)
is ahead of schedule with EUR 18.7 billion of assets disposed of at the end of
December 2014 (about 28 % of which are Irish), taking advantage of strong
market demand. The Consumer
Protection (Regulation of Credit Servicing Firms) Bill was published in January
2015. The bill aims to address concerns regarding the protection of borrowers
when loans are sold to entities unregulated by the Central Bank of Ireland.
Under the discussion in the Irish Parliament, the bill would extend the
existing protection of borrowers by regulating credit servicing firms. These firms would need to manage or
administer the credit agreement with the consumer or SME on behalf of the
unregulated buyer.

Overall, Ireland has made some progress
in the implementing the Council Recommendations, including those on
non-performing loans. As described above, Ireland
has made considerable progress on mortgage arrears resolution. However, it has
made less progress in developing guidelines on the sustainability of solutions
and publishing data on banks’ SME/commercial arrears. Ireland has also yet to
develop a strategy to address the issue of commercial real-estate
arrears ([20]), although
progress with restructuring some of these is being monitored under the
commercial loan resolution targets ([21]). The National Asset Management Agency is accelerating asset
disposals, taking advantage of strong market demand. The introduction of a
central credit register is underway.

Current account and competitiveness

Large current account surpluses have
become the norm. The major external imbalances that
characterised Ireland in the 2000s seem firmly behind it. Following substantial
deficits since 2000, the current account balance has turned positive again
since the second half of 2010, driven mostly by increasingly large trade
surpluses (graph 2.3.1). A number of underlying factors
explain the sharp turnaround, with the large presence of multinational
companies in Ireland complicating the understanding of the external accounts.
Headline numbers therefore need to be interpreted carefully.

Graph 2.3.1:   Current account balances

Source: Central Statistics Office

Competitiveness gains and demand shifts
have contributed to external rebalancing. Ireland
has long had a very open economy, with exports exceeding 80% of GDP as far back
as the late 1980s (graph 2.3.2). The economic boom of the 2000s,
however, led to a significant decrease in the export ratio as domestic demand
surged to unsustainable levels and the non-tradable sector boomed, undermining
the countryʼs competitiveness. The adjustment process of the past few
years entailed a significant reallocation of resources away from an oversized
construction sector to the tradable sector, a sharp contraction in domestic
demand and renewed impetus in exports as a result of competitiveness gains.

Graph 2.3.2:   Exports of goods and services

Source: Central Statistics Office

The rebalancing process between the
tradable and non-tradable sectors seems to be nearing completion. Indications are that the reallocation of resources has reached a
‘natural’ limit ([22]) sufficient
to put Ireland on a sustainable path. Ireland's unit-labour-cost-based real
effective exchange rate is now moving broadly in line with Germany but still
outperforming the euro area's rate (graph 2.3.3). This contrasts sharply with the
period between mid-2008 and mid-2012 when Irelandʼs adjustment was much
faster than that of other euro area Member States. With investment and private
consumption having now passed their turning point, domestic demand has stopped
contracting and the share of net exports in GDP has stabilised at around
22 % (graph 2.3.4). This remains very high by historical
standards and could indicate that there may have been some overshooting in the
rebalancing process between the tradable and non-tradable sectors.

Graph 2.3.3:   Real effective exchange rate, 2005=100

Source: European Commission

Graph 2.3.4:   Demand composition of GDP and GDP growth

Source: Central Statistics Office

Ireland continues to draw investments by
large multinational companies. The strong export
performance over the past few decades owes much to Ireland's ability to attract
multinational companies. Exports of pharmaceuticals, information technology,
business and financial services for example, represent a large proportion of
total exports and are almost entirely driven by multinational companies.
However, data on net foreign direct investment inflows need to be interpreted
carefully because certain transactions do not generate new operational
investments in Ireland. Foreign investments in Ireland have regained momentum
in the past couple of years. This is reflected in the number of projects
completed with support from IDA Ireland, the entity responsible for attracting
and facilitating foreign investment.

Shifts in multinational companiesʼ
operations greatly affect Ireland. Business
decisions by multinational companies in Ireland are determined not only by
country-specific factors, but also by the dynamics of global value chains and
regulatory determinants, including in particular the interplay between tax
regimes and bilateral tax treaties. Evolutions in global value chains have
significantly affected Ireland's economy in the past and will continue to do so
in the future, at times bringing about significant changes in the structure of
output in a short period of time. ([23]) Multinational companies drive Irleandʼs export performance,
provide a significant amount of high-skilled employment and generate a
substantial share of national value added, particularly in manufacturing. Their
activities also impact Ireland's balance of payments and international
investment position to such an extent that it is difficult to disentangle
underlying trends from specific issues.

The ʽpatent cliffʼ has been
bridged. There were concerns in 2012 and 2013 that
the expiration of patents on certain blockbuster drugs could trigger a general
decline in the pharmaceutical industry, causing a sharp and sustained fall in
exports. The patent cliff did in fact generate a steep drop in exports between
their peak in Q2-2012 and the trough in Q3-2013. However, renewed investment
and diversification put pharmaceutical exports on a rising trend again
throughout 2014, allaying earlier fears (graph 2.3.5).

Graph 2.3.5:   Exports of pharmaceutical products

Source: Central Statistics Office

Contracted manufacturing inflates recent
export figures. A small number of multinational
companies appear to have used contracted manufacturing more in recent quarters.
Under such contracts, products manufactured overseas for Irish-resident firms
are accounted as Irish exports once shipped to a third country, even if they
never transit through Ireland. Although such operations should result in a
countervailing service import, they increased the contribution of net exports
to GDP in 2014, artificially inflating the current account surplus. This recent
development has resulted in a disconnect between customs-based trade data and
balance of payments-based data. The difference between net merchandise exports
on balance of payments and customs bases, which used to fluctuate around zero,
has become significantly positive since the first quarter of 2014 (graph 2.3.6).

Graph 2.3.6:   Difference in net exports (balance of payments vs. customs)

Source: Central Statistics Office

The full and medium-term impact of
contracted manufacturing remains unclear. The
business decisions underlying the rise in contract manufacturing are not
entirely known. The extent to which a boost to current account and national
accounts data through merchandise trade could/will be counterbalanced by rising
services imports is also unclear at this stage. Neither is it known if this
situation will be long-lasting or if it could extend to a wider set of
companies. In any case, it will be an issue to monitor when analysing future
trends in the current account balance, in addition to the impact of
re-domiciled public limited companies. ([24])

Services exports have surged, but so
have imports. Services export growth has far
outpaced goods exports growth in the past few decades as large multinational
companies have increasingly used Ireland as a base for providing ICT, business
and financial services. Imports of services, however, have increased nearly as
rapidly in the same period, with rising payments on royalties and licences. As
a result, Irelandʼs balance on services remains in deficit, even though it
is now close to balance compared to sizeable deficits during most of the 1990s
and 2000s (graph 2.3.7). Its
strong merchandise trade performance therefore remains the driving force behind
the current account surplus.

Graph 2.3.7:   Services exports, imports and balance

Source: Central Statistics Office

Offshore financial services are a strong
generator of net exports. Irelandʼs rise as a
services exporter must also be considered in the light of the International
Financial Services Centre. More than 500 companies operate in the International
Financial Services Centre, directly employing over 30,000 people. ([25]) It generated net services exports of around EUR 10 billion in
2012 and 2013, and EUR 7.8 billion in the first three quarters of 2014. In
contrast, non-International Financial Services Centre companies generated net
imports of services of EUR 16.5 billion, EUR 10.4 billion
and EUR 10.8 billion, respectively, in the same periods. Similarly, while
International Financial Services Centre companies generate broadly balanced net
primary income, the rest of the Irish economy is a large net payer of primary
income to the rest of the world. Net non-International Financial Services
Centre primary payments represented an average of around
EUR 25 billion in 2012–2014, reflecting the high profitability of
multinational companies (graph 2.3.8).

Graph 2.3.8:   International Financial Services Centre and non-International Financial Services Centre trade in services, primary and secondary income flows

Source: CSO

Irelandʼs current account position
is strong. The rebalancing and regained
competitiveness of the past few years, together with the economyʼs sound
fundamentals in terms of the business environment, the regulatory framework and
skills, have led to a robust and lasting turnaround in the current account
position (graph 2.3.9). Despite the rise of Ireland as an
international services platform, merchandise trade continues to be the driving
force behind the current account surplus. Multinational companies also continue
to vastly dominate flows in the current and financial accounts. The nature of
some of their operations also makes it hard to identify underlying patterns and
economic impacts. They also make Ireland more susceptible to potential swings
than most other economies.

Graph 2.3.9:   Current account balance

Source: Central Statistics Office

External assets and liabilities

Net external liabilities remain large. Ireland had a negative net international investment position of
EUR 176.5 billion (about 96% of estimated 2014 GDP) at the end of
Q3-2014. This was down from a peak of EUR 204.4 billion (118% of GDP)
in Q1-2012 (graph 2.3.10). Although the official sector
(government and central bank) accounts for most of this net position, the
countryʼs international investment position has developed in contrasting
ways in recent quarters. The large multinational companies sector and
Irelandʼs International Financial Services Centre also have large gross
asset and liabilities positions liable to generate significant swings in the
net international investment position, including through valuation effects

Graph 2.3.10: Net international investment position by institutional sector

Source: Central Statistics Office

Public sector debt remains the main
reason for Irelandʼs negative net international investment position. A large proportion of government debt is held abroad, either by
foreign bond holders or as debt owed to official creditors, mainly the European
Financial Stabilisation Mechanism, European Financial Stability Facility and
the International Monetary Fund. As of Q3-2014, general government gross
external liabilities represented about 73% of estimated 2014 GDP. Although
foreign assets partly compensate for this, the general governmentʼs
negative net international investment position is significant enough that it
accounts for most of the overall position.

General government external liabilities
are stabilising. Given the openness of
Irelandʼs economy, including in terms of access to financial markets for
government funding, the general governmentʼs large negative net
international investment position is unlikely to be reduced at an accelerated
pace in the years ahead. Yet, it has stabilised in recent quarters on the back
of declining government deficits and the emergence of a small primary surplus
in 2014. It is expected to fall only gradually in the coming years, in line
with Irelandʼs efforts to ensure long-term fiscal sustainability and put
public debt on a firm downward trajectory (Section 3.1.1). The composition of
this debt, however, will again shift towards liabilities towards private
creditors. The early repayment of XDR 15.7 billion of loans to the
International Monetary Fund will speed up the process this year.

Target 2 balances fall. In contrast with the general government, the Central Bank of
Ireland has sharply reduced its net and gross external liabilities, mainly
Target 2 balances ([26]).This was
made possible by the end of the emergency liquidity assistance provided to
domestic banks, the conversion of promissory notes, the near-completion of the
deleveraging process of domestic banks and regained access to international
financial markets for the government and domestic banks alike. As of the end of
2014, Target 2 balances amounted to EUR 40.9 billion, down from
a peak of EUR 162 billion at the end of 2010 (graph 2.3.11).

Graph 2.3.11: Target 2 balances

Source: Central Bank of Ireland

The net international investment
position of domestic banks is stabilising. Before
2007, domestic banks had accumulated large external liabilities that enabled
them to fuel the housing market boom and acquire assets abroad. The
restructuring of the banking sector in recent years has caused a rapid fall in
the external assets and liabilities of domestic banks, including by
transferring some positions to the public sector. The external liabilities of
domestic banks stabilised in the first three quarters of 2014 at around EUR 110
billion, a third of their position at the end of 2009. External assets also
stabilised and shrunk in similar proportion, from EUR 251 billion to
around EUR 85 billion (graph 2.3.12). Once an important force behind the
evolution of Irelandʼs international investment position, domestic banks
have therefore become significantly less so.

Graph 2.3.12: External assets and liabilities of domestic banks

Source: Central Statistics Office

Business entities outside the
International Financial Services Centre have broadly compensating net
international investment positions. Non-bank
financial intermediaries outside the International Financial Services Centre,
including insurance companies, owned net external assets worth
EUR 75 billion at the end of Q3-2014. This position has been
relatively stable in the past few years, with external liabilities typically
small. In contrast, the net international investment position of non-financial
companies (mainly multinational companies) has been negative in the past few
years (graph 2.3.13).

Graph 2.3.13: International investment position of non-financial companies and non-bank financial intermediaries (outside the International Financial Services Centre)

Source: Central Statistics Office

The external positions of multinational
companies are very large. The net international
investment position of the corporate sector outside the International Financial
Services Centre (mainly multinational companies) has been negative in the past
few years, but decreased to EUR 54 billion at the end of Q3 2014.
This is mainly because multinational companies finance most of their Irish
operations abroad, including through intra-company loans and reinvested earnings.
In contrast to that of non-bank financial intermediaries, their net position
hides much larger assets and liabilities, amounting to almost 300 % of GDP
(graph 2.3.14). The size of their liabilities
relative to the Irish economy, together with their large external assets, also
show that multinational companies use Ireland to finance operations in the rest
of the EU. It is therefore not possible to distinguish the amount of net
liabilities that are directly related to Irish-based operations only.

Graph 2.3.14: International investment position of non-financial companies

Source: Central Statistics Office

The nature of the external assets and
liabilities of multinational companies differ. As
of Q3-2014, resident entities outside the International Financial Services
Centre held most of their assets abroad in the form of direct investments
(64.9 % of the total), including intra-company loans. The re-domiciliation
of public limited companies contributed to increasing resident holdings of
direct investment abroad, but the situation now appears to have stabilised.
Portfolio investments, in turn, accounted for another 20.3 % of resident's
external assets. Direct investment accounted for only 25.9 % of total
liabilities, with more volatile portfolio investments and other forms of
instruments accounting for 59.9 % and 34.7 % of the total,
respectively. This type of mismatch between assets and liabilities could
potentially expose Ireland to risks related to the transactions of
multinational companies.

The gross positions of the International
Financial Services Centre swamp those of the rest of the economy. External assets and liabilities of the International Financial
Services Centre are exceptionally large in relation to the size of the Irish
economy. As of Q3-2014, gross external assets and liabilities each represented
almost 1500 % of GDP, by far exceeding even the positions of
non-International Financial Services Centre multinational companies. The net
position has nevertheless remained relatively small over the past few years,
hovering around plus and minus 15 % of GDP (graph 2.3.15). As a result of the type of
activities by International Financial Services Centre companies, external
assets and liabilities are mainly held as portfolio investments. ([27]) The nature of portfolio holdings makes asset price variations more
likely and potentially larger than for other types of assets. The size of gross
positions means that relatively modest variations in asset prices are
susceptible to have a significant impact on Irelandʼs overall net
international investment position. However, the Irish economy and its external
accounts are by and large sheltered from such variations as assets and
liabilities refer to foreign entities.

Graph 2.3.15: International investment position of International Financial Services Centre

Source: Central Statistics Office

Graph 2.3.16: International investment position of non-International Financial Services Centre sectors

Source: Central Statistics Office

The core net international investment
position has strengthened recently. Abstracting
from the holdings of the International Financial Services Centre, Ireland's net
international investment position strengthened significantly over the past few
quarters, falling from a negative position of 124.2 % of GDP in Q2-2012 to
76.7 % of estimated GDP in Q3-2014 (graph 2.3.16). This is consistent with the
significant rebalancing of the economy in the aftermath of the crisis and the
remarkable shift from a current account deficit of EUR 10 billion in
20007–2008 to a surplus of EUR 7.7 billion in the first three
quarters of 2014. The remaining sizeable negative net international investment
position is mostly due to the legacy effects of the economic and banking crisis
on government external debt. It should fall in parallel with Irelandʼs
efforts to reduce fiscal imbalances by moving back towards the 60 % of GDP
debt rule under the Stability and Growth Pact.

The labour market continues to adjust. The crisis caused large-scale unemployment with associated adverse
social consequences. The rebalancing between the tradable and non-tradable
sectors has created skills mismatches that risk increasing structural
unemployment. The authorities have dealt with the situation by putting active
labour market policies in place, revamping the further education and training
sector and stimulating job creation.

Labour market challenges and rebalancing

The collapse of the property market and
the ensuing financial and economic crisis led to a sharp deterioration in
labour market indicators. Unemployment surged from
an average of 4.1 % in 2000–07 to a peak of 14.9 % in early 2012.

The labour market reached a turning
point in 2013 with renewed job creation in the private sector, modest rises in
participation levels and modest falls in the unemployment rate. These improvements continued in 2014 with the employment rate
(15-64 age group) at 62.2 % in Q3-2014, up just over 1 percentage point
from 2013. The unemployment rate (15-74 age group) fell from 13.1 % in
Q3-2013 to 11.4 % in 2014. Long-term unemployment has fallen gradually
with the strengthening of the labour market, although it remains high at
7 % in 2014. Youth unemployment (15-24 age group) has fallen
significantly from its peak of 33 % in mid-2012 to 21.9  % in
Q4-2014. The number of young jobseekers (15-24) with very low skill levels has
also fallen from 50.4 % in 2012 to 40.8 % in 2013 is a positive
development. The situation is also improving for young people not in
employment, education nor training, with the rate dropping from 18.7 % in
2012 to 16.1 % in 2013. These improvements in labour market indicators
are encouraging signs that the policy measures put in place over the past few
years are paying off. At 10.7 % (15-74 age group) in Q4-2014, however,
the unemployment rate is still more than double its pre-crisis level (Graph 2.4.1).

Graph 2.4.1:   Unemployment rate, long-term unemployment rate and youth unemployment rate

Source: European Commission

The adjustment of the Irish labour
market has been supported by both migration and wage developments. In the run-up to the crisis strong labour demand attracted
significant labour migration. In contrast, the proportion of foreigners born in
another Member State in the working-age population decreased between 2008 and
2013. Partly as a result of this, the total working-age population has
decreased since 2009 (Graph 2.4.2).

Graph 2.4.2:   Working-age population, active and employed people

Source: European Commission

Wage developments also supported labour
market adjustment. While in the pre-crisis period
Irish wage increases were among the highest in the EU, its post-crisis
adjustment has also proceeded rapidly. As a result, the accumulated growth of
Irish nominal unit labour costs between 2000 and 2014 matches the euro area
average (Graph 2.4.3).

Graph 2.4.3:   Nominal unit labour costs, total economy

Source: European Commission

Long-term unemployment remains a serious
concern, with the risk that cyclical unemployment could become structural. Long-term unemployment has fallen with the strengthening of the
labour market, but it remains high at 6.6 % in Q3-2014, representing
almost 60 % of total unemployment. Almost 5 % of the workforce has
been out of work for more than 24 months. This partly reflects the difficulties
that redundant workers with construction-sector skills have in transferring to
other types of employment. It is also a mechanical consequence of the gradual
nature of the recovery following a period of severe job-shedding during the
downturn. The high prevalence of long-term and very long-term unemployment
means that the workers affected are at great risk of losing tangible and
intangible skills. This could have a lasting effect on their ability to regain
employment.

Despite recent improvements, important
challenges remain in relation to youth unemployment. The youth unemployment rate and the rate of people who are not in
employment, education or training are still very high and above the EU average.
Additionally, among those who are not in employment, education or training, a
rising proportion is also not active in the labour force ([28]). A worrying trend in the Irish youth labour market is the increase
in involuntary part-time work, which stands at 41.4 % of those aged 15-24
in temporary employment (compared with 37.5 % in the EU as a whole). This
trend, along with a 20 percentage points increase in part-time employment as a
percentage of total employment for those aged 15-24 ([29]), points to increasing labour market segmentation for young people.

Unemployment figures understate the
effect of the crisis on the labour market since many workers who lost their
jobs, especially men, became inactive. The activity
rate of men fell by 4 percentage points from its pre-crisis peak to about
78 % in 2014. The activity rate of women held strong through the same
period, but its pre-crisis growth has come to a halt. Overall, the number of
economically active people has decreased slightly since 2009 (Graph 2.4.4). This partly reflects the decline in
the working-age population, but also the withdrawal of some workers from the
labour market through discouragement effects.

Graph 2.4.4:   Labour market participation rates (ages 15-64)

Source: European Commission

Both the crisis and the recovery
affected sectors and skill groups differentially.
The crisis hit the construction sector disproportionately.  In the first two
years of the crisis, some 200 000 jobs were shed in the construction
sector. It also affected the public sector, with employment falling by
24 500 (6.2 %) over three years to Q3-2014. A drop of 6 000
jobs occurred in the year to Q3-2014, bringing the total number of employees in
the public sector to 370 300. Conversely, the number of employees in the
private sector increased by 67 800 over the three years to Q3 2014 with
an increase of about 26 000 over the last four quarters of the period.
High-skilled sectors of the economy fuelled this growth. The ICT sector in
Ireland grew, year-on-year, at a rate of 16 % during the 12 months to
July 2014. Professional, scientific and technical activities increased by
5.9 % in the same period.

Skills mismatches have emerged with the
rebalancing of the economy. Since the recovery was
strongest in skill-intensive sectors, it opened up job opportunities mostly for
high-skilled workers. While total employment of those with tertiary education
has continued to increase, total employment of those with less than tertiary
education has only stabilised during the recovery (Graph 2.4.5). The unemployment rates also show how
the different effects of the recovery across skill groups. For those with at
most lower secondary education, the unemployment rate was at 21.2 % in Q3
2014. It fell below 14 % for those with upper secondary education and
below 7 % for those with tertiary or a higher level of education (Graph 2.4.6).

Graph 2.4.5:   Employment by educational attainment

Source: European Commission

Ireland has digital skills gaps. Some 42 % of the workforce has few or no digital skills. Ireland
suffers from a shortage of skilled ICT professionals. Demand is high, with over
30 % of companies employing ICT professionals. Supply is not keeping pace
with demand. In 2014, over 50 % of companies that recruited or tried to
recruit ICT professionals reported difficulties doing so, one of the highest
rates in Europe ([30]). Ireland
has nevertheless been proactive in addressing its digital skills gaps. With the
help of relevant stakeholders, it has developed an ICT Skills Action Plan for
the period 2014–18. The three main aims of the plan are to increase graduate
numbers, enhance ICT capacity, improve awareness in the education system and
attract foreign talent.

Graph 2.4.6:   Unemployment rate by educational attainment (ages 15-64)

Source: European Commission

There have been positive developments in
basic and tertiary education in Ireland. In the
2012 Programme for International Student Assessment (PISA) tests Ireland scored
below the EU benchmark of 15 % for low achievers in reading and science
(9.6 % and 11.1 % respectively). It scored slightly above the
benchmark in relation to mathematics (16.9 %). Early school leaving has
been falling consistently since 2009 (11.7 %) to a rate of 8.4 % in
2013, over 3 percentage points below the EU average of 12 % in 2013.
Tertiary education attainment also continues to rise. Ireland’s tertiary
education attainment rate for 30-34 year olds was 52.6 % in 2013, up from
51.1 % in 2012. While this represents the highest rate in the EU28, it is
still short of Ireland’s Europe 2020 target of 60 % of the 30-34 year old
population with a tertiary education qualification by 2020. Enrolments are
projected to continue to increase over the next decade as the number of
students grows and the national strategy to improve access, flexibility and
lifelong learning is rolled out.

At the same time, re-skilling and
up-skilling are a challenge for the education and training system. The further education and training system has been ineffective in
providing the types of skills that the rebalanced Irish economy needs. It also
failed to give the unemployed valuable and relevant re-skilling and up-skilling
opportunities. Traditionally, the apprenticeship system in Ireland has been
heavily geared towards the construction sector. The authorities have recognised
the need to reform further education and training. Reforms have been put in
place to ensure the creation of a system that is more responsive and relevant
to labour market needs (Box 2.4.1).

It is difficult for lower socio-economic
groups to access tertiary education. Young people
from a lower socio-economic background are less likely to attend university
given poor educational attainment at secondary school. A number of
studies ([31]) have looked
at the impact of social class on higher education participation. They have
found persistent evidence of social inequalities in higher education
participation and that financial constraints are a major explanatory factor.
The abolition of fees for higher education has not been enough to narrow the
social class-related gap in higher education participation.

Policy responses

There are concerns about the
effectiveness of existing activation policies and training programmes. The effectiveness of some of the training programmes available to
the unemployed is unclear. There is evidence that the largest programme, the
Community Employment Scheme, is ineffective. Past participation on Community
Employment was found to increase a claimant’s probability of falling back into
long-term unemployment ([32]). With
respect to JobBridge, existing evaluation evidence points to some
positive effects, particularly where training is heavily focused on existing
labour market demand ([33]).

Activation policies are underachieving
due to limited capacities in the employment service. There are currently around 500 jobseekers per caseworker in the
Public Employment Service, a ratio well above what is considered best practice.
Allocation of additional resources and efforts to tackle long-term
unemployment, through the roll-out of the JobPath initiative, will see
the caseload fall closer to 200 cases per member of staff. This will also help
to reduce the high rates of households with low work intensity, given
52.7 % of the total unemployed come from such households.

It will still take some time before the
first effects of JobPath have an impact on the labour market. Referrals to the providers are expected to start only in the beginning
of the second half of 2015. Since a comprehensive monitoring and evaluation
framework is being put in place only now, it is difficult to assess ex ante the
programme’s effectiveness.  It remains to be seen how the private sector
approach will differ from that of the Public Employment Services, what profile
of claimants they will be working with, and their ability to harness links with
employers and provide more effective services (with both activation and social
inclusion components). The effective rolling out of the programme to tackle
long-term unemployment will be necessary to meet ambitious numerical targets.

More measures need to be implemented,
within the Youth Guarantee, to improve the situation of young people. Currently, there is a nine-month waiting period for young people
who have been assessed to have a medium or high probability of exiting
unemployment. The Council Recommendation on establishing a Youth Guarantee
recommends young people receive a good-quality offer of employment, continued
education, an apprenticeship or a traineeship within four months of becoming
unemployed or leaving formal education to avoid scarring effects. Ireland also
lacks a more comprehensive outreach strategy regarding, specifically, people
not in employment, education nor training who are not active in the labour
force.  The data on involuntary temporary employment as a result of employer
uncertainty arising from the financial and economic crisis also shows
the importance of providing good-quality offers of employment or education,
traineeships or apprenticeships relevant to labour market needs and leading to
permanent jobs.

Further education, training and
apprenticeship reforms are progressing in the right direction. The Further Education and Training Authority, SOLAS, has put a
strategy in place to ensure programmes are efficient and relevant, link the
provision of training to labour market needs and facilitate the movement of the
long-term unemployed back into work. This includes setting up referral
protocols between education and training boards and Intreo offices
(single points of contact for all employment and income supports). A sound
oversight system has been put in place to ensure that the rollout of the
strategy and services plan is successful.

Ongoing reforms to the apprenticeship
system will continue to be employer-led and should ensure the alignment of
education and training provision with the needs of the labour market. The Apprenticeship Council has been given the task of extending
apprenticeship opportunities to new sectors of the economy. Currently only a
limited number of trades provide apprenticeship opportunities. Carrying out a
‘sustainability test’ that takes into account the evidence of labour market
needs and future strategic economic priorities, future demand for
apprenticeships and the progression routes for apprentices, should help enhance
the labour market relevance of proposals. The first results of this initiative
will not be seen before the end of 2015.

Given continued efforts to strengthen
the skills base, the implementation of the new Junior Cycle would be a major
development in school education. Current proposals
would gradually replace the Junior Certificate Examinations with a combination
of central assessment and school-based model of assessment with an emphasis on
the quality of students’ learning experience. Schools will be expected to
deliver a programme that enables students to develop a wide range of skills.
These include critical thinking skills and basic skills such as numeracy and
literacy. Major changes have been made to initial teacher education programmes,
with literacy and numeracy units now part of the national teacher induction
programme. School self-evaluation has been rolled out and new requirements have
been introduced on standardised testing, including the return of aggregate data
to the Department of Education and Skills.

A new national access plan for higher
education to increase the participation of disadvantaged students is being
drawn up. Due to be finalised in early 2015, it
will identify new targets for broadening access and contain recommendations on
helping disadvantaged students participate in higher education. They include
targeted interventions in disadvantaged neighbourhood schools to increase the
numbers of their students attending university and helping those who do make it
to university when they get there.

The labour market situation has improved
recently. Overall, Ireland has made some progress
in addressing the Council Recommendation and the authorities’ efforts to
address labour market challenges have started to pay off. Unemployment is on a
firm downward trend. The institutional mechanisms are being put in place that
should contribute to adequate labour market activation policies and provision
of re-skilling or up-skilling training opportunities to address skills
mismatches.

Irelandʼs healthcare sector is
atypical among EU Member States. Health insurance
and the delivery of healthcare are organised under a two-tiered structure of
public and private systems. The private system covers the highest share of the population
among EU countries for supplementary health services. All residents are
eligible for a core set of public services, including hospital care, but full
public health coverage is means-tested and restricted to a subset of the
population. There are also intermediate levels of public coverage depending on
circumstances. This complicates the rules defining entitlements to health
services. In addition, there are numerous interactions, both intended and
unintended, between the public and private systems. For example, doctors can
treat both public and private patients in public hospitals.

Public expenditure on healthcare is
comparatively high in Ireland. In spite of the
relatively favourable demographics, public healthcare expenditure represented
8.7 % of gross national income in 2012, compared with the EU average of
7.3 %. ([34]) This ratio
was down from a peak of 10.0 % in 2009 after years of increases in the
2000s and following efforts to contain healthcare costs as part of the measures
to restore the sustainability of public finances (graph 3.1.1). Nevertheless, public healthcare
expenditure remains fairly dynamic. In the past several years, outturns
regularly exceeded the profiles set out in successive government budget plans.

Graph 3.1.1:   Public healthcare expenditure, Ireland and EU

Source: European Commission

Population health outcomes are
comparable to those of the rest of the EU. In spite
of higher public expenditure on health, population health status indicators
such as life expectancy and infant mortality are by and large no better than in
the rest of the EU. The number of hospital beds and doctors per resident is
comparatively low. A number of observers ([35]) have also independently pointed out that while efficiency gains
have been achieved in recent years, the Irish health system may have passed an
ʽinflection pointʼ making deeper long-term structural reforms
necessary in order to contain expected cost increases.

Demographic trends are set to put
additional pressure on health expenditure. While
Ireland's demographic structure is currently favourable, its population is
ageing rapidly. This will put significant pressure on healthcare expenditure
between now and 2060, as recognised in the governmentʼs Comprehensive
Expenditure Report 2015 - 2017.

Ireland has begun to implement a wide
range of reforms in the healthcare sector. Initial
reforms focused on securing savings as part of the fiscal consolidation
efforts. In November 2012, the authorities published the Future Health
strategy, an ambitious medium-term plan to reform the sector based on four
pillars: (1) health and well-being; (2) service reform through an
integrated model of care; (3) structural reform; and (4) financial
reform. Future Health set an end-goal of transforming the two-tiered
system into a system based on universal health insurance partly supported by
general taxation.

The transition towards universal health
insurance is being slowed down. A White Paper on
the subject was published in April 2014, stating the governmentʼs aim to
complete the reform by 2019. Since then, the authorities have decided to
postpone the introduction of universal health insurance without announcing a
new target date. They are still moving ahead with other reforms and the
progressive completion of the building blocks for universal health insurance.
These include the e-health strategy ([36]), financial reforms, the ʽmoney follows the patientʼ
activity-based funding model for hospitals and making savings on public
pharmaceuticals expenditure through structural measures. All of these reforms
were launched under the EU-IMF financial assistance programme.

Universal health insurance postponement
could have consequences for the private insurance sector. There may be concerns about the impact of possible announcement
effects on the voluntary health insurance market, for which the introduction of
lifetime community rating is planned. The roll-out of free general practitioner
care for certain age groups planned for this year, an intermediate step towards
introducing universal health insurance, will also require close monitoring of
related budget impacts.

Several strands of reforms have moved
ahead regardless of universal health insurance postponement. A Council Recommendation issued under the 2014 European Semester
called for progress on all the universal health insurance building blocks in
2014. Some progress has been made in making the delivery of high-quality
healthcare services more cost-effective.

Some structural cost-saving measures are
being implemented in public expenditure on pharmaceuticals. While recent reforms to bring down prices from very high levels
have worked, public spending on pharmaceuticals remains well above the EU average.
Negotiations under the mid-term review of the 2012 agreement between the
Department of Health/Health Service Executive and the industry body
representing patent-protected medicines were due to start in the summer of
2014. However, these have been delayed and the mid-term review is still
ongoing. This puts the achievement of any further significant savings in 2015
at significant risk. For off-patent medicines, the introduction of
interchangeable groups is almost complete. The generics penetration rate is now
close to 70% in volume terms of publicly-covered outpatient use. This has
resulted in substantial cost savings and there may be only limited scope to
further improve value-for-money in this market segment. Finally, as regards
medicinal products, the inclusion of ʽcost-effective prescribing
behaviourʼ as a key priority with actions forthcoming in 2015 should
further assist value-for-money gains.

Financial reforms and e-health have
faced delays. Financial management systems reforms
have yet to be completed. A key deliverable is the introduction of a common
chart of accounts across the hospital sector, which has not yet been achieved.
The introduction of an activity-based funding model for budget allocations in
statutory hospitals has begun on a shadow basis, but a full switch to
activity-based funding to make the hospital sector more efficient, will take
some years to complete. The timeline for the roll-out of the first phase of
individual health identifiers has also been delayed, even though governance arrangements
for setting up of e-health Ireland have progressed, with the appointment of a
new Chief Information Officer and budget planning to support the first phase of
deliverables. A full system of health identifiers is necessary for wider
hospital funding reform.

SME access to finance

The improved macroeconomic environment
has found its way to the SME sector, enabling firms to stabilise their
businesses after a prolonged period of distress.
According to the Red C SME Credit Demand Survey, almost half of the surveyed
firms reported a higher turnover between March and September 2014. Profits were
recorded in about 56 % of the firms (up from 51 % for the preceding
six months). Although the outlook is now more positive ([37]), most firms are cautious on new investment projects. Different
strategies are being pursued by SMEs. While some firms still need to refinance
their debt with new borrowing, a growing number are using retained earnings for
working capital purposes. New investment prospects have improved over the past
six months, with some enterprises renewing their inventories and others (about
11 % of SMEs surveyed) looking to expand. About 30 % of SMEs have
increased their staff since the end of March.

Less credit is extended and less credit
is sought, but the outlook might be changing. The
level of outstanding bank credit to SMEs has been in decline since 2012 (Graph 3.2.1). The stock reduced by 8 % in
the first two quarters of 2014.  This is consistent with the deleveraging trend
described in Section 3.1.1 and the focus of SMEs on the stabilisation and
consolidation of business activity. Compared with the rising levels of
investment that were observed in 2014, it further confirms the view that the
recovery in Ireland is still largely driven by SMEs internal funds and by
multinationals financed abroad (including by parent companies and through
market issuance). Annual SME lending flows (a series reporting on new credit
facilities drawn down by SMEs during the quarter), albeit volatile, shows a
moderate recovery in the second half of 2014.

Graph 3.2.1:   Outstanding credit to SMEs

(1) Data refers to credit advanced by all credit institutions resident in Ireland, including foreign subsidiaries and branches. Source: Central Bank of Ireland

Subdued credit demand is showing signs
of recovery. As shown by the RedC Survey, from
March 2013 to September 2014 SMEs demanded less bank credit. This was the case
for all sectors except for manufacturing, where credit demand remained
constant. The lack of need for credit has been given as the main reason for
SMEs generally not applying for credit (81 %). Indicating a possible
reversal of this trend, in the third quarter of 2014 the banks themselves
reported an increase in demand across all enterprise sizes and loan maturities
([38]).The type of
products that firms requested (Graph 3.2.2) could indicate that what drove
overall credit demand down was fewer requests for renewals and overdrafts.
Applications for new loans and leasing or hire-purchase agreements increased
however (to 24 % of total products requested from 21 % at the end
of March). As a further sign of stabilisation, renewals and overdraft products
sought did not include requests for additional funds (the sizes of  facilities
remained unchanged) in almost half of cases. When they did, the additional
amount needed was smaller than observed over the previous period. This means
that the ability of SMEs to service their debts is improving.

Graph 3.2.2:   Bank products requested by SMEs

Source: RedC SME Credit Demand Survey

SMEs seeking credit are facing fewer
rejections by banks, but also higher interest rates than the euro area average. Survey data shows that SMEs are becoming less worried about access
to finance, although this is still a major concern for around a third.
According to the RedC Survey,  rejection rates for credit applications have
fallen to about 14 % ([39]) and SMEs have a more positive perception of the banks’ willingness
to provide credit, causing the number of discouraged potential borrowers to
fall. However, some SME organisations say that the overall bank rejection rate
is as high as 38 %. Interest rates for new corporate loans of up to EUR 1
million in value, used as a for proxy SME lending, are also higher for Irish
SMEs than for most of their euro area counterparts (Graph 3.2.3). On average, they are also markedly
higher than the rates for larger firms. This is due to the banks’ efforts to
increase their interest margins on new lending to improve profitability. It is
because low-yielding legacy assets account for large shares of their balance
sheets. It could also be a result of the concentration of SME lending markets,
in increase since 2013.

Certain collateral requirements and
credit application processes may be discouraging for some SMEs. According to the RedC survey, at the end of September 2014,
collateral such as buildings, machinery and land was still required for over
40 % of loan applications, putting businesses with a different asset
structure at a disadvantage. The Irish Business and Employers Confederation
said that banks have improved their sectoral understanding and their ability to
base lending decisions on projected cash flows, but called for further efforts.
Personal guarantees are becoming less of a prerequisite for credit too
(38 % at the end of September, compared to 44 % at the end of
March). The upper limit for referring refusals to the Credit Review Office has
been increased to EUR 3 million. The SME stakeholders’ feedback that the
Central Bank of Ireland gathered as part of the consultation on the Review of
the Code of Conduct for Business Lending to Small and Medium Enterprises
revealed a need for more clarity on the lenders’ application process. This
referred especially to the information required and the criteria for
determining the ability to repay, as well as reasons for credit refusal and
appeal rights, including recourse to the Credit Review Office.

Graph 3.2.3:   Interest rates on SME loans - comparative overview

Source: Central Bank of Ireland, European Central Bank

Demand for non-bank credit by SMEs
remains subdued despite a number of SME financing initiatives (Table 3.2.1). As shown by the latest September
2014 RedC SME Credit Demand Survey, the number of SMEs aware of existing
government support schemes and the Credit Review Office has decreased. The
sometimes greater complexity of non-bank borrowing schemes could deter a number
of companies. The Credit Review Office also points to a need for further
efforts to be made to improve the financial management skills of SMEs. Although
the amount of bank financing has decreased, Irish enterprises and SMEs in
particular remain heavily reliant on banks for financing. There is therefore
further scope for the development of non-bank financing alternatives in
Ireland, for both equity and debt instruments, to help SMEs diversify their
funding sources. This was also one of the cornerstones of the Commission’s Investment
Plan for Europe announced in November 2014 ([40]). It is among the priorities on which ongoing Commission work on
developing a Capital Markets Union is based ([41]). The recent changes to the Irish Alternative Investment Fund
rulebook also aim to support non-bank lending by allowing loan origination by
qualifying investment funds within a prudential framework (Box 4.2.1).

The Strategic Banking Corporation of
Ireland and the existing support funds aim to diversify the sources and types
of funding for Irish SMEs. The goal of the newly
established Strategic Banking Corporation of Ireland is to lower funding costs
for SMEs by increasing the number of lenders offering SME loans and providing
new products with a longer duration and flexible repayment periods. The Strategic
Banking Corporation of Ireland (which does not have a bank license) has lower
funding costs and this cost benefit will have to be passed on to SMEs. This
will partly address the relevant Council Recommendation. It was launched in
October 2014, with a full roll-out of products expected in the first quarter of
2015 and the inclusion of new non-bank lenders in the market later in the year.
It sources funds from the German development bank KfW, the Ireland Strategic
Investment Fund and the EIB and makes them available to SMEs through
on-lenders, including retail banks and non-banks. The Strategic Banking
Corporation of Ireland secured an initial amount of EUR 800 million in funds,
of which EUR 550 million are guaranteed by the government. A maximum of EUR 5
billion could be given by the state provided there is demand for it.

(Continued on the next page)

Box (continued)

Additional resources have been put in
place to support SME lending, marking some progress in addressing the Council
Recommendation. Two SME funds, co-financed by the
National Pensions Reserve Fund, are lending with a growing number of projects
in the pipeline. The mandate of a third National Pensions Reserve Fund, the
Turnaround Fund, was not renewed at the end of 2014. This was due to the
limited pool of underperforming/distressed businesses eligible as turnaround
investment cases amid a continued economic recovery. The Action Plan for Jobs
2015 announced a reconfigured Credit Guarantee Scheme and a simplified
operation of the Microenterprise Loan Fund. Regarding the latter, the extent of
rejections (43 %) appears to suggest some scope for improvement ([42]). An SME Online Tool was also launched to increase awareness
among SMEs of available business supports, backed by a communications campaign
showcasing the online guide. 23 % of enterprises were aware of this
online tool in September 2014, following its launch in May. However, awareness
and knowledge of SME funding options remains quite low overall. The Irish
central credit register, set to become operational in late 2016 (and in 2017
for corporate credit), should support lending by making it easier to assess the
creditworthiness of borrowers.The value of credit registers as a way of
improving both banks’ and supervisors’ risk assessments has been recognised in
over half of EU Member States that have established them to date. This will
also be an important component of calibrating some macro-prudential measures
(e.g. total debt-to-income and debt-service-to-income ratios).

SME development

Legislative changes are focused on
making it easier to do business. Ireland has
modified several tax incentives to further encourage investment in SMEs. These
include changes to the tax credit scheme for research and development ([43]) and the removal of the high earners restriction from the
Employment and Investment Incentive ([44]). The latter should incentivise high earners to invest more in
eligible companies. Ireland has moved up four positions
to 13th place in the World Bank’s global ranking on the ease of doing
business and was among the ten top improvers in
2013/2014. However performance has dropped in a number
of specific areas (access to credit, construction permits and enforcing
contracts). The Companies Act 2014 passed by the Oireachtas (Parliament)
at the end of December 2014 is due to come into effect on 1 June 2015. It
should reduce red tape by simplifying many existing company law requirements,
for example reducing the time and cost of setting up a business, providing
legal power to borrow money and allowing the establishment of companies with
one director. Legislation which facilitates and reduces
the cost of creditor protection for SMEs ([45]) became applicable in July 2014. Despite this, only five SMEs had
sought the appointment of an examiner through the Circuit Court until November
2014. Ireland also ranks as the best in the EU and 6th
in the world in terms of the ease of paying taxes. Improvements continue to be
made to the system, with increased provision of e-services and on-line service
platforms. A roll-out the Integrated Licensing Application Service is due to
take place in the first quarter of 2015 for retail licenses, after some
tender-related delays. Stakeholders have signalled the need to further improve
the existing Regulatory Impact Assessment procedures, emphasising their varying
quality across departments, a lack of cost/benefit analyses, as well as timing
and accessibility issues ([46]).

Centralised public procurement might be
a deterrent for SMEs. The streamlining of public
procurement procedures through the establishment of the Office of Government
Procurement as a central purchasing body sought to reduce government costs. It
has actively promoted public-private programmes for the training and education
of SMEs. However, it may also have generated new challenges for SMEs in seeking
procurement contracts. This is mostly due to the frequent use of framework
contracts that only consortia of SMEs are large enough to access. The
government has sought to address this issue through a number of measures
announced in the 2014 Action Plan for Jobs, among them a review of Public Works
Contracts. Circular 10/14 published in April 2014 recommended a number of actions
by procurement authorities to facilitate SME participation. The eTenders
platform has also helped increase transparency and streamline procedures. A new
Tender Advisory Service was announced in December 2014 to enable potential
suppliers to raise concerns about a particular live tender process. This is due
to be piloted as from February 2015. An SME Working Group has also been set up
to assist the Office of Government Procurement in developing and monitoring
strategies for SME access to procurement.

There is further scope for domestic
innovation to grow. Ireland has made significant
progress towards achieving its national research and development intensity
target for 2020 of 2.0 % of GDP. It performs relatively well in terms of
innovation outputs, both in the innovation output indicator and on the Innovation
Union Scoreboard. This is mainly due to its economic structure, geared towards
several high-tech manufacturing sectors and knowledge-intensive services.
However, research and development activity is largely carried out by foreign
multinationals and there have been limited spillovers to SMEs. Concerns remain
regarding the lack of innovative activities by Irish SMEs ([47]), insufficient commercialisation of research results and the
low availability of finance for innovative companies ([48]).

Table 3.2.1:     Overview of SME credit policy initiatives

Source: Department of Jobs, Enterprise & Innovation, Department of Finance, Credit Review Office

Taxation

Irelandʼs tax burden has marginally
increased, but remains low compared to the EU average. The overall tax burden is estimated to have increased to
30.9 % of GDP in 2014 from 28.7% of GDP in 2012 (Graph 3.3.1). The ratio is relatively low,
however, at almost 10 percentage points below the EU average of 40.1 % ([49]). Indirect tax revenues as a percentage of GDP are the third lowest
in the EU, with value-added tax revenue well below the EU average. Direct taxes
are the 10th highest in the EU at 13.5 % of GDP. The personal
income tax system is very progressive and the tax wedge in 2013 for the
average-wage worker was around 26.6 %, significantly below the EU average
and one of the lowest among Member States. Social contributions are the second
lowest in the EU, largely due to the small employers’ contributions, which
represent less than half the EU average.

Graph 3.3.1:   Tax burden

Source: European Commission

Tax measures in Budget 2015 focused on
tax cuts. Rather than using the revenue windfall to
accelerate debt reduction, as recommended by the Council under the ongoing
Excessive Deficit Procedure, the authorities took advantage of the
stronger-than-expected economic environment to introduce a range of tax cuts
and reliefs in Budget 2015. Measures include: (i) income tax reductions through
a combination of higher income thresholds and changes in tax rates ([50]); and (ii) higher tax incentives for R&D and the creation of
intangibles. They also include a variety of minor revenue-increasing
adjustments to tax expenditures and some increases in excise duties. Overall,
the net impact on revenues is estimated to be negative at around 0.25 % of
GDP.

The tax wedge on labour is set to
decline somewhat. The planned personal income tax 
reductions in Budget 2015 will decrease the tax wedge on labour, but only by a
small margin. For workers (single people without children) with a gross income
of EUR 35 000, net income is estimated to increase by 1.4 %. The overall
effect tends to be slightly progressive, with net income gains as a proportion
of earnings decreasing along the income distribution for the main categories of
taxpayers.

The authorities announced changes to the
tax residency rules as part of Budget 2015. The
possibility to apply the so-called double Irish tax scheme will disappear with
immediate effect for new companies and will vanish after six years for existing
companies. The full impact of the changes to Irish tax rules may not be fully
apparent in the near term, but they have the potential to broaden the tax base,
even if it may take some time to assess their full impact.

Tax incentives for the SME sector are
variously targeted but appear to lack overall cohesion. Various lending schemes have been introduced to support business
start-ups, notably for the SME sector (Section 4.2). Perhaps due to the
constraints imposed by fiscal consolidation tax incentives have developed in a
fragmented manner. Boosting productive investment remains a priority, however,
as gross fixed capital formation fell sharply during the crisis and remains
well below the EU average in spite of the recovery in investment in 2014.

The yield on the value-added tax is low
in comparison with other Member States ([51]) as a result of the large value-added tax policy gap. The value-added tax policy gap measures the additional revenues
that could in principle be collected if a uniform rate applied to all
consumption, abstracting from compliance issues, which are limited in Ireland.
In turn, the use of reduced rates and exemptions on value-added taxes ([52]) is high and generates a large value-added tax policy gap. Only
four Member States have bigger policy gaps than Ireland. According to a range
of studies ([53]), at any
given level of the tax burden, a system in which indirect taxes account for a
large share of total revenue – e.g. a system making limited use of reduced
rates, exceptions and exemptions on value-added tax, in line with the European
directive – is less distortive and more growth-friendly than a system with a
large share of direct taxes. There appears to be no process for evaluating the
costs and benefits of reduced rates on value-added tax, in sharp contrast with
the systematic evaluation principles to be applied to income tax expenditures
as per the October 2014 Guidelines for Tax Expenditure Evaluation.

Revenues from immovable properties are
lower than the EU average. Recurrent taxes on
immovable property are considered among the least harmful to growth ([54]). In the context of the EU-IMF financial assistance programme,
residential property taxation has shifted from a transaction tax to a recurrent
tax based on residential property values ([55]). The effectiveness of the new system is also proved by the high
compliance ratio of the new property tax (around 95 %). While government
revenues from immovable property as a percentage of GDP are projected to
increase slightly (from 0.9 % in 2012 to nearly 1.1% in 2014), the yield
from the property tax is still relatively low compared to other Member States
(Graph 3.3.2). Moreover, the base is reduced by the
exclusion of some non-residential properties, in particular development land
and derelict sites, in spite of the emerging supply constraints on the housing
market (section 4.1). It is also currently based on a self-assessment of
property prices at historic values. Values are to be re-evaluated in 2016,
although a property register with cadastral values might be put in place. The
possibility for the local authorities to vary, within limits, as of 2015, the
basic local property tax rate, could further limit tax revenues ([56]).

Graph 3.3.2:   Revenues from property taxes (2012)

(1) Ordered by revenue from recurrent property taxes. ‘Other taxes on property’ include taxes on net wealth, inheritance, gifts and other property items as well as financial and capital transactions. Data do not include personal income tax on imputed rents. Source: European Commission

Revenues from environmental taxes
represented 2.5 % of GDP in 2012, compared to 2.4 % of GDP in the EU.
The role of environmentally related fiscal measures
has been strengthened in the past five years ([57]). Limited additional changes were introduced in the budget for
2015, except for measures such as extending the accelerated capital allowances
scheme for energy-efficient equipment for another three years. Peat used for
electricity generation (subject to the emission trading system) is exempt from
the carbon tax, but its extraction remains subsidised ([58]). Reduced rates of value-added tax on energy products (at
13.5 %) may also conflict with overall energy and climate policy
objectives. They effectively decrease incentives to reduce energy consumption
or improve energy efficiency. There appears to be no overall policy of
reviewing value-added tax rates and excise duty to ensure continued alignment
with environmental considerations.

Overall, some progress has been made in
addressing the recommendation to broaden the tax base and enhance the growth
and environmental friendliness of the tax system.
Yet, there are further opportunities to tap into more growth-friendly taxes,
notably on consumption and property. In addition, there appears to be no
process of evaluating the costs and benefits of reduced value-added tax rates
despite a significant value-added tax policy gap, while environmental taxation
generates distortive subsidies making it harder to achieve environmental
objectives.

Fiscal framework

Major reforms to the fiscal framework
have been undertaken in the context of the EU-IMF financial assistance
programme. The new rules and procedures, in
particular the medium-term expenditure framework, if implemented effectively,
provide a potential safeguard against pro-cyclical fiscal policy and are
crucial for fiscal sustainability. However, despite the timely presentation of
a multiannual budgetary planning, and the introduction in 2013 of a medium-term
expenditure framework – including three-year ministerial expenditure ceilings –
the fiscal framework does not provide information about the broad budgetary
measures underlying the medium term expenditure targets.

The Irish fiscal framework has benefited
from the expertise and independence of the Irish Fiscal Advisory Council. Pursuant to Regulation (EU) No 472/2013 (part of the
ʽTwo-Packʼ), the task of assessing the macroeconomic forecast
underpinning the annual budget plans and the Stability Programme was assigned
to the Irish Fiscal Advisory Council in the Fiscal Responsibility Act of 2012
and 2013. In practice, the macroeconomic forecasts underpinning the 2014 and
2015 Budget Laws were endorsed. The Irish Fiscal Advisory Council, was also
given the mandate of independently providing an assessment of, and commenting
publicly on, whether the national budgetary objectives are met and comply with
the numerical fiscal rules introduced by the Fiscal Responsibility Act. Its
financial and functional independence is ensured by primary legislation and has
been underscored in the advice given so far.

Graph 3.3.3:   Expenditure ceiling reconciliation for 2015

Source: Comprehensive Expenditure Report 2015-2017

Reporting standards have improved. The authorities have started publishing new fiscal reports covering
the general government sector and complementing existing fragmented reports by
individual government entities.

However, the medium-term budgetary plans
could be undermined by regular changes to government expenditure ceilings. Under current rules the government has considerable discretion to
change expenditure ceilings (see Graph 3.3.2). This weakens medium-term budgetary
plans. As a result, the current set-up falls somewhat short of the Council
Recommendation asking Ireland to ʽensure the binding nature of the
government expenditure ceiling including by limiting the statutory scope for
discretionary changesʼ. Previous Commission reports called on the Irish
authorities to strengthen the credibility of the medium-term expenditure plans
by limiting changes to the expenditure ceilings to predefined exceptional
circumstances specified in the internal circular 15/13 ([59]).

Limited progress has been made in
addressing the parts of the Council Recommendation relating to the fiscal
framework. Although the fiscal framework has been
strengthened significantly in recent years, in particular with the adoption of
the Fiscal Responsibility Act, some weaknesses remain. These led the Council to
recommend in June 2014 that Ireland better define broad budgetary measures
underlying the medium-term fiscal targets and ensure the binding nature of its
expenditure ceiling including by limiting the statutory scope for discretionary
changes. No changes were made in this regard in 2014.

Legal services costs have yet to adjust. Irelandʼs Competition Authority highlighted price and
competition issues in the provision of legal services as far back as 2006. As
legal services are an input to all sectors of the economy, including the
tradable goods sector, their cost has a bearing on Ireland’s competitiveness.
In its report, the authority provided a number of recommendations on reforming
the regulatory framework for the sector to enhance competition and bring about
a reduction in high legal services costs affecting not only businesses but also
citizens.

Legal services reform is a long-standing
project. Given the importance of reducing legal
services costs in supporting Irelandʼs competitiveness and promote SME
growth, the authorities committed under the EU-IMF financial assistance
programme to introduce a new regulatory framework for the sector. In this
context, they published the Legal Services Regulation Bill in October 2011,
building on a number of recommendations from the Competition Authorityʼs
2006 report.

The regulatory model is to be
overhauled. The Bill aims to reshape the
essentially self-regulated structure of the legal profession by establishing an
independent regulatory authority, improve access and competition, and make
legal costs more transparent and less expensive for consumers and businesses.
Among other things, it provides for the establishment of legal partnerships
between solicitors and barristers and possible multi-disciplinary practices
bringing together barristers, solicitors and other professional service
providers (such as accountants) or even services of non-professional nature. It
should also address restrictions on advertising by solicitors and barristers,
for which an infringement procedure (2013/2192) under the Services Directive is
ongoing.

Vested interests have strongly opposed
the Bill from the outset. Progress towards its
enactment was therefore slow and could not be completed by the time of
Irelandʼs exit from the EU-IMF programme at the end of 2013. Since then, a
significant number of amendments have been introduced, some to strengthen the
independence of the Board of the Legal Services Regulatory Authority, some to
address specific concerns of the legal profession. A country-specific
recommendation was also addressed to Ireland in the context of the 2014
European Semester calling for the enactment of the Bill by the end of that
year.

Delays in the process persist. Progress towards enactment remained slow in the second half of 2014
due to ongoing pressures from vested interests. The authorities agreed to
reopen the issue of multidisciplinary practices and finalised the amendments to
be considered at the resumption of Dáil Report Stage, to take place in early
2015. The removal of the ʽsolicitor's lienʼ, part of the 2014 Council
Recommendation, will not be included in the Bill. ([60])

Significant amendments have been tabled. The amendments will require the future Legal Services Regulatory
Authority to conduct research and consultations on multidisciplinary
practices ([61]) before
issuing a recommendation to the Minister, who will then determine whether the
section of the legislation on multidisciplinary practices should be commenced
or not. Although the authorities indicate that their intention remains to allow
multidisciplinary practices, uncertainty on this matter has increased
significantly as the recommendation from the Legal Services Regulatory
Authority may well go in the opposite direction. In contrast, legal
partnerships appear to be safeguarded. Direct access to barrister is also
included for non-contentious matters, although research and consultations will
take place before considering whether to include contentious matters.

The Bill might soon be enacted. The authorities confirmed on a number of occasions their intention
to have the Bill enacted in early 2015 and ensure that the Legal Services
Regulatory Authority is in operation by the middle of the year. Budget 2015 has
earmarked EUR 500 000 to help set up the Authority.

Justice reforms are progressing. Besides the reform of the regulatory framework for the profession,
the country-specific recommendation also urged Ireland to improve data
collection systems as an enabler of quality and efficiency of judicial
proceedings. In 2014, Ireland carried out an important reform of the judicial
system, setting up the New Court of Appeal between the High Court and the
Supreme Court. This should help resolve long delays in having appeals heard by
the Supreme Court. ([62]) In
addition, the scope of the jurisdiction of Circuit Courts and of Districts
Courts has been extended. ([63])

The authorities have taken measures to
improve data collection systems on judicial proceedings. These measures remain to be completed for some courts and areas of
the justice system. In addition, there is no regular evaluation system and
there are no defined quality standards or specialised court staff in charge of
quality policy. Budgetary restrictions and the relatively low number of judges
make it all the more important to step up the measures to support the quality
of the justice system, in particular with regard to extending online case
management. This is currently only available for some case categories, the
evaluation of court activities and courts communication policies. The new
Mediation Bill is yet to be submitted to parliament. ([64])

The implementation of the
country-specific recommendation is progressing at varying speed. Overall, limited progress has been made so far on the implementation
of the CSR related to the Legal Services Regulation Bill. Some progress has
been made on data collection systems, however.

Weaknesses in key infrastructure sectors
remain. Ireland invested significantly in public
infrastructure in the late 1990s and the first part of the 2000s when property
taxes boosted government revenue. General government gross fixed capital
formation averaged 4 % of GDP during the period 2000–2008. This investment
push focused on roads and housing, with significant investments also in water
supply and sewerage and health. Public investment has nevertheless fallen
sharply during the past six years to an estimated 1.5 % of GDP in 2014. As
a result, key weaknesses in infrastructure remain that affect the growth
potential, the efficient use of resources and action against climate change.

Graph 3.5.1:   Public sector gross fixed capital formation by area

Source: Central Statistics Office

Water infrastructure

The water sector is in urgent need of
investment. Until Irish Water was set up in January
2014, the water sector was run by 34 local authorities each operating over
small geographic areas and running their own investment programmes, financed
mainly from general government funds. Water charges were imposed on
non-domestic users but collection rates were low, and domestic users were not
charged at all. ([65]) As a
result, investment in water supply and treatment infrastructure was
insufficient. ([66]) It is
estimated that almost 50 % of clean water is currently wasted through
leaks, while treatment facilities are insufficient and give rise to serious
environmental concerns ([67]). Water
supply problems (boil notices, reduced pressure and others) are also recurrent,
including in the main cities.

Weaknesses in water infrastructure have
far-reaching consequences. These weaknesses raise
concerns not only from an environmental and social perspective, but also from a
growth perspective as water supply is a key input to some major industries in
Ireland, including the pharmaceutical sector. Insufficient water supply and
treatment capacity has also recently constrained the development of new
residential projects in Dublin, where demand is largest. ([68]) Yet, the insufficient housing supply response has contributed
lately to rising house prices and rents in Dublin, with adverse social and
competitiveness effects.

Water sector reforms were initiated in
2011. Ireland considered policies to fundamentally
reform the water sector in the National Recovery Plan 2011–2014 already. This
process was integrated in the EU-IMF programme of financial assistance, under
which Ireland committed itself to re-organising the sector around a fully
publicly owned national utility (Irish Water) and to introducing charges for
domestic users to incentivise a more sensible use of the resource and ensure
more sustainable financing for the sector. Reforms have been progressing since
2011, culminating with the setting up of Irish Water and the planned
introduction of charges for households in the last quarter of 2014.

The structure and level of charges
planned initially have been modified. In November
2014, the government announced revisions to the structure and level of charges
compared with what had been determined by the Commission for Energy Regulation.
The core of the reforms remains, however, and the authorities publicly
committed to Irish Water operating the sector as a 100 % state-owned national
utility under the regulatory oversight of the Commission for Energy Regulation.
They also indicated that the installation of meters would proceed as planned.
The latest decisions raise some concerns, however:

· Infrastructure investment: Irish Water
will remain dependent on central government funding for some time and the
prospects of the company becoming self-funded have become more distant.
Although the latest decisions do not affect its capital spending programme to
the end of 2016 as approved by the regulator, the extent to which Irish Water
will be in a position to fund and borrow on the markets for much-needed capital
investment is unclear.

· Conservation objectives: capping
domestic water charges at low levels provides weaker incentives to conserve
water than under the original plan for most households, even those with a
meter.

· Fiscal implications: fiscal risk arises
from the uncertainty surrounding the pending Eurostat ruling on whether Irish
Water complies with the market test under European System of Accounting 2010
rules.

ICT infrastructure

A strong ICT infrastructure is of key
importance for the Irish economy. The surge in
services exports (Section 3.3) would not have been possible without a good ICT
infrastructure and the digital economy has strongly contributed to growth and
job creation in recent years. Several inter-related factors contribute to the
performance of digital markets, including broadband internet, digital skills,
e-government and integration of digital technologies by businesses. ([69])

Broadband coverage can improve. Fixed broadband covers 96 % of households, only slightly below
the EU average of 97 %. In 2013, 54 % of homes were covered with
speeds of at least 30 Mbps (next generation access), compared with 62 % on
average in the EU. This also represented a 12 percentage point increase in
next generation access coverage over the previous year. Ireland is still a long
way from achieving the Digital Agenda target of 100 % coverage of fixed
broadband above 30 Mbps by 2020. In addition, fibre coverage is low 1.7 %.
Fibre connection is critical for higher speeds. The National Broadband Plan
2012 outlines the governmentʼs policy on the delivery of high-speed
broadband services and specifies targets for delivery and roll-out. These targets
are in line with the Digital Agenda targets.

Energy infrastructure

Ireland is vulnerable to gas supply
interruptions. Gas is the primary fuel for
electricity generation (50 %), followed by coal (20 %), renewables
(19 %) and peat (9 %). The UK is the only source of gas imports
through two parallel subsea pipelines. The safety of supply is a concern given
both interconnectors experienced outages in the winter of 2012/13. Ireland also
does not comply with the ʽN-1 ruleʼ, i.e. the ability to continue
providing gas to domestic (or high-priority) customers when faced with the loss
of the major gas import route. There are projects to allow bi-directional gas
flows from Northern Ireland to Great Britain and from Ireland to the UK that
have received the label of projects of common interest, but implementation is
yet to be started.

Renewables play an increasing role in
electricity production. The main expansion of
renewables has taken place in the electricity sector. Renewable energy sources
for electricity represented 19.6 % of the total in 2012, with wind energy
the main contributor (almost 80 % of the total). The share of renewable
energy reached 7.3 % of final energy consumption in 2013, which is above
the interim target of 7 % for 2013/2014. Ireland is thus on track to achieve
its 16 % renewable energy target by 2020. Such an increase would help
reduce energy dependency and Ireland aims to reach the overall renewables
target by achieving by 2020 a 40% renewables (mostly wind) share in electricity
generation. Increasing the proportion of wind energy in electricity production
poses both market and technical challenges, including technical adaptation in
energy networks and systems (such as smart meters). To a small extent, Ireland
relies on electricity imports from the UK. Work is in progress on the
feasibility of a new France-Ireland interconnection and on Ireland-UK
electricity interconnections. The ʽNorth Atlantic Green Zone Projectʼ
has already received financial aid under Connection Europe Facility.

Climate

Ireland is not on track to reach its
greenhouse gas emission reduction targets. It is
committed to reducing its greenhouse gas emissions in the non-emissions trading
system sector by 20 % between 2005 and 2020. According to the latest
national projections it is likely to miss this target by a wide margin, with
the authorities expecting emissions to decrease only by 3% in 2020 compared
with 2005. Emissions in the agricultural sector, the largest non-emissions
trading system sector in terms of greenhouse gas emissions, are expected to
remain stable between 2005 and 2020. Emissions in transport, the second largest
non-emissions trading system sector in terms of emissions, are expected to
increase significantly between 2005 and 2020. This is mainly due to the lack of
public transport, including the underdevelopment of rail and the lack of
infrastructure to make it possible to reach national targets on electric
mobility. Although Ireland has a carbon tax in place, it is not linked to the
evolution of energy prices and it is not consistent across different energy
carriers and climate pollutants (methane and nitrous oxide emissions, for
example, are not taxed like carbon).

Policies to address climate-related
commitments are insufficient. The government
prepared the main parts of a Bill on climate action and low carbon development.
It has also adopted a renewable energy strategy, a second energy efficiency
national action plan, an agricultural, food sector-specific economic
development strategy, and taken measures to improve the household segregation
of food waste. However, no progress was made in identifying how Ireland commits
itself to meeting its existing, binding climate and energy targets for the
period up to 2020 in an integrated way and how best to use the earmarked,
available EU support for the structural development needed in the different
areas.

Social transfers sheltered the most
vulnerable and reduced poverty rates throughout the crisis. In spite of this and an improving labour market situation,
significant challenges remain.

The high proportion of people living in
households with low work intensity generates serious social challenges. At 23.9 %, it is currently the highest in the EU and more than
double the EU average of 10.8 %. The rate was higher than the EU average
prior to the crisis and surged from 14.3% in 2007 to 24.2% in 2011, before
falling to 23.4% in 2012 ([70]). This
increase has been attributed to a combination of factors, such as the increase
in unemployment, changes in household structure and other factors – for
instance, having a disability or having caring responsibilities. An important
feature of Ireland’s jobless households is the likelihood that they have
children. The rate of children living in jobless households in Ireland is
17.7 % (2013). This rate is the highest in the EU and significantly above
the EU average of 11.2%. While fewer than 30 % of adults in jobless
households live with children in other EU-15 countries, 56 % do so in
Ireland. Low work intensity is particularly severe among single adult
households with children, and the proportion of children living in households
with low work intensity is nearly three times the EU average. This increases
the risk of social exclusion of children, particularly those in lone-parent
households, with the overall at-risk-of-poverty and social exclusion rate for
children increasing from 26.2% in 2007 to 33.9 % in 2013.  Studies also
show ([71]) that there
is a wide range of household joblessness in need of tailor-made measures going
beyond labour market activation interventions.

Absolute poverty, including amongst
children, is increasing. The severe material
deprivation rate (measured as four or more items of experienced deprivation)
rose sharply between 2011 (7.8 %) and 2013 (9.9 %) and is now above
the EU average of 9.6 %. Severe material deprivation among children has
also increased. It almost doubled since 2008 (6.8 %) to 13.4% in 2013,
above the EU average of 11.1 %. However, the most recent available
European Union statistics on Income and Living Conditions, for the year 2013,
indicate that relative poverty has started to fall in Ireland. The
at-risk-of-poverty rate was 14.1 %, down from 15.7% in 2012 and 2.5
percentage points below the EU average. Similarly, for children (aged 0-17) the
at-risk-of-poverty rate fell from 18% in 2012 to 16 % in 2013 and is over
4 percentage points below the EU average of 20.2 %.

The limited availability and high cost
of childcare remains a significant barrier to increased female labour market
participation. The employment rate for women rose
in the year from 60.5 % in Q3-2013 to 61.3 % in Q3-2014. However, it
still remains over 10 percentage points lower than the rate for men (with the
gender employment gap actually increasing between Q3-2012 and Q3-2014) and over
2 percentage points lower than the EU average. Single-parent households and
households with three or more children have much lower employment rates and
lower work intensity when they are in employment ([72]). According to 2013 figures, the average fee for childcare
nationally was EUR 152 per child per week, amounting to almost
EUR 16 000 per year for a two-child family. As a percentage of wages,
childcare costs are higher than in any other EU country ([73]).

Access to full-time childcare is limited
and the quality of services remains a problem. The
most recent comparable EU data, from 2011, shows that Ireland had not reached
the Barcelona target of a 33 % coverage rate for children under three as
only 21 % of children under three had formal childcare arrangements.
Childcare coverage had fallen significantly below EU averages for formal
childcare for i) between 1 and 29 hours (10 % compared with the EU average
of 15 %) and ii) 30 or more hours (11 % compared with the EU average
of 15 %). Currently, there is no comprehensive monitoring system for
assessing the quality of childcare services. The findings from various
sources ([74]) indicate
that there is variable quality in terms of compliance with (minimum standard)
pre-school regulations, qualification levels of staff, in particular in
centre-based services, and shortcomings in pre-school curricula.

Ireland has made some progress in
tackling the low work intensity of households. The
authorities have begun to address inactivity traps by altering the operation of
some welfare entitlements. The family income supplement, a weekly tax-free
top-up payment for employees on low pay with children, is now payable for a
continuous 52 weeks for eligible claimants regardless of a change in
circumstances, such as an increase in weekly earnings. Previously the payment
was discontinued as soon as a claimant moved above the upper limit. The
authorities are also in the process of reforming welfare entitlements for
housing and piloting a housing assistance payment to replace the rent
supplement. This change should address the ‘cliff edge’ effect for rent
supplement claimants who lose their entitlement as soon as they become employed
for over 30 hours a week.

In a move to address child poverty,
Ireland focused on fiscal measures. Budget 2015
announced a EUR 5 increase in child benefit which brings the rate to
EUR 135 per month per child. A further increase of EUR 5 is envisaged
in 2016. This represents a strengthening of child benefit as it was previously
decreased from EUR 166 to EUR 130. A universal payment, it is not
means-dependent. The increase will affect approximately 1.17 million children.
The question remains on the prioritisation of spending with no actual progress
in investment in more universal early childhood education and care services. In
addition, the 2013–16 Area-based Childhood Programme targets investments to
improve parental wellbeing, education and child health. It also targets
development outcomes for children and families living in disadvantaged areas. The
authorities are currently evaluating the initial phase of the programme’s
implementation.

Limited progress has been made in
relation to improving access to more affordable and full-time childcare,
particularly for low-income families. Budget 2015
announced the introduction of the back to work family dividend to address
childcare and other costs associated with returning to work, such as transport.
The dividend will allow families to retain the full qualified child increase of
EUR 29.8 a week per child for the first 12 months after returning to work
and 50 % of the payment in the second year. The impact of this initiative
is likely to be limited because the cost of full-time childcare ranges from
EUR 210 a week for an infant to EUR 53 a week for a primary school
age child.

The Department of Children and Youth
Affairs estimates that approximately 100 000 children benefit from support
under a range of available childcare programmes.
The Early Childhood Care and Education Scheme was announced in 2010, introducing
the free pre-school year which provides 15 hours a week of childcare for 38
weeks a year. There is no progress in extending the daily coverage of this
provision and no further steps have been taken to introduce a second free year
which the authorities have committed to introducing by 2020. The community
childcare subvention for low-income families offers support for recipients of
social welfare payments and some participants in employment schemes. The
training and employment childcare programmes, the umbrella for all childcare
education and training support funding schemes, offer only a few thousand
subsidised places.

The scattered provisions for childcare
support are complicated and difficult to navigate.
The shortcomings of current provisions relate mainly to a combination of low
payment rates for childcare providers, limited knowledge of the scheme and
practical obstacles to accessing after-school care (geographical or
administrative). In an attempt to increase the quality of services, a new
National Quality Support Service will commence in 2015 with a limited budget
and small staff. No budget was allocated to up-skill childcare staff beyond
minimum qualifications. Childcare programmes generally fail to have a
significant impact on increasing access to affordable and quality childcare,
particularly for low-income families. The recently set up inter-departmental
group on childcare might be seen as a platform to develop more comprehensive
solutions to this problem.

Commitments || Summary assessment ([75])

2014 Country-specific recommendations (CSRs)

CSR 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. Ensure the binding nature of the government expenditure ceiling including 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. || Ireland has made some progress in addressing CSR 1 (this overall evaluation excludes an assessment of compliance with the Stability and Growth Pact): · No progress: no changes have been made to the legal framework for expenditure ceilings. · Some progress: starting in 2015 for new companies, and following a transition period until the end of 2020 for established ones, companies registered in Ireland will be treated as resident for tax purposes regardless of ownership structure, thereby scheduling an end to the ʽdouble Irishʼ system and potentially broadening the tax base. No other measures have been taken to broaden the tax base, and little has been done to enhance the growth and environmental friendliness of the tax system.

CSR 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 by the end of the first quarter of 2015 at the latest. || Ireland has made some progress in addressing CSR 2: · Some progress: the Health (Pricing and Supply of Medical Goods) Act 2013 provided for the establishment of  a system of internal reference pricing, with internal reference pricing now established for 36 molecules.  Generics penetration increased to around 70% in volume by Q3-2014. The mid-term review of the framework agreement with the Irish Pharmaceutical Healthcare Association (IPHA) on the supply terms, conditions and prices of medicines has begun but not finished. The authorities are asking for a widening of the reference basket, alignment to the lowest price instead of the average price, and more frequent realignments. The outcome of the review is not yet known. The rules on pricing realignment for patented medicines have not been changed. · Some progress: an activity-based funding model for budget allocations in statutory hospitals has been introduced on a shadow basis, but a full switch to activity-based funding will take some years to complete. · Some progress: the timeline for the roll-out of the first phase of individual health identifiers has been delayed, but the Health Identifiers Act 2014 was enacted in July 2014 and the Chief Information Officer in charge of leading the work has been recruited. The first phase of deliverables is being supported by budget planning.

CSR 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 ongoing 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. || Ireland has made some progress in addressing CSR 3: · Some progress: a new version of Pathways to Work, the strategy setting out Irelandʼs reform of activation and training services, was published in October 2014. It sets out new actions to be implemented in the coming year as well as quantitative targets, with a greater emphasis on long-term and youth unemployment. Pathways to Work 2015 specifies new measures for implementating the Youth Guarantee. There was some delay in setting up the JobPath initiative, but it is going ahead and the contracts with the two providers have now been signed. When fully implemented, it will enable a large number of long-term unemployed to benefit from activation services provided by private contractors. · Some progress: all training centres under the management of SOLAS have been consolidated under their respective Education and Training Boards, and SOLAS recently published its three-year corporate strategy and a five-year strategy for developing and delivering an integrated further education and training sector. · Some progress: there are about 550 case officers dealing with jobseekers in Intreo offices. There are 44 Intreo offices now open, but there have been some delays in opening the remaining 16. · Some progress: protocols have been put in place between Education and Training Boards and Intreo offices.

CSR 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. || Ireland has made limited progress in addressing CSR 4: · Limited progress: Budget 2015 announced that Child Benefit payments will increase by EUR 5 a month throughout 2015. This is not likely to have a significant impact as an individual measure but may help matters as part of a series of announced measures that includes: (1) reforms to the Back to Work Family Dividend; and (2) the establishment of a Low Pay Commission as an independent statutory body that will make annual recommendations to the government on the appropriate level of the minimum wage and related matters. The Housing Supplement is gradually being replaced with the Housing Assistance Payment in order to reduce the disincentive to return to work arising from housing subsidies for the unemployed. · No progress was made in improving access to more affordable and full-time childcare.

CSR 5: Advance policies for the SME sector including initiatives to address the availability of bank and non-bank financing and debt restructuring issues, while avoiding risks to public finances and financial stability. Advance initiatives to improve SMEʼs 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 Officeʼs visibility and capabilities in mediating disputes between banks and prospective SME borrowers who have been refused credit. || Ireland has made some progress in addressing CSR 5: · Some progress: the legislation to replace the National Pensions Reserve Fund (NPRF) with the Ireland Strategic Investment Fund was enacted in July 2014. The mandate of the Ireland Strategic Investment Fund is to invest on a commercial basis to support economic activity in Ireland. It will focus in part on SMEs and manage assets worth EUR 7 billion (4% of GDP). The recently established state development corporation for SMEs, the Strategic Banking Corporation of Ireland was launched in October 2014 to provide loans through existing credit institutions, with a full roll-out of products expected in the first quarter of 2015. The Strategic Banking Corporation of Ireland secured an initial amount of EUR 800 million in funds, of which EUR 550 million are guaranteed by the government. · Substantial progress: The authorities publish quarterly data on bank lending to SMEs, but no longer have a formal target-based system to monitor lending to SMEs though it is closely watched. · Some progress: Two SME funds, co-financed by the National Pensions Reserve Fund (NPRF), are lending with a growing number of projects in the pipeline. The mandate of a third NPRF fund, the Turnaround Fund, was not renewed at the end of 2014 due to the limited pool of underperforming/distressed businesses eligible as turnaround investment cases amid a continued economic recovery. The Action for Jobs 2015 announced a reconfigured Credit Guarantee Scheme and a simplified operation of the Microenterprise Loan Fund. A supporting SMEs Online Tool was launched to increase awareness among SMEs of available business supports. A communications campaign is being run to showcase the website. · Some progress: Permanent TSB has agreed to participate in the Credit Review Office process since it will begin lending to SMEs. The upper limit for referring refusals to the Credit Review Office has been increased to EUR 3 million. As the latest RedC SME Credit Demand Survey (September 2014) shows, there are still issues with the visibility and usage of non-bank schemes and of the Credit Review Office for appeals against credit refusals. Awareness and knowledge of SME funding options remains low.

CSR 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. || Ireland has made some progress in addressing CSR 6: · Full implementation: the Central Bank of Ireland continues to monitor banks' performance against the mortgage arrears restructuring targets. · Full implementation: in June 2014, the Central Bank of Ireland announced new targets for the third and fourth quarters of 2014. For the third quarter of 2014, the banks reached and even exceededed the targets, with an encouraging 91 % of solutions meeting the terms. Audits are taking place of the banksʼ mortgage arrears resolution targets Q2-2014 returns. · Substantial progress: the Central Bank of Ireland continues to assess the sustainability of the concluded restructuring arrangements through audits and on-site reviews. · No progress was made in developing guidelines for the durability of solutions. · No progress was made in publishing regular data on the banksʼ SME loan portfolios in arrears. · Limited progress: the National Asset Management Agency is ahead of schedule with EUR 18.7 billion of asset disposals at end-December 2014 (28 % of which are disposals of Irish assets), taking advantage of strong market demand. · Limited progress: the Credit Reporting Act, 2013 came into force in January 2014. Work on the central credit register has been well underway since January 2014, but the current timeline envisages some delay with the register being operational in late 2016 for consumer credit, and subsequently for commercial credit.

CSR 7: Reduce the cost of legal proceedings and services and foster competition, including by adopting 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 enhance the monitoring and evaluation of the efficiency of judicial proceedings to identify issues in need of reform. || Ireland has made limited progress in addressing CSR 7: · Limited progress: the authorities have indicated that the Legal Services Regulation Bill should pass Dáil Report Stage in early 2015 and proceed to the Seanad soon after that. Progress towards enactment therefore continues to be slow. Indications were initially that the Bill would proceed to Report Stage (the final stage in the Dáil l before being sent to the Seanad) before the summer recess, but this did not happen. Recurrent long delays have been experienced in the past and seem to be happening again after some acceleration in the process in early 2014. · No progress: the Bill will not include a provision to remove the solicitorʼs lien. · No progress: the Bill needs to be enacted first and it will take time before its impact can be assessed. · Limited progress: Budget 2015 allocated EUR 500 000 towards setting up the Legal Services Regulatory Authority. · Some progress: the authorities have taken measures to improve systems to collect data collection on judicial proceedings. The implementation of these measures remains to be completed for some courts and areas of the justice system.

Europe 2020 (national targets and progress)

Employment rate target: between 69 % and 71 % || The employment rate (Eurostat definition, age group 20-64) increased to 67.5 % in Q3 2014 compared with an average of 63.7 % in 2011–12. Concurrently, the unemployment rate (Eurostat definition, age group 20-64) is on a firm declining trend, falling to 11.1 % in Q3 2014 compared with an average of 14.4 % in 2011–12.

R&D investment target:  2.0 % of GDP || Ireland has set itself a national R&D intensity target for 2020 of 2.0 % of GDP. It has made very significant progress towards reaching this target. Investment in R&D grew steadily until the financial crisis. Between 2002 and 2013 R&D intensity increased from 1.1 % in 2002 to 1.28 % in 2007 and 1.74 % in 2013. The first increase reflects considerable real growth of the volume of investment as this came at a time of strong economic growth, while the latter increase in R&D intensity reflects the economic contraction. Public sector R&D intensity in 2013 was 0.44 % and business R&D intensity 1.2 %. While Ireland has maintained public spending on research at 2010 nominal levels, this constitutes a decrease in real terms. Business expenditure on R&D, which has been evolving more favourably than public expenditures in recent years, has been supported indirectly by an R&D tax credit scheme which has seen a large uptake.

Reduction of greenhouse gas (GHG) emissions in sectors that are not covered by the Emission Trading System by 20 % compared to 2005 levels. || Non-Emission Trading System greenhouse gas emissions decreased by 12 % between 2005 and 2013. According to the latest national projections submitted to the European Commission that take existing measures into account, it is expected that Ireland will miss the target, with 2020 emissions expected to be 2 % lower than 2005 emissions (i.e. a projected shortfall of 18 percentage points).

Renewable energy target: 16 % proportion of renewable energy in total gross energy consumption in 2020. || The proportion of renewable energy was 7.2 % in 2012. Although this is in line with the linear trajectory up to 2020, the existing policy, market and budget framework appears to be insufficient to enable Ireland to gradually achieve the 2020 objective.

Energy efficiency target || The second national Irish energy efficiency action plan aims to achieve 20 % energy savings in 2020 (as compared to 2005). The European Commissionʼs reference scenario projects a 1 % decrease in gross primary energy consumption in 2030 compared to 2005.

Early school leaving target: 8 % || The early-school-leaving rate was 11.5 % in 2010, 10.8 % in 2011, 9.7 % in 2012 and 8.4 % in 2013. There has been a consistent positive trend in recent years, with Ireland performing better than the EU-28 average (8.4 % and 11.9 % respectively in 2013). It is on track to reach the target of 8 %.

Tertiary education attainment target: 60 % || The tertiary education attainment rate was 50.1 % in 2010, 49.7 % in 2011, 51.1 % in 2012 and 52.6 % in 2013. With the exception of 2011, it has been consistently increasing and Ireland currently has the highest tertiary education attainment rate in the EU. Further participation in tertiary education can be sought by improving access for students from disadvantaged backgrounds and addressing the gender imbalance (57.9 % of women against 44 % of men in 2012).

To reduce the number experiencing consistent poverty to 4 % by 2016 (interim target) and to 2 % or less by 2020, from the 2010 baseline rate of 6.2 %, which will lift at least 200 000 people out of the risk of poverty and exclusion between 2012 and 2020 (revised target). || The number of people at risk of poverty or social exclusion increased from a pre-crisis level of 1.05 million in 2008 to 1.36 million in 2013. Achieving the national target remains ambitious.

Table AB.1:     Macroeconomic indicators

(1) The output gap constitutes the gap between the actual and potential gross domestic product at 2010 market prices.          (2) The indicator of domestic demand includes stocks.         (3) Unemployed persons are all those who were not employed, had actively sought work and were ready to begin working immediately or within two weeks. The labour force is the total number of people employed and unemployed. The unemployment rate covers the age group 15-74.         Source: European Commission 2015 winter forecast, Commission calculations.

Table AB.2:     Financial market indicators

(1) Latest data November 2014. (2) Latest data Q4 2013. Basel II. (3) Latest data September 2014.      (4) Latest data June 2014.  Monetary authorities, monetary and financial institutions are not included.      (\*) Measured in basis points. Source: IMF (financial soundness indicators); European Commission (long-term interest rates); World Bank (gross external debt); ECB (all other indicators).

Table AB.3:     Taxation indicators

(1) Tax revenues are broken down by economic function, i.e. according to whether taxes are raised on consumption, labour or capital. See European Commission (2014), 'Taxation trends in the European Union', for a more detailed explanation.      (2) This category comprises taxes on energy, transport and pollution and resources included in taxes on consumption and capital.      (3) VAT efficiency is measured via the VAT revenue ratio. It is defined as the ratio between the actual VAT revenue collected and the revenue that would be raised if VAT was applied at the standard rate to all final (domestic) consumption expenditures, which is an imperfect measure of the theoretical pure VAT base. A low ratio can indicate a reduction of the tax base due to large exemptions or the application of reduced rates to a wide range of goods and services (‘policy gap’) or a failure to collect all tax due to e.g. fraud (‘collection gap’). It should be noted that the relative scale of cross-border shopping (including trade in financial services) compared to domestic consumption also influences the value of the ratio, notably for smaller economies. For a more detailed discussion, see European Commission (2012), 'Tax Reforms in EU Member States', and OECD (2014), 'Consumption tax trends'. Source: European Commission.

Table AB.4:     Labour market and social indicators

(1) Unemployed persons are all those who were not employed, but had actively sought work and were ready to begin working immediately or within two weeks. The labour force is the total number of people employed and unemployed. Data on the unemployment rate of 2014 includes the last release by Eurostat in early February 2015.       (2) Long-term unemployed are persons who have been unemployed for at least 12 months. Source: European Commission (EU Labour Force Survey and European National Accounts).

Table AB.5:     Expenditure on social protection benefits (% of GDP)

(1) People at risk of poverty or social exclusion (AROPE): individuals who are at risk of poverty (AROP) and/or suffering from severe material deprivation (SMD) and/or living in households with zero or very low work intensity (LWI).      (2) At-risk-of-poverty rate (AROP): proportion of people with an equivalised disposable income below 60 % of the national equivalised median income.       (3) Proportion of people who experience at least four of the following forms of deprivation: not being able to afford to i) pay their rent or utility bills, ii) keep their home adequately warm, iii) face unexpected expenses, iv) eat meat, fish or a protein equivalent every second day, v) enjoy a week of holiday away from home once a year, vi) have a car, vii) have a washing machine, viii) have a colour TV, or ix) have a telephone.      (4) People living in households with very low work intensity: proportion of people aged 0-59 living in households where the adults (excluding dependent children) worked less than 20 % of their total work-time potential in the previous 12 months.      (5) For EE, CY, MT, SI and SK, thresholds in nominal values in euros; harmonised index of consumer prices (HICP) = 100 in 2006 (2007 survey refers to 2006 incomes).     (6) 2014 data refer to the average of the first three quarters. Source: For expenditure for social protection benefits ESSPROS; for social inclusion EU-SILC.

Table AB.6:     Product market performance and policy indicators

(1) Labour productivity is defined as gross value added (in constant prices) divided by the number of persons employed.       (2) Patent data refer to applications to the European Patent Office (EPO). They are counted according to the year in which they were filed at the EPO. They are broken down according to the inventor’s place of residence, using fractional counting if multiple inventors or IPC classes are provided to avoid double counting.        (3) The methodologies, including the assumptions, for this indicator are presented in detail here: http://www.doingbusiness.org/methodology.        (4) Index: 0 = not regulated; 6 = most regulated. The methodologies of the OECD product market regulation indicators are presented in detail here: http://www.oecd.org/competition/reform/indicatorsofproductmarketregulationhomepage.htm       (5) Aggregate OECD indicators of regulation in energy, transport and communications (ETCR). Source: European Commission; World Bank - Doing Business (for enforcing contracts and time to start a business); OECD (for the product market regulation indicators)

Table AB.7:     Green Growth

Country-specific notes:         2013 is not included in the table due to lack of data.        General explanation of the table items:        All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2000 prices)                  Energy intensity: gross inland energy consumption (in kgoe) divided by GDP (in EUR)                  Carbon intensity: Greenhouse gas emissions (in kg CO2 equivalents) divided by GDP (in EUR)                  Resource intensity: Domestic material consumption (in kg) divided by GDP (in EUR)                  Waste intensity: waste (in kg) divided by GDP (in EUR)        Energy balance of trade: the balance of energy exports and imports, expressed as % of GDP          Energy weight in HICP: the proportion of "energy" items in the consumption basket used for the construction of the HICP        Difference between energy price change and inflation: energy component of HICP, and total HICP inflation (annual % change)        Environmental taxes over labour or total taxes: from DG TAXUD’s database ‘Taxation trends in the European Union’        Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (in 2005 EUR)         Share of energy-intensive industries in the economy: share of gross value added of the energy-intensive industries in GDP        Electricity and gas prices for medium-sized industrial users: consumption band 500–2000MWh and 10000–100000 GJ; figures excl. VAT.        Recycling rate of municipal waste: ratio of recycled municipal waste to total municipal waste        Public R&D for energy or for the environment: government spending on R&D (GBAORD) for these categories as % of GDP        "Proportion of GHG emissions covered by ETS: based on greenhouse gas emissions (excl LULUCF) as reported by Member States to the European Environment Agency "        Transport energy intensity: final energy consumption of transport activity (kgoe) divided by transport industry gross value added (in 2005 EUR)        Transport carbon intensity: greenhouse gas emissions in transport activity divided by gross value added of the transport sector        Energy import dependency: net energy imports divided by gross inland energy consumption incl. consumption of international bunker fuels        Diversification of oil import sources: Herfindahl index (HHI), calculated as the sum of the squared market shares of countries of origin        Diversification of the energy mix: Herfindahl index over natural gas, total petrol products, nuclear heat, renewable energies and solid fuels        Renewable energy share of energy mix: %-share of gross inland energy consumption, expressed in tonne oil equivalents \* European Commission and European Environment Agency    \*\* For 2007 average of S1 & S2 for DE, HR, LU, NL, FI, SE & UK. Other countries only have S2.    \*\*\* For 2007 average of S1 & S2 for HR, IT, NL, FI, SE & UK. Other countries only have S2. Source: European Commission unless indicated otherwise; European Commission elaborations indicated below

([1])  Contracted production refers to goods
produced abroad on behalf of an entity resident in Ireland. The sale of goods
is recorded as an Irish export and production inputs as Irish imports, under
the European System of Accounts 2010.

([2])  European
Commission 2015 Winter Forecast.

([3])  This based on a combination of methods using
in-house work on debt sustainability and an IMF analysis of historical debt
boom/bust episodes. Source: 'Private sector deleveraging: where do we stand?', Quarterly
report on the euro area, October 2014,Vol 13 (2014), Issue 3.

([4])  Source: Eurostat. In 2013, the
consolidated non-financial corporation debt-to-GDP ratio was 173.6 %. The
non-consolidated ratio was 199.9 % .

([5])  Since there are no comparable aggregate
data on cross-border inter-company lending, an estimate is constructed using
sector financial accounts. It is based on the assumption that most consolidated
loans held by

       Non-financial corporations are
likely to be related to cross-border lending, the counterparts most likely
foreign

       corporates (by virtue of the
same assumption as for    domestic entities).

([6])  Due to the limited availability of
aggregate data on non-financial assets, the denominator (total liabilities) is
used as a proxy for the total market value of assets in line with accounting
principles.

([7])  McCann, F. and McIndoe-Calder, T.: 'Property
debt overhang: the case of Irish SMEs', Research technical paper, Central Bank
of Ireland, 2014.

([8])  Duffy, D., Byrne, D. and Fitzgerald,
J., 'Alternative scenarios for new household formation in Ireland', Special
Article in Quarterly Economic Commentary, Spring 2014, The Economic and Social
Research Institute https://www.esri.ie/UserFiles/publications/QEC2014SPR\_SA\_Duffy.pdf

([9])  These are investment companies that
hold rental properties. Their appeal lies in the fact that the income or gains
from the trustʼs property rental business are not subject to Irish
corporation tax.

([10]) The Irish Bank Resolution Corporation
(IBRC) was set up in July 2011 to merge and eventually wind down the former
Anglo Irish Bank and the Irish Nationwide Building Society. The Irish
government owns it. With the transition to ESA 2010 accounting rules it was
reclassified as part of the general government sector. This reclassification
added EUR 12.6 billion to government debt at the end of 2013.

([11]) Data for the end of December take into
account the repayment of EUR 9 billion of IMF loans, but do not yet reflect the
extension of the European Financial Stabilisation Mechanism loan maturities
(see Graph 3.1.9). Including
the European Financial Stabilisation Mechanism loan maturity extension, the
average maturity of long-term debt is estimated to be around 13 years.

([12]) For more information on the
Commission's methodology, see
http://ec.europa.eu/economy\_finance/publications/occasional\_paper/2014/pdf/ocp200\_en.pdf.

([13]) The SGP scenario assumes that for
countries under excessive deficit procedure such as Ireland, a structural
adjustment path in compliance with the fiscal effort recommended by the Council
is maintained until the excessive deficit is corrected, and thereafter an
annual structural consolidation effort of 0.5 percentage point of GDP or 0.6
percentage point if public debt exceeds 60 % of GDP is maintained until
the medium-term objective is reached. The effort of 0.6 percentage point is
used for illustrative purposes and does not prejudge the actual effort in
excess of the 0.5 percentage point benchmark that will be required until the medium-term
objective is achieved.

([14]) The 2015 Commission Ageing Report
(underlying assumptions and projection methodologies) projects the old-age
dependency ratio to increase to 27 % in 2025 from 19 % in 2013.

([15]) As a result of the pension reforms, the
qualifying age for state pensions increased to 66 in 2014. It will increase to
67 in 2021 and then to 68 in 2028 (for more information on the new Single
Public Service Pension Scheme, see the Department of Public Expenditure and
Reform's web page: http://www.per.gov.ie/pensions/).
The 2013 public service wage agreement included pension cuts for annual
pensions above EUR 32,500 for new retirees from 31 August 2014.

([16]) Tracker mortgages are low-yielding
legacy loans where the interest rate is set at a low fixed margin above
European Central Bank or Bank of England policy rates.

([17]) Permanent TSB
still conservatively assumes 55 % peak-to-trough house price decline in
its mortgage provision models versus an actual decline of about 41 %.

([18]) In Ireland, this involves a phasing out
of the counting of deferred tax assets towards common equity tier 1 capital by
10 % annually from 2015 until end 2023 for Allied Irish Banks and Bank of
Ireland (Permanent TSB also recognised EUR 414 million of deferred tax assets
in 2013). Pursuant to the Capital Requirement Regulation, preference shares
subscribed by the government will no longer count as regulatory capital own
funds, after 1 January 2018.

([19]) For principal dwelling housing, new
loans above a  loan-to-value ratio of 80 % will be limited to 15 %
of the value of the flow of new housing loans in the year, and a cap of 20 %
will apply for new loans above 3.5 times the borrower’s income. First time
buyers may be granted up to 90 % loan-to-value financing on the first EUR
220 000 of any mortgage, although the bank will still need to comply with
the general loan-to-value limit. For buy-to-let purchases, the value of loans
issued above 70 % loan-to-value will be limited to 10 % of the
total value of new lending.

([20]) It is, however, important to note that
the bulk of banks’ distressed commercial real estate exposures built-up in the
run up to the crisis have been addressed through transfers to the National Asset
Management Agency that is ahead of targets for their work-out, and the special
liquidation of the Irish Bank Resolution Corporation which resulted in sizeable
disposals of commercial real estate loans to private buyers.

([21]) Given different practices of portfolio
segmentation by banks, it is challenging to assess whether residual commercial
real estate exposures on banks’ balance sheets that do not have SME/corporate
debtor connections are in fact subject to central bank restructuring targets.

([22]) In particular, the proportion of people
working in the export-oriented sectors should reach an upper limit at some
point, as rising income and demand from workers operating in the export sector
should fuel demand for non-tradables.

([23]) Production of computers by
multinational companies represented a large share of as recently as the early
2000s, but has now dropped to near-insignificance.

([24]) Everett (2012) and Fitzgerald (2013)
first analysed the issue of re-domiciled public limited companiess and their
impact on the current account. It is also discussed in the 2014 in-depth review
of Ireland.

([25]) Key activities in the International
Financial Services Centre include fund and asset management, banking,
insurance, aircraft leasing, securitisation, and corporate treasury.

([26]) TARGET2 is the real-time gross
settlement system owned and operated by the Eurosystem. See ECB website.

([27]) Portfolio investments represented 67.7%
of total external assets and 73.5% of total external liabilities as of Q3 2014.
Direct investment assets and liabilities are marginal among International
Financial Services Centre companies.

([28]) 2012: 46 %, 2013: 48.45 %. In
total this cohort comprises 7.8 % of the 15-24 year old population. This
group is defined as individuals who are not in employment, education or
training and are not active in the labour force.

([29]) Eurostat 2013: 2008:
26.6 % (EU28: 26.2 %), 2013: 46.6 % (EU28: 31.9 %).

([30]) Eurostat, Survey on ICT usage
and eCommerce.

([31]) Smyth, E. (1999) ‘Educational
inequalities among school leavers in Ireland 1979–1994’ in The Economic and
Social Review 30; McCoy, S., Byrne, D., O’Connell, P., Kelly, E. and Doherty,
C. (2010a), ‘Hidden disadvantage? A Study on the Low Participation in Higher
Education by the Non-manual Group’, Dublin Higher Education Authority;
O’Connell, P.J., Clancy, D. and McCoy, S. (2006) ‘Who went to college?
Socio-economic inequality in entry to higher education in the Republic of
Ireland in 2004’ in Higher Education Quarterly 60; McCoy, S. and Smyth, E.
(2011), ‘Higher education expansion and differentiation in the Republic of
Ireland’ in Higher Education 61; Cullinan, J., Flannery, D., Walsh, S., McCoy,
S. (2013), ‘Distance effects, social class and the decision to participate in
higher education in Ireland’ in The Economic and Social Review 44.

([32]) O’Connell, P., McGuinness, S. and
Kelly, E., ‘A Statistical Profiling Model of Long-term Unemployment Risk in
Ireland’, The Economic & Social Review, 2012 Vol. 43(1) pp. 135-164.

([33]) Indecon (2013), ‘Indecon’s Evaluation
of Jobbridge’
http://www.welfare.ie/en/downloads/indecon-report-on-evaluation-of-jobbridge.pdf;
McGuinness, S., O’Connell, P. & Kelly, E. (2014), ‘One Dummy Won’t Get it:
The Impact of Training Programme Type and Duration on the Employment Chances of
the Unemployed in Ireland’, Economic and Social Review, 2014, Vol. 545(3), pp.
425-450.

([34]) Given Irelandʼs economic structure
and the large negative net factor income flows generated by multinational
companies, the share of expenditure in terms of gross national income is a more
appropriate benchmark than the GDP share. If GDP is used, healthcare
expenditure represents a share of 7.1 %. This is below the EU average of
7.3 % and places Ireland 11th instead of 3rd in the
ranking.

([35]) See for instance Burke et al (2014), http://www.healthpolicyjrnl.com/article/S0168-8510(14)00166-3/fulltext

([36]) As indicated in the e-health Strategy
for Ireland (2013), e-health ʽinvolves the integration of all information
and knowledge sources involved in the delivery of healthcare via information
technology-based systems. This includes patients and their records, caregivers
and their systems, monitoring devices and sensors, management and
administrative functions.ʼ

([37]) 58 % of SMEs surveyed expressed the
belief that the business climate in Ireland would improve in the next six
months.

([38]) ECB/EC Survey of Access to Finance of
Small and Medium-sized Enterprises (SAFE), Irish responses, October 2014; http://www.centralbank.ie/mpolbo/mpolicy/Documents/Comment%20on%20Irish%20Results%20October%202014.pdf.

([39]) The RedC Survey puts the rejection rate
at 14 % for the period between March and September 2014, while the SAFE survey
puts it at 10.4 % for the period between April and September 2014. The Irish
Small and Medium Entrerprises Association Quarterly Bank Watch survey refers to
the fourth quarter of 2014.

([40]) Investment Plan for Europe, http://ec.europa.eu/priorities/jobs-growth-investment/plan/.

([41]) Green paper: Building a Capital
Markets Union, http://ec.europa.eu/finance/consultations/2015/capital-markets-union/docs/green-paper\_en.pdf

([42]) Microfinance Ireland Progress Report Q3
2014, http://www.djei.ie/enterprise/smes/MicrofinanceIrelandProgressReportQ32014.pdf.

([43]) A 25 % tax credit for qualifying research
and development expenditure is available for companies carrying out qualifying
research and development undertaken within the European Economic Area.

([44]) The Employment and Investment Incentive
is a tax incentive (deduction) to encourage investment in businesses. It
applies to investments in new ordinary share capital in the majority of small
and medium sized trading companies, with the exception of certain sectors. It
can be used for investments in companies that are not listed on the official
list of a stock exchange or on an unlisted securities market of a stock
exchange. http://www.revenue.ie/en/tax/it/leaflets/it55.html.

([45]) Under Irish law, examinership
allows a company that is experiencing financial difficulties a period of
protection from creditor action during which a third party (the examiner) has
an opportunity to study the affairs of the company and, if there is a prospect
for the continuation of the company, to draw up a plan for its continuation. Before the legislative change which allocated
competence to the Circuit Court, a High Court procedure was necessary which
entailed higher legal costs.

([46]) Consultation on civil service
accountability and performance, Irish Business and Employers Confederation
(IBEC) submission, March 2014.

([47]) 2013/2014 European Commission Annual
Report on European SMEs, http://ec.europa.eu/enterprise/policies/sme/facts-figures-analysis/performance-review/files/supporting-documents/2014/annual-report-smes-2014\_en.pdf

([48]) 2013/2014 European Commission Annual
Report on European SMEs.

([49]) The tax burden as a percentage of gross
national income (GNI) might be a more appropriate benchmark in the case of
Ireland given the large presence of multinational companies and their share of
gross value added in the economy. In 2014, the tax-to-GNI ratio was at
43.1 % in Ireland, compared with 48.2% on average in the EU.

([50]) Budget 2015 increases the band at which
the standard-rate income tax rate applies by EUR 1,000 (from
EUR 32,800 to EUR 33,800 for single individuals and from
EUR 41,800 to EUR 42,800 for married one earner couples). At the same
time, the top marginal income tax rate is cut from 41 % to 40 %.
Changes to the Universal Social Charge also apply as of 2015. In particular,
the exemption threshold is increased to EUR 12,012. Contribution rates are
reduced for low-income earners, while at the same time an increased rate of
8 % applies to high-income earners (above EUR 70,044). These changes
are designed to support employment and job creation and make the system more
progressive.

([51]) VAT revenues amounted to 6.2 % of
GDP in 2012, which is the fourth lowest level in the EU.

([52]) The reduced rate of 9% in the tourism
sector (temporarily introduced until December 2014) has been further prolonged
with Budget 2015. A 13.5 % reduced rate applies to various services,
newspapers, building works and household energy and fuels, whereas other goods
and services, such as children clothes and transport, are zero-rated. Reduced
rates and exemptions not only lead to revenue losses, but are considered a poor
instrument of redistribution, since they are not targeted to specific
categories of recipients.

([53]) See for example: OECD (2010). Tax
policy reform and economic growth (No. 20). OECD Tax Policy Studies. OECD
Publishing; or OECD (2013), Tax Administration 2013, Comparative information on
OECD and other advanced and emerging economies. OECD Publishing.

([54]) See, for example, Arnold, J.M., B.
Brys, C. Heady, A. Johansson, C. Schwellnus and L. Vartia (2011), ‘Tax Policy
for Economic Recovery and Growth’, Economic Journal, 121 (550), F59-F80.

([55]) A Local Property Tax – as from July
2013 – replaced the flat non-principal private residence charge (as from 2014)
and the household charge. The Local Property Tax is based on a system of
valuation bands, and is charged at a rate of 0.18 % for properties valued
below € 1 million, and 0.25% on the excess value. Thus, it clearly increases
the fairness of the property tax system compared to the repealed charges.

([56]) The ʽlocal factor adjustmentʼ
allows local authorities to vary the basic local property tax rate on residential
properties in their administrative area (the basic rates of local property tax
are 0.18 % and 0.25 %). These rates can be increased or decreased by
up to 15 % (both rates must be adjusted by the same amount). Fourteen
local authorities have reduced the local property tax rate for 2015. The
reductions range from 1.5 % to 15 %. The Irish Revenue authority
estimates a negative impact of the variations on local property tax of EUR 45
million approximately.

([57]) Eunomia Research & Consulting with
Aarhus University and IEEP, Study on Environmental Fiscal Reform Potential in
14 EU Member States, Draft final report 22.10.14

([58]) Subsidising peat extraction for
electricity generation results in substantial inefficiencies, as it is
significantly less costly to finance electricity from renewable sources than
generating the same amount of electricity from peat.

([59]) The circular does not in practice
restrain the government from making discretionary changes to the ceilings. Transparency
could be improved by justifying in more detail the rationale behind
adjustments. This could still allow for flexibility within the binding
overarching constraint of the expenditure benchmark, considering for instance
changes to the projections underlying the budgetary targets.

([60]) The ʽsolicitor's lienʼ is the
practice whereby a solicitor may retain possession of a clientʼs file
pending receipt of payment, frustrating attempts by a client to switch
solicitors. The practice was found to be anticompetitive in the Competition
Authorityʼs 2006 report.

([61]) The process should be split between a
six-month research phase and a six-month consultation period.

([62]) The clearance rate for civil and
commercial cases at second instance courts in 2013 was 88.7%. See Study of the
European Commission for the Efficiency of Justice (CEPEJ) prepared in view of
the 2015 EU Justice Scoreboard (to be published in early March)

([63]) The Courts and Civil Law (Miscellaneous
Provisions) Act 2013 extends the jurisdiction of the Circuit Court to
EUR 75 000 and of the District Court to EUR 15 000. In
regard to personal injury actions, the revised monetary jurisdiction limit of
the Circuit Court will be EUR 60 000.

([64]) The Draft General Scheme of Mediation
Bill was published in 2012. The publication of the Bill has been delayed
several times.

([65]) So far, and until water charges for
domestic users were introduced, costs have been covered through general
taxation, with transfers from the central government to the local authorities.
Such transfers will continue in the foreseeable future because charges will not
fully cover Irish Waterʼs costs.

([66]) The investment shortfall was explained
in the Irish
Water: Phase 1 Report drawn up in 2011 to plan the reform programme.

([67]) Environmental Protection Agency (2014).
Focus
on Urban Waste Water Treatment 2013.

([68]) The Dublin City Development Plan 2011–2017
indicates that the cityʼs water supply is currently operating at capacity,
frustrating efforts to plan further residential developments. Irish
Waterʼs Draft Water
Services Strategic Plan published in February 2015 also raises the same
issue.

([69]) As regards the five main drivers of the
digital economy, Ireland ranks 18th among Member States on
connectivity, 7th on human capital, 17th as regards the
use of internet, 3rd in integration of digital technologies by
business and 9th in digital public services.

([70]) The 2012 European Union statistics on
Income and Living Conditions indicates a rate of 23.4 % for low work
intensity households in Ireland. Irish authorities have conducted further
research into the measurement and there is a disparity when comparing EU
Statistics on Income and Living Conditions data and Labour Force Survey data.
The latter indicates a rate of closer to 17 % in Ireland and this would still
be the second highest rate of very low work intensity households in the EU in
2012. While differences between the two surveys are common across EU member
states, the magnitude is much larger in Ireland. The issue will be studied
further in order to diminish divergences between the indicators.

([71]) Jobless Households: An Exploration
of the Issues, No. 137 June 2014, National Economic and Social Council
(NESC).

([72]) According to the 2011 census, 25.8 %
of all families with children in Ireland are one-parent families, with 86.5 %
of them headed by a woman.

([73]) ‘Economic Policy Reforms: Going for
Growth’ http://www.oecd.org/inclusive-growth/Economic%20Policy%20Reforms%202013%20Going%20for%20Growth.pdf.
See chapter 4, structural policy indicators, Chart 4.9.

([74]) Hanafin, S. (2014), Report on the
Quality of Pre-school Services: Analysis of pre-school inspection reports.
Dublin: Tusla, Child and Family Agency; Start Strong (2014) ‘Childcare:
Business or Profession’; Neylon, G. (2014) ‘An analysis of Irish pre-school
practice and pedagogy using the early childhood environmental four curricular
subscales’, in Irish Educational Studies, Vol.33, No. 1.

([75]) The following categories are used to
assess progress in implementing the 2014 CSRs of the Council Recommendation:

No progress: The Member State has
neither announced nor adopted any measures to address the CSR. This category
also applies if a Member State has commissioned a study group to evaluate
possible measures.

Limited progress: The Member State
has announced some measures to address the CSR, but these measures appear
insufficient and/or their adoption/implementation is at risk.

Some progress: The Member State has
announced or adopted measures to address the CSR. These measures are promising,
but not all of them have been implemented yet and implementation is not certain
in all cases.

Substantial progress: The Member
State has adopted measures, most of which have been implemented. These measures
go a long way in addressing the CSR.

Fully addressed: The Member State has
adopted and implemented measures that address the CSR appropriately.

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