Irish Economy
European Commission gives fail grades to Ireland on health, legal and employment reforms
By Michael Hennigan, Finfacts founder and editor
Jun 3, 2014 - 9:31 AM

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Olli Rehn, vice-president of the EC in charge of Economic and Monetary Affairs and the Euro, Algirdas Šemeta, member of the EC in charge of Taxation and Customs Union, Audit and Anti-Fraud, and László Andor, member of the EC in charge of Employment, Social Affairs and Inclusion, gave a joint press conference on the 2014 country-specific recommendations (CSR). Algirdas Šemeta, Olli Rehn and László Andor (from right to left)

The European Commission on Monday issued country specific recommendations on expected continuing reforms in 26 countries of the European Union (excluding Greece and Cyprus, which are implementing economic adjustment programmes). Ireland got fail grades on health, legal and employment reforms while tax, SME financing, mortgage arrears and the condition of the banks also got attention.

Olli Rehn, economics and euro commissioner, said Ireland has to continue with reforms while Algirdas Šemeta, tax commissioner, said Ireland needs to update its laws to tackle aggressive tax planning.

“Many reforms initiated under the programme were of a long-term and structural nature, and it was in fact never expected that the process would stop due to the completion of the [bailout] programme," Rehn said. "Therefore it’s only natural that the recommendations reflect continuity with the efforts undertaken during the programme.”

The Commission said the Government should 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."

  • The Ireland document says the tax base is still relatively narrow as certain properties remain outside of the tax net e.g. farmland, development land, and derelict site. Labour taxation is fragmented and complex; and the tax bases for consumption and environment taxes are narrowed by reduced rates and exemptions, while such taxes are more growth-friendly. Zero and reduced VAT rates result in a VAT efficiency below the EU average.
  • Even though Ireland has a relatively young population, public healthcare expenditure was among the highest in the EU in 2012 at 8.7% of GNI (gross national income), significantly above the EU average of 7.3%. Given the current difficulties in managing the health budget, expected demographic pressures due to an ageing population mean that current service levels can be maintained only if value-for-money gains are achieved over the medium to long term.
  • Lending to SMEs remains weak, reflecting a combination of subdued credit demand and supply constraints, as SMEs continue to be affected by excess leveraging and weak domestic demand while banks need to make further progress in achieving sustainable resolutions in their SME non-performing loans book.
  • Private sector indebtedness is still among the highest in the EU in spite of recent deleveraging and this remains a risk to financial stability and a burden on the economy. Household and SME deleveraging is incomplete, and bank and SME balance sheet repair are critical to restore credit channels.
  • The cost of enforcing contracts is high. Lawyer fees represent the majority of these costs, at 18.8 pp and high legal services costs affect the cost structure of all businesses, including SMEs.
  • Ireland has one of the highest proportions of people living in households with low work intensity in the EU, which generates serious social challenges. The proportion was higher than the EU average prior to the crisis and surged from 14.3% in 2007 to 24.2% in 2011. Low work intensity is particularly severe among single-parent households with children. This has contributed to a growing risk of poverty or social exclusion of children in Ireland and exacerbates the issue of the unequal labour market participation of women which stood at 67.2% in 2013, as compared with 83.4% for men.

The Commission recommends:

  • 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.
  • Pursue further improvements in active labour market policies, with a particular focus on the long-term unemployed, the low-skilled and, in line with the objectives of a youth guarantee, young people. Advance the on-going reform of the further education and training (FET) system, employment support schemes and apprenticeship programmes.
  • 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.
  • Develop further policy initiatives for the SME sector including policy initiatives to address the availability of bank and non-bank financing and debt restructuring issues. Advance initiatives to improve SME's access to bank credit and non-bank finance. Introduce a monitoring system for SME lending in the banking sector. In parallel, work to ensure that available non-bank credit facilities, including the three SME funds co-funded by the National Pensions Reserve Fund, Microfinance Ireland and the temporary loan guarantee scheme, are better utilised.
  • 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.
  • Reduce the cost of legal proceedings and services and foster competition, including by enacting the Legal Services Regulation Bill by the end of 2014, including its provision allowing the establishment of multi-disciplinary practices, and by seeking EN 8 EN 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

Ireland detail [pdf]

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