I thank the Chair and the committee for inviting us to come here. It is an honour and a pleasure to be in front of the committee for a second time. In this short presentation I would like to walk the committee through the country-specific recommendations that were adopted last week on Wednesday, 23 May. Before I do that I would like to explain the context in which these recommendations have been adopted by the Commission.
Last week the Commission adopted what we call the spring package. The spring package is part of the European semester, which is a process of economic policy co-ordination within the European Union. This package includes the country-specific recommendations, but also the assessment of the Commission concerning the national reform programme and also the assessment, in the case of Ireland as a country with the euro as its currency, of the stability programme.
The European semester starts in the autumn with the adoption of what we call the autumn package, which includes the annual growth survey, the alert mechanism report and the recommendations for the euro area. In the annual growth survey the Commission establishes the policy priorities to be implemented in the European Union. In November last year, in the annual survey, the main policy priority was to continue the efforts along the virtuous triangle which consists of boosting investment, pursuing structural reforms and ensuring responsible fiscal policies. This year, on top of this, much emphasis has been placed on the European pillar of social rights. The second document adopted by the Commission last autumn was the alert mechanism report in which we carry out a screening of the economic situation in every member state and identify the countries for which we have to carry out a more detailed analysis, what we call an in-depth review.
Last autumn Ireland was identified as one of the countries that would benefit from an in-depth review. In November the Commission adopted the recommendations for the euro area. These recommendations must be implemented and all member states in the euro area should ensure they implement them.
Once the Commission has adopted this autumn package which sets out the policy priorities and identifies the countries for which an in-depth review is necessary, the Commission services prepare the country reports. The county reports were published on 7 March 2018. They provide an assessment of the economic and social situation in the member state, including progress made in the implementation of the country-specific recommendations of the past year. The country reports also include the results of the in-depth review of the concerned countries. On the basis of the in-depth review published in the country report in March, the Commission concluded that Ireland was still experiencing macroeconomic imbalances characterised by large stocks of external private and public debt, a high number of non-performing loans and rising property prices.
On the basis of the conclusions of the country reports and taking into account the national reform programmes, which are presented by the respective member states in April, the stability programmes, which present the medium-term budgetary targets of the Government, and the national reform programme, which presents the economic policy priorities of each member state, the Commission adopts the proposal for the country-specific recommendations that we adopted last year. This is the context in which the country-specific recommendations were adopted as part of the European semester cycle of economic policy co-ordination.
This year the country-specific recommendations adopted by the Commission are framed in a context of the fastest growth pace of the European economy in a decade, with record employment, recovering investment and improved public finances. The Commission noted, however, that new risks are emerging such as volatility in global financial markets and trade protectionism. For this reason, it is important that we use without delay the current favourable conditions to make Europe's economies and societies strong and more resilient.
The Commission proposes three recommendations for Ireland, that is, three blocks of priority areas: first, budgetary policy and fiscal structural issues, including taxation and sustainability of public finances; second, infrastructure and skills; and third, measures aimed at fostering productivity growth and reducing the stock of non-performing loans.
I will explain the rationale behind the different recommendations, beginning with the first, the compliance with EU fiscal rules. In 2019, the structural balance is forecast to reach a deficit of 0.4% of GDP, thus achieving the medium-term budgetary objective of a deficit of 0.5% of GDP. For this to happen, growth of Government expenditure should remain below 5.3% in 2019. Ireland is expected to comply with these provisions, including the debt rule. The debt-to-GDP ratio has declined significantly, but it is also true that part of the decline in the debt-to-GDP ratio is due to the denominator effect. GDP in Ireland includes contract manufacturing. Members will remember that in 2015, Irish GDP grew by more than 25%. In terms of GDP, while we see that debt is declining, in nominal terms, in terms of size, Ireland's debt is still very high. This is the reason that the Commission recommends that given the current cyclical conditions and the heightened external risks, Ireland should use any windfall gains to reduce general Government debt further. The Commission is recommending that this is the prudent fiscal policy to follow. I have learned that the recent plans for a rainy day fund would set aside €8 billion over the medium term. I believe this is an important development and could provide a fiscal buffer during a future economic downturn.
I will now deal with the composition of public finances, in particular taxation. Corporate taxes as a proportion of total taxes continued to increase. Such taxes are highly concentrated among a few large multinational enterprises which are prone to high volatility. Some recent tax measures have focused on cuts and reliefs and seem to have increased further reliance on highly procyclical sources of revenue. The Commission considers that broadening the tax base could help improve revenue stability in the face of economic fluctuations. Moreover, there exists further potential to improve the way the tax system can support environmental objectives.
The long-term sustainability of public finances presents risks related to the cost of ageing, although it is true that Ireland has introduced some significant measures to increase the efficiency of public healthcare, such as a cost-saving agreement with the pharmaceutical industry, a financial management system and activity-based funding. Some measures have also been taken to improve the availability of primary health care. The Government has also introduced a wide range of reforms to contain public pension expenditure. Nevertheless, according to the most recent long-term assessment approved by the ageing working group of the economic policy committee, the cost of ageing represents a medium fiscal sustainability risk for Ireland over the long term. On this basis, the Commission believes there is a need to increase the cost-effectiveness of the healthcare system and to pursue the envisaged pension reforms.
I will now address the second recommendation. The Commission found in the country report that barriers to inclusive growth remain in the form of skills mismatches and skills shortages.
The country report also found there was insufficient access to affordable and quality childcare.
Although unemployment fell to 6.7 % in 2017, certain groups are still largely detached from the labour market and socially excluded. In addition, years of reduced Government investment are taking their toll on the availability of housing and appropriate clean energy, transport and water infrastructure. In housing markets, persistent supply shortages, coupled with increasing demand, continue to fuel property price increases.
The Commission concludes that addressing emerging infrastructure bottlenecks is essential for sustainable and balanced growth in the future. It therefore recommends that Ireland improve the skills of the adult population and effectively implement in a timely way the relevant parts of the national development plan, including infrastructure and childcare.
The Commission finds that the productivity of domestic companies is lower, or growing at a slower pace, in comparison with the multinationals operating in Ireland. Given the current favourable economic conditions but also keeping in mind the existing risks and uncertainties, the Commission's third recommendation is that Ireland stimulate research and innovation with a view to enhancing the resilience of the domestic sectors.
Although Ireland continued to make progress in reducing non-performing loans, their ratio-to-total gross loans remains among the highest in the EU. Particularly worrying are long-term mortgage arrears, which are those in arrears for over two years. These represent 60% of the total mortgages in arrears in 2017. Reducing the long-term arrears could improve the resilience of the Irish banking sector and help to address the problem of debt overhang, which reduces the incentives for SMEs to put credit to more productive uses. On this basis, and as part of the same third recommendation, the Commission recommends promoting a faster and durable reduction of long-term mortgage arrears through promoting write-offs while protecting consumer rights.
In sum, the Commission proposes a comprehensive package to underpin the sustainability of public finances, foster productivity and enhance the resilience of Ireland's economy to external shocks, to which Ireland, like any other small open economy, is highly exposed. This is along the lines of the strategy of the Irish authorities to build resilience in the face of global challenges and the recommendations of the National Competitiveness Council.