Integrated Guidelines for Growth and Jobs

Lisbon Agenda

Ireland

National Reform Programme 2008-2010

October 2008

Contents

Foreword

1 Overview

1.1Introduction

1.2Economic Outlook

1.3Banking Guarantee

1.4Budget 2009

1.5Spring European Council 2006-2008 Priority Actions

1.6Points to Watch, 2007

1.7Linkages with Cohesion Policy

1.8Linkages with Social Policy

1.9North-South Cooperation on the island of Ireland

2Macroeconomic Policy Objectives

2.1Overview

2.2Stability

2.3Sustainability

2.4Resource Allocation

2.5Wage Developments

2.6Policy Coherence

2.7EMU

3Microeconomic Policy Objectives

3.1Overview

3.2Investing More in Knowledge and Innovation

3.3Unlocking Business Potential, Especially of SMEs

3.4Towards an Integrated and Efficient Energy Policy

3.5Transport 21

4Employment Objectives

4.1Labour Market Priorities 2008-2010

4.2Labour Market Performance

4.3Labour Labour Market Outlook

4.4Flexicurity

4.5Commission Strategic Progress Report, 2007

4.6Gender Equality

Annex 1: Euro Area Recommendations

Annex 2: National Development Plan 2009-2011

Annex 3: European Research Area (ERA)

Annex 4: Competition Policy Recommendations

Annex 5: Transport 21 Developments

Annex 6: National Indicators for European Employment Strategy

Annex 7: Expenditure on Employment and Training Supports

Foreword

In these difficult and uncertain times for the Irish, European and World economies, the Lisbon Agenda for Growth and Jobs assumes an even greater importance.

Ireland has made good progress since the first National Reform Programme in 2005, as reflected in economic and employment growth over that period, and some of those achievements are captured in this document.

However the economic situation has changed rapidly during the course of 2008, with a domestic slowdown due to declining construction output compounded by the severe international financial crisis. This creates serious economic and fiscal challenges for the Irish Government and is already being reflected in increased unemployment.

This updated National Reform Programme sets out the current policies and strategies of the Irish Government in the areas of macroeconomic policy, structural and market reforms, and employment. It also responds to specific issues raised by the Commission in their 2007 Progress Report.

The Programme has been prepared after consultation with the social partners under Ireland’s social partnership framework, in particular the Review of Towards 2016 which took place during 2008. It is informed by the shared analysis of the social partners and also takes account of consultation with the relevant Oireachtas Committee and regional assemblies.

In view of the fast-changing economic situation, Ireland’s 2009 Budget was brought forward to 14 October2008. While key elements of the Budget are reflected in this Programme, Government policies will continue to evolve in response to the serious challenges which lie ahead.

However, the broad thrust of the Government’s strategy remains clear and is consistent with the priorities identified by the European Council including:

investing in Research & Development and innovation to build a knowledge-based economy
providing a positive climate for entrepreneurship and start-up companies, and supporting export-led growth
improving skill levels throughout the workforce and helping those who lose their jobs back into employment or training, and
increasing energy efficiency and moving towards a low carbon economy.

The Government looks forward to implementing this National Reform Programme in co-operation with the social partners and will continue to respond to the competitive pressures and challenges which will arise in the period ahead.

Brian Cowen, T.D.

Taoiseach

1 Overview

1.1Introduction

This National Reform Programme (NRP) has been prepared during a period of significant economic change and uncertainty with a deteriorating economic outlook, both internationally and domestically.

This uncertain and difficult economic environment re-emphasises the importance of the framework provided by the NRP for articulating Ireland’s approach to generating economic growth and job creation. The Government has indicated that it will bring forward revised and new strategies over the period ahead in response to an extremely fast-changing situation.

It brings together a broad range of policies and initiatives within the framework of the Towards 2016 social partnership agreement, the implementation of which aim to ensure a return by Ireland to strong economic growth and employment performance as its overall contribution to the renewed Lisbon Agenda over the period to 2010, while stressing also the interdependence of social, environmental and economic goals.

The outcome of the review of the Towards 2016 agreement by the Government and Social Partners that took place over recent months is reflected in the Review and Transitional Agreement 2008-2009[1].

The parties endorsed the broad conclusions from the report prepared by the National Economic and Social Council (NESC), The Irish Economy in the Early 21st Century, including that “a combination of factors in 2008 has created an exceptionally difficult policy context in which to manage the economy’s transition to the next phase of development…. The sharp contraction of the domestic construction sector, the global credit market squeeze, greatly increased energy and commodity prices, a strong euro and a major weakening of current tax revenue combine to make it difficult – and even risky or foolhardy in the opinion of some – to look too far ahead”[2].

The parties also recognised the implications of these developments, in particular higher energy and food prices, for the most vulnerable in society.

The Government and the Social Partners concluded that:

the Irish economy can be strong and dynamic again, provided the right decisions are taken during this difficult period,
services, exports and employment can be further expanded, while manufacturing, including the export orientated food and drink processing sector, will continue to have a key role in Ireland’s economic development,
people’s skills and capabilities are the core economic asset,
Ireland’s continuing economic and social infrastructure deficit means that a high level of investment in infrastructure should be sustained,
there is a need to fine-tune some of the strategic investments in the National Development Plan and Towards 2016, elements of which need modification in the light of new information and understanding,
social partnership, which has contributed to the economic and social progress of the last two decades, continues to have an important potential contribution in managing a difficult transition for the economy and protecting the vulnerable during what is an uncertain conjuncture.

The Government and Social Partners intend therefore to work together through the current period of economic transition and uncertainty to ensure that the Vision and Goals set down in Towards 2016 can still be achieved.

This NRP summarises progress in 2007 and 2008 while setting out a renewed approach for the period ahead based, in particular, on the recent review of Towards 2016 and Budget 2009.

1.2Economic Outlook

This year the Irish economy has experienced multiple shocks, as an unparalleled confluence of international and domestic developments has impacted upon our economy. Reflecting these developments, the economy has moved into recession. After GDP growth of 6% during 2007, the economy is forecast to contract by -1.3% this year and remain in recession during 2009 with economic activity declining by -0.8%. Thereafter a pick-up to 2.7% in 2010 and 3.7% in 2011 is expected, with growth averaging 1.9% per annum over the period 2009- 2011.

GNP is projected to contract by -1.6% this year and by -1.0% in 2009.

As signalled in our 2007 progress report, the transition of the house building sector to more sustainable levels of output is having a significant dampening effect upon the economy. Compounding this situation are adverse developments in the international economy.

The Budget forecast for the General Government Balance (GGB) in 2008 is now a deficit of 5.5% of GDP. This can be explained for the most part by a projected shortfall in taxes for 2008 of about €6.5 billion, a worsening in the accrual of tax (VAT and PAYE) receipts of €400 million, as well as a worsening in the surplus of the Social Insurance Fund of the order of €760 million and the buyout by the Government of the M50 Westlink toll bridge costing €550 million. The debt to GDP ratio for 2008 is forecast to be 36%.

The numbers in employment are expected to remain static this year and decline by 20,000 (-0.9%) in 2009. A modest increase of 10,000 (0.5 %) is projected for 2010 and this rise will accelerate by a further 25,000 (1.2%) the following year. The unemployment rate is forecast to rise to 7% in 2009 from 5.8% in 2008. It will broadly stabilise in 2010 and then subsequently ease back.

As measured by the Harmonised Index of Consumer Prices (HICP), inflation in Ireland was 3.2% in the twelve months to September 2008. Inflation in 2008 has largely been driven by external developments – mainly increases in agricultural and energy commodity prices on global markets. Pressures have been similar elsewhere in the euro area where HICP inflation has been higher than in Ireland, at 3.6% in the twelve months to September. For Ireland, the outlook is for an easing of inflation towards the end of this year and into the next due to the overall slowdown in the economy and a range of technical factors. HICP inflation is expected to average 3½% for 2008 as a whole and 2¼% in 2009.

As output in the housing sector moves towards sustainable levels and a pick-up in the global economy emerges, it is expected that a return to trend GDP growth can be achieved over the medium term. Developments in the housing market will continue to be closely monitored. To safeguard our economic growth prospects, measures to improve competitiveness and productivity have been introduced.

This NRP takes account of the National Development Plan (2007-2013), which was launched in early 2007 and sets out an indicative investment allocation of €184 billion for investment up to the end of 2013. However, annual decisions on Government investment and expenditure under the NDP are, and will be, taken by Government with due regard to the policy of maintaining economic and budgetary sustainability and to the availability of resources.

1.3Banking Guarantee

The Government has put in place a wide guarantee for the banking system in Ireland which has to date been successful in bringing stability during an unprecedented period in international financial markets. The Irish scheme is firmly aligned with the main themes of the Eurogroup plan endorsed by the European Council in October 2008.

The purpose of the Irish bank guarantee is to maintain financial stability and the long-term sustainability of the Irish banking system in the best interests of the public and the economy of the State; and remedy a serious disturbance in the economy caused by the unprecedented turmoil in the international financial markets and the particular macro-economic conditions in Ireland. The guarantee is intended to assist the institutions covered by the guarantee in accessing their required funding, which had become extremely difficult in dislocated market conditions.

The Credit Institutions (Financial Support) Act 2008 provides the legislative basis for this guarantee. The Credit Institutions (Financial Support) Scheme, which sets out the terms and conditions of the Government’s guarantee has also been approved by Parliament. The European Commission had approved the Scheme under EC Treaty state aid rules.

The following liabilities are covered by the Scheme:

all retail and corporate deposits (to the extent not covered by existing deposit protection schemes in Ireland or any other jurisdiction);
interbank deposits;
senior unsecured debt;
covered bonds (including asset covered securities); and
dated subordinated debt (Lower Tier 2).

The Scheme provides that a covered institution must pay a charge for its guarantee. The aggregate charge for the participating institutions is based on the estimated long-term cost to the Exchequer of providing the guarantee and this is distributed among the institutions covered by the Scheme on the basis of a charging model, based on a number of factors including their credit rating, asset quality and liquidity position.

1.4Budget 2009

The aims of Budget 2009[3] are to:

Bring order and stability to the public finances;
Enhance our productive capacity;
Ensure fairness and equity in public spending and raising revenue;
Protect the most vulnerable in our society.

This Budget was framed against the background of the most challenging fiscal and economic situation for a generation. In particular, against the backdrop of international economic uncertainties, Ireland is confronted with severe budgetary pressures and negative economic growth. The Budget, which was brought forward so as to address matters in a decisive manner, seeks to restore order and stability to the public finances. With fairness in mind, the Budget seeks to increase productivity and competitiveness and to protect, to the greatest extent possible, the position of the most vulnerable in our country.

Macroeconomic and fiscal policy continues to be set within the broad framework of the Stability and Growth Pact. The deterioration in the General Government Balance from a surplus of 0.2 % in 2007 to an estimated deficit of 5.5% in 2008 is mainly attributable to a fall-off in tax revenue due to the economic slowdown.

Against this background, the Government has targeted a gradual reduction in the deficit from the Budget Day projection of 6.5% of GDP in 2009 to below 3% by 2011. The consolidation of the public finances is being pursued through substantial reductions in the rate of growth in public expenditure, with the annual growth in gross voted expenditure for the period 2009-2011 forecast to average 1.8% compared to 8.6% over the last three years.

Tax measures are also being implemented to improve the fiscal position. The success of the budgetary strategy will also be significantly dependent on positive developments both in the international economic environment and in the performance of Ireland’s main trading partners.

The Government is determined against the uncertain international and domestic economic background, to pursue prudent and sustainable policies that will help see Ireland through this extremely challenging period. Budget 2009 contains a number of measures designed to support enterprise and innovation, while improving competitiveness, including:

The current 20% rate of tax credit for a company on qualifying research and development (R&D) is being increased to 25%.
The tax incentive which provides for capital allowances of 100% of expenditure incurred by companies on certain categories of new energy-efficient equipment is being extended from three to seven categories.
New start-up companies which commence trading in 2009 will be exempt from tax in each of the first three years to the extent that their tax liability in the year does not exceed €40,000.
The Government has decided to proceed with rationalisation proposals that will reduce the number of state agencies and bodies by 41, streamline functions in three areas and rationalise the army barracks structure.

In addition, the Budget recognises that investment in Ireland’s infrastructure can improve competitiveness and productivity. Exchequer capital expenditure (gross) at over €8.2billion will represent over 5% of GNP in 2009. Resources will be targeted on core economic infrastructure to ensure that Ireland is well-positioned to take advantage of a global economic upswing. Capital investment will be particularly focused on:

Upgrading our national roads infrastructure, particularly the Major Inter-Urban Routes between Dublin and the regional cities;
Improving and expanding our public transport infrastructure and networks;
Enhancing and maintaining our Water Services Infrastructure;
Supporting the provision of schools at both primary and second level;
Supporting the Strategy for Science, Technology and Innovation;
Attracting Foreign Direct Investment to Ireland and supporting indigenous enterprise.

1.5Spring European Council 2006-2008 Priority Actions

It is clear that the more challenging economic environment that Ireland and Europe now face will require a renewed focus on the reforms and the investment necessary to sustain jobs and growth, having regard in particular to the four priority action areas agreed by the EU Heads of Government.

1.5.1Investing more in knowledge and innovation

To place innovation in a wider context, the Government published its Innovation Strategy Statement in June 2008, mapping progress across ten key policy areas and identifying opportunities where innovation will be further exploited, such as public procurement, services innovation and environmental goods and services.

Our Strategy is geared towards providing an integrated national innovation system and ensuring maximum economic and social benefits are derived from the Government’s substantial commitment to this area under our National Development Plan.

Expenditure on Science, Technology and Innovation is now over nine times the level of investment made in 2000. The fiscal environment for Research and Development is being significantly improved in 2009 in terms of increased tax credits for R&D.

The first report on implementation of the Strategy for Science, Technology and Innovation, to be published shortly, indicates that this investment is on schedule and is demonstrating impacts in terms of our attractiveness for new enterprise investment and meeting the skills needs of high-tech sectors. The Government is determined to harvest the downstream benefits of the much-expanded expenditure on R&D for wealth creation and economic and social well-being. There will be much closer alignment between Science Foundation Ireland (SFI)-supported activity and that of the Higher Education Authority (HEA) and the work of the development agencies, IDA and EnterpriseIreland. Our objective now is to ensure the commercialisation of new products and services. The development agencies will work with services enterprises to ensure that our science and research and development strategies contribute to the growth of innovation in this highly important sector of our economy.

We continue to make progress towards the Lisbon R&D target and despite tougher global conditions we expect Gross Expenditure on RD (GERD) to reach 1.9% of GNP (1.6% of GDP) in 2010, up from 1.32% of GNP in 2000 and 1.56% of GNP in 2006. Our total R&D spending grew to an estimated €2.5 billion during 2007. The SSTI goal is that enhanced performance in business, higher education and public sector R&D should result in GERD increasing to 2.5% of GNP by 2013.

A Services Strategy for Ireland(Catching the Wave) was published in September 2008. Today services are the main driver of the economy, and the most likely avenue to sustainable and balanced growth, continued prosperity and improved living standards in the years ahead. As a result of this report, we will look further at the areas of sectoral development, skills provision, innovation and productivity to develop the services side of the economy. The key thrust of this strategy identifies three strategic aims for future services policy in Ireland: