## 1. Broader Measures of Well-Being ## Source details **Canonical URL:** [1. Broader Measures of Well-Being](https://www.imf.org/-/media/files/publications/cr/2017/cr17172.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr17172.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr17172.pdf.json) --- ### Overview and Purpose - Provides a brief overview of income distribution and the welfare system in Ireland, with a focus on the crisis and post-crisis period. - Emphasizes that Ireland’s flexible economy and strong social safety net helped mitigate adverse effects of the property-driven crisis. - Notes ongoing needs to address lingering impact on those hardest hit, including the long-term unemployed and unemployed youth. - Highlights ambition to reduce consistent poverty to 2 percent by 2020. ### Caveats on Analysis - Quantitative analysis focuses on basic aspects of income distribution due to data limitations. - Economic inequality is a holistic concept beyond narrow income measures; public services (health, education) affect household living standards and inequality in ways that are hard to quantify. - Latest available social and income-distribution data do not reflect more recent improvements in the Irish economy. ### Structure of the Paper - Section A: overview of economic and social developments from crisis to recovery. - Section B: causes of relatively high market-income inequality in Ireland. - Section C: summary of tax-benefit system, focusing on personal income taxation, labor market policies, and social benefits’ impact on income disparities and poverty. - Section D: conclusions. ### Key Findings (summary) - Ireland is characterized by one of highest dispersions of market income among EU (and OECD) countries. - Ireland’s tax-benefit system is one of the most effective in the EU in redistributing income, mitigating income disparities across a range of factors (including regions); a relatively progressive tax system funds a robust system of social benefits, a significant share of which is means-tested. - Despite severe financial crisis and substantial budget cuts, the government preserved most welfare expenditure, cushioning the worst effects of the crisis. - During the crisis, the elderly were shielded more than younger generations; with recovery and declining unemployment (including youth), intergenerational distribution has shown some improvement. - The welfare system is efficient but complex, covers a relatively high number of individuals and families, and represents a sizable portion of public expenditures. - Policy emphasis: continue efforts to get more people into secure, better-paying jobs, enhance active labor-market policies, better align education with enterprise needs, and address childcare provision gaps to support female labor market participation. ### OECD Better Life Index (Box 1) - The OECD Better Life Index covers civic engagement, housing, household income, work-life balance, skills, and health status. - Ireland performs well in: housing (despite supply shortfall), personal security, health status, education and skills, social connections, subjective well-being, work-life balance, and environmental quality. - Ireland ranks below average in: income and wealth, and civic engagement. --- ### A. From Crisis to Recovery — Major Developments and Statistics - Real estate bust plus Great Recession had striking impact; labor market consequences were rapid and deep, particularly for younger generations. - Total unemployment: - rose to almost 15 percent in 2011–12 from less than 5 percent in 2007. - Youth joblessness: - peaked at 30 percent from less than 10 percent over the same period. - Per-capita market income: - declined by about 17 percent on average, with burden disproportionately borne by lower-income deciles. - Wage entry of new hires: - collapsed by 20–25 percent compared to existing workers or job changers. - Worsening of market-income distribution (Gini coefficient) was among the steepest in EU countries. - Regional dispersion: - increased, with Border, Midland, and South-East regions falling further from national average. Social payments and fiscal measures during crisis - Number of recipients of welfare social payments: - peaked in 2012 at 1.47 million, or 32 percent of the total population, compared to 24 percent in 2007. - Social benefit recalibration measures included: - tightening eligibility criteria, - strengthening means-testing, - shortening duration of some benefits, - reducing allowances in some cases (including universal Child Benefits, unemployment payments, and welfare payments to one-parent families). - Universal Social Charge (USC) introduced, replacing two flat contribution-rate levies (the health and income levies), increasing the progressivity of the income tax system. Effectiveness of social transfers - During apex of the crisis (2010–12), social transfers (including pensions) reduced share of total population at risk of poverty to around 15 percent from over 50 percent (before transfers). - In 2010–11, improvement due to social transfers was about 25 percentage points in absolute terms, corresponding to poverty reduction of about 50 percent — the largest in EU countries. - The Irish tax-benefit system reduced relatively high market-income inequality to the EU average in terms of disposable income (after taxes and transfers). - Disposable-income inequality: remained relatively unchanged during 2008–10, increasing in 2010–13; nonetheless Ireland compares favorably to other crisis-hit countries. Intergenerational and distributional effects - Welfare system protected elderly more than young during crisis: - Pensioners were mainly affected by reductions in supplementary entitlements, while pension benefits were increased in the 2009 and 2016 budgets. - Working-age individuals faced larger scale rate reductions (including child benefits) and reductions in supplementary payments. - Negative wealth from collapsed real-estate prices sharply increased wealth inequality. - Material deprivation and financial stress for young and working-age groups deteriorated substantially until 2012–13; trends for the elderly were smoother. - Debt distribution is skewed towards the young. Recovery trends and remaining challenges (as of early 2017 / 2015 data referenced) - Economic recovery is firmly underway; unemployment and youth joblessness have declined steadily since 2012: - Total unemployment: about 6½ percent in early 2017. - Youth joblessness: about 14½ percent in early 2017. - Both unemployment measures are well below EU averages and projected to continue to decline. - Labor market participation has not recovered to pre-crisis levels; part-time employment has increased, particularly for workers aged 15–24 years. - Long-term unemployment: - declined from 9 percent in 2012 to 4.2 percent in 2016 (broadly in line with EU average). - Material deprivation and financial stress: - younger groups show signs of improvement but remained, as of 2015, disadvantaged relative to EU average. --- ### 11. High market-income inequality in Ireland is mainly driven by the lower end of income ### Key findings on inequality drivers - The share of market income accruing to the top decile is about 37 percent, partly driven by the growing role of multinational enterprises (MNEs) offering high-paid jobs to high-skill workers; the high-end share is not excessive by international comparison. - The income share of the bottom 20 percent of households is the lowest in the OECD (OECD, 2015). - The share of low-wage earners in Ireland is about 22 percent of total employees versus about 17 percent EU average. - Earnings dispersion in Ireland has widened over time and is among the largest in the EU. Labor market dynamics and work intensity - Long-term unemployment as of end-2016: just over 83 thousand (3.8 percent of the labor force); almost three times higher than in 2007. - Long spells of unemployment deplete labor skills, hindering return to work. - Labor market participation is low compared to EU peers, especially for women; childcare availability and cost are key barriers. - Inactivity due to caring responsibilities: - 27.4 percent of inactive women aged 20–64 do not work because they must look after children or incapacitated adults (4.5 percent of men). - 26 percent of women who work part-time cite the same reason (3.6 percent of men). - People living in households with very low work intensity: 18.8 percent in 2015—the highest in Europe. - The share of children living in jobless households is second only to that of Bulgaria. Education, skills, and intergenerational mobility - Ireland performs generally well in educational attainment; the share of students leaving school early is relatively low. - Ireland lags EU peers on young adults NEET (not in education, employment, or training); NEET percentages shown in source figures (2015). - Unemployment among those with low educational achievement: 13½ percent as of 2016Q3. - Skill shortages in ICT and other sectors; need to upskill and reskill adult population via increased participation in further education and training. - Policy frameworks: Action Plan for Education (2016); National Skills Strategy; National Skills Council; Regional Skills Fora. Tax-benefit system, redistribution, and incentives - Ireland’s tax-benefit system is among the most effective in redistributing income compared to EU peers. - About 60 percent of the average 25-percentage point difference in Ireland’s market- and disposable-income Gini coefficient during the 2007–15 period was driven by social benefits (largely means-tested). - About one-fourth of the improvement was due to direct taxes (broadly in line with the EU average). - 12 percent of the improvement was through pensions, the lowest in the EU. - Personal income taxation: - Top decile pay about 59 percent of total income tax, although their share of market income is about 37 percent. - PIT structure: 20 percent on income within the standard band and 40 percent on income above the standard band. - Shortcomings: - Some 36 percent of income earners are currently exempted from income tax and about 29 percent from the USC. - Entry to the second PIT bracket occurs at a relatively low level. - The standard rate band threshold for a single individual, €33,800, is below the national average wage, €36,815. Policy options discussed - Consider merging the USC into a more comprehensive PIT with a review of income brackets (including possible introduction of a third bracket). - Compensate potential regressivity by means-tested transfers to low-income households. - Decrease number of products with reduced and zero VAT rates and align self-assessed property values to market values. - Conduct a thorough review of tax expenditures to support revenue enhancement. Pensions and social insurance (Box 2 summary) - Pension system: pay-as-you-go public pension pillar supplemented by voluntary second pillar schemes and private pension plans. - Public pillar: contributory and non-contributory elements; non-contributory is means-tested and paid at age 66. - Old-age contributory pension: flat-rate benefits depending on contribution period without reference to pre-retirement earnings. - PRSI: - Levied at a single rate of 4 percent on gross wage income and funds PRSI pensions and other benefits. - Since 2014, PRSI payable also on unearned income (investments, rents). - Recent reforms to financial viability: - Revenue measures: increases in contribution rates, broadening of base, abolition of employee ceiling for charging PRSI, abolition of PRSI relief for employee pension contributions, abolition of employee PRSI-free allowance. - Expenditure savings: stricter entitlement conditions, reductions in level and duration of entitlement (notably for jobseeker and illness benefits), increase in pension age to 66 years. - State pension age will increase to 67 years in 2021 and 68 years from 2028. Labor market policies and activation - Pathways to Work strategy to increase engagement of long-term and young jobseekers. - Institutional changes: - Intreo “one-stop-shop” combining welfare income benefits, community welfare services, and employment supports. - Consolidation to sixteen Education and Training Boards from 33 Vocational Education Committees. - Local Development Committees in each of the 31 local authority areas. - LMP spending and outcomes: - LMP spending surged to over 3 percent of GDP during the crisis; scaled back with recovery but remains above EU average. - Share of jobseekers participating in activation programs is low compared to best performers. - Spending per LMP participant is relatively low versus best performers. - Jobseekers per caseworker fell from 800 in 2013 to 500 in 2015. - Recommendations: streamline initiatives, target scarce resources to effective programs, reduce jobseekers per caseworker. Policy recommendations (summary) - Address childcare access and affordability to increase female labor force participation. - Broaden tax base and consider merging USC into PIT with bracket reform and possible third bracket; offset regressivity with means-tested transfers. - Align property tax bases to market values; reduce number of reduced and zero VAT rates. - Review tax expenditures comprehensively. - Continue LMP reforms: evaluate programs, streamline initiatives, reduce jobseekers per caseworker, target activation measures. - Improve upskilling and reskilling via National Skills Strategy, National Skills Council, and Regional Skills Fora. - Build on social insurance and pension measures to safeguard financial viability. --- ### 24. Social protection spending, targeting, and household deleveraging Social protection spending levels and composition - Ireland’s cash social benefit spending in per-capita terms, measured in purchasing powers standards, is broadly in line with the simple average of EU countries. - Social benefits in cash account for about 60 percent of total social protection spending; lower than the EU average. - If pensions excluded, Ireland’s per-capita cash social benefit spending is somewhat higher than the EU average. - Ireland’s social spending absorbs a larger share of general government’s total revenue. - When in-kind social benefits are included, Ireland’s social spending accounts for a slightly larger share of general government primary expenditure than the EU simple average. Targeting, redistribution, and poverty reduction - Almost a third of social transfers in Ireland is means-tested, the second largest share in the EU. - For the bottom two deciles, social transfers make up about three-quarters of total income, with more than half of these transfers related to unemployment benefits and family-children allowances. - Considering all social benefits including pensions, Ireland’s welfare system is more focused on poverty reduction (difference between share at risk before and after transfers) than on income redistribution (difference between market and disposable income). - If pensions excluded, Ireland’s efficiency in redistributing income and fighting poverty is well-above EU peers. Conclusions and policy recommendations - Ireland’s tax-benefit system is effective in redistributing income and alleviating poverty. Despite severe fiscal consolidation during the crisis, most welfare expenditure was preserved. - A relatively progressive tax system funds a robust system of social transfers, a significant share of which is means-tested. - The crisis period shielded the elderly more than younger generations; important structural challenges persist, particularly intergenerational and regional disparities. - Recommended multi-pronged approach: - Support unemployed workers to upskill and reskill through more effective active labor market policies. - Better align education with market needs while providing equal opportunities for disadvantaged children. - Revise personal income taxation. - Support transition to work through additional (temporary) in-work benefits. - Improve childcare availability and affordability. Household deleveraging (contextual findings) - Irish households deleveraged to about 150 percent of disposable income and about 19 percent of total assets at end-2016––its lowest level in a decade. - Household debt includes loans and other accounts payables, and is seasonally-adjusted. - Pre-crisis peak: nearly 240 percent of disposable income in late 2009 from 115 percent in early 2003. - Household leverage ratio (debt to financial and housing assets) increased to nearly 30 percent from 15 percent in 2003. - During 2003–07 the saving rate averaged 7½ percent. - Euro area reference statistics shown in the chapter: - Euro area average = 27.8 - EA average = 103.6 --- ### 4. Extent, drivers, and dynamics of household debt accumulation and deleveraging Extent of pre-crisis accumulation and international comparison - Rapid increase in household debt in 2002–08 was exceptional; only comparable to Denmark. - Irish household debt-to-disposable-income was among the highest in Europe when the global financial crisis unfolded. - Combined with house-price overvaluation, high household debt amplified vulnerabilities and likely contributed to prolonged adjustment. Deleveraging dynamics and drivers (post-2009) - Adverse 2009 shock prompted households to begin reducing nominal debt almost immediately. - Household debt ratio continued to increase in 2009 because disposable income contracted significantly. - 2010–11: ratio moderated initially due to significant net debt repayments. - From 2011 onwards: moderation also driven by recovery of disposable income. - Recent years: moderation mainly driven by strong increase in disposable income as new borrowing picked up and net repayments slowed. - Irish household debt registered a decline of about 90 percentage points of disposable income from its peak in late 2009. - Sharp deleveraging accompanied by significant defaults and partly driven by: - strong growth of disposable income in recent years, - low level of new lending, - intensified supervisory efforts promoting “sustainable solutions” for distressed borrowers. Debt service burden and interest dynamics - Interest burden stood at more than 10 percent of household disposable income in 2007 and fell significantly in recent years due to higher disposable income and lower interest rates. - Despite high debt levels, debt service burden is similar to euro area across most age cohorts, explained by high incomes among mortgage holders, long maturities, and prevalence of “tracker” rate mortgages with full pass-through. - Proportion of long maturity loans (over 30 years) increased from 10 percent to 35 percent between 2004 and 2007 (Connor and others, 2012). Distribution across households, cohorts, and equity positions - ECB Household Finance and Consumption Survey (2016): about 57 percent of Irish households held debt in 2013/14—above euro area average of 42 percent. - About 12 percent of households had negative equity—among the highest in the euro area—largely reflecting younger cohorts who bought near the market peak. - Deleveraging proceeded faster among older households; young households deleveraged only modestly. Composition of household debt holders and market structure - Household debt mainly consists of loans from Monetary Financial Institutions (MFIs) and Other Financial Institutions (OFIs). - About 2½ percent of total household loans is provided by the general government and the non-financial corporate (NFC) sector. - Share of MFI loans averaged about 80 percent pre-crisis and receded to 62 percent in 2016Q3. - Decline in MFI share reflects securitization, sales of distressed loans to non-MFIs, and new lending by non-MFIs. - Retained securitizations represent a significant percentage of overall non-MFI lending (Central Bank of Ireland preliminary Q3 2016 analysis). Determinants of household debt (cross-country regression) - Data sample: 2003Q1–2016Q3 for eleven euro area countries. - Dependent variable: household debt as a share of gross disposable income. - Method: instrumental variable 2SLS with country fixed effects and a time dummy; instruments include variable lags, financial assets, and employment. - Explanatory variables: share of young population, house price-to-disposable-income ratio, unemployment (difference from long-run average), home-ownership rate, real mortgage interest rate, “Getting Credit” indicator, public debt-to-GDP. Estimation results and interpretation - Fixed effects preferred (Hausman tests rejected random effects). - Specifications exhibited relatively low explanatory power (0.18–0.35 in earlier summary; table shows R2 within up to 0.649). - Findings: - Indebtedness higher with a high share of young people and high home ownership. - Higher house price-to-income ratio positively affects household debt. - Higher mortgage interest rates and lower public debt contribute to lower household indebtedness. - High unemployment (relative to long-run average) positively affects household debt ratios. - Better borrower information and stronger legal rights (“Getting Credit”) correlate with higher household debt. - A pre-crisis dummy indicates higher household debt in the pre-crisis period. Summary statistics (2003Q1–2016Q3) - Full sample (excluding Ireland) mean values: - Debt-to-disposable income mean: 99.8 - Public debt as a share of GDP mean: 100.1 - Real interest rate on mortgages mean: 3.5 - Home ownership mean: 71.7 - Population age 25–44 mean: 28.8 - House price to income ratio mean: 110.3 - World Bank “Getting Credit” mean: 61.8 - Ireland mean values: - Debt-to-disposable income mean: 186.9 - Public debt as a share of GDP mean: 61.9 - Real interest rate on mortgages mean: 3.1 - Home ownership mean: 74.4 - Population age 25–44 mean: 30.8 - House price to income ratio mean: 119.2 - World Bank “Getting Credit” mean: 84.9 - Ireland debt-to-disposable income min 112.7, max 237.2. Caveats on the model and data (section 14) - Estimations have relatively low explanatory power; time-varying sentiment and boom-bust cycles not fully captured. - Analysis uses macro-level data and ignores distributional asymmetries across households. - Two-stage IV methodology used, but endogeneity cannot be ruled out. Model-based estimates of Ireland’s deleveraging - Model replicates hump shape: estimated debt increases from about 140 percent in early 2005 to nearly 185 percent at end-2009 due to higher house prices and rising share of young. - From 2010 onwards, model explains more than half of actual deleveraging; drivers include decline in unemployment, decline in homeownership and young share, lower access to credit, and moderation of house prices (mainly up to 2014). - At 2016Q3: - Estimated debt just below 140 percent of disposable income. - Actual debt ratio declined more rapidly, leaving an unexplained gap of about 15 percentage points of disposable income (down from nearly 55 percentage points in late 2009). - Interpretation: continued reduction in the unexplained gap would be consistent with further deleveraging in the near term. Key takeaways - Household debt declined sharply but remained above the euro area average and pre-boom levels. - Significant share of households, particularly young and high-income households, remain heavily indebted with negative equity. - Share of household loans held by nonbanks stabilized just below 40 percent in recent years. - Cross-country correlates of higher household debt-to-disposable income: high proportion of young, high home ownership rates, better access to credit, high unemployment (relative), high house price-to-income ratio, lower public debt-to-GDP, and lower real mortgage rates. - Model conclusion (with caveats): identified determinants contributed to more than half of decline in household debt since 2010; unexplained gap narrowed from 55 percentage points in late-2009 to about 15 percentage points at 2016Q3. --- ### 7. Multinationals, employment, and implications for policy and statistics Employment patterns and skills - Employing non-Irish workers is common; share in multinational-dominated sectors is higher than in broader economy. - Reflects open economy and likely skills mismatches—shortages of local high-skilled professionals for multinationals. - Job creation, 2012–2015: - Indigenous sector: over 115 thousand jobs created. - MNEs: 8 thousand jobs created (2012–2015); MNE job creation jumped in 2015 to 82 thousand. - High vacancies in multinational-dominated sectors (financial sector, ICT) suggest untapped employment potential. Multipliers and stabilization role of multinationals - Output multipliers: - Multinational-dominated sector: 1.2. - Indigenous sector: 1.4. - Employment effects from a €1m increase in final demand: - Multinational-dominated sector: 3 additional jobs. - Indigenous sector: 10 additional jobs. - Multinationals provide buffer during downturns due to strong access to external finance. External sector: multinationals and external accounts - Multinationals had sizable impact on NIIP, especially in 2015. - Foreign investment became key driver of NIIP; large assets and liabilities reflect scale of multinational operations. - Recent NIIP deterioration driven by multinationals’ intangible operations related to balance-sheet restructuring and not affecting external sustainability of core domestic sectors. - Exports: - IDA (2011): multinationals accounted for 75 percent of exports. - 2015 trade data: multinational activities close to 70 percent of total; concentrated in chemicals, selected manufacturing, computer and financial services. - Contract manufacturing: - Approximately 25 percent of GDP in 2016 (up from 5 percent of GDP in 2013) relates to contract manufacturing. - Trade balance for goods and services is 23.2 percent of GDP; without contract manufacturing it would be close to zero. - Share of domestic GVA in gross exports fell from 62 percent to 56 percent between 1995 and 2011. Policy implications and risks from multinationals - Opportunities: channel products to markets, partnerships for Irish businesses, R&D investment raising productivity. - Risks: high concentration, potential tax changes in partner countries, international tax cooperation developments. - Offshore and tax risks: - Contract manufacturing major part of offshore production; accounted for a third of 2015 GDP and about a quarter of 2016 GDP. - Ireland’s attractiveness derives from factors beyond low tax rates. - Destination-based tax systems and measures less favorable to imports would likely impact exporters. - Policy priorities: - Continue building fiscal buffers and broaden the tax base. - Fortify business environment: infrastructure, human capital, female labor force participation, tertiary and technical education, innovation and SME diversification, increase local sourcing. Importance for public finances - CIT share of total tax revenues about double the EU average and concentrated among few companies. - Multinationals pay about 15 percent of total compensation of employees. - IMF staff estimates top 50 companies account for about 10 percent of non-CIT tax receipts. - Offshore activities accounted for about 25 percent of GDP in 2016 (staff estimate). - Concentration risk reinforces importance of saving revenue windfalls and building fiscal buffers. - Need for alternative metrics as headline GDP overstates underlying activity; planned publication of additional metrics beginning in July will help strip out global activities by multinationals. Structural reform recommendations - Enhance labor skills and align education with business needs (2016 National Skill Bulletin). - Improve business environment: contract enforcement, property registration, financial market development, construction permits. - Address infrastructure constraints. - Promote SME innovation: expand government support for SME-driven R&D, monitor IP activity at firm level, increase collaboration via Knowledge Transfer Ireland, broaden non-bank financing options. - Goal: increase domestic value added in exports, employment of skilled labor, and economic multiplier of multinational operations. Statistical challenges - Measurement challenges from large scale and changing nature of multinational activities. - Investment in intangible and internationally mobile capital assets and contract manufacturing have large statistical impacts not in line with domestic activity. - 2015 complexity: multinational intangible operations and contract manufacturing responsible for large portion of 26.3 percent headline GDP growth. --- ### 2. Why alternative metrics are important and CSO/ESRG response Why alternative metrics are needed - Headline aggregates (GDP, headline balance of payments) no longer provide an accurate picture of underlying performance because multinational activities can: - Mask trends in underlying growth, trade, and investment. - Complicate assessment of cyclical position and policy settings. - Introduce volatility and lumpiness in investment and income flows. - Headline data limit meaningful cross-country comparisons and can misrepresent Ireland’s relative position. How multinationals affect national accounts - Expenditure approach: offshore production and proceeds for invested capital (license fees) are part of net exports; IP investment affects capital formation and imports. - Production approach: GVA includes domestic and offshore value added from multinationals; current statistics do not separate these. - Income approach: profits of Irish-domiciled companies, including offshore activities, are part of GNP/GNI; current statistics do not separately report profits of multinationals from offshore activities with weak links to employment. - Specific IP operations: - Investment into IP registered as increase in investment and imports; negative immediate effect on current account. - Transferring IP assets to Irish subsidiary increases capital stock and affects IIP and, over time, net exports through royalties and trade effects. - Balance of Payments and NIIP: multinationals affect virtually all parts of BOP and NIIP. Historical metrics and limitations - GNP historically used as alternative; gap between GDP and GNP among highest in world and growing due to multinationals. - GNP grew on average about a percentage point a year slower than GDP over nearly two decades. - GNP problematic as substitute due to IP ownership under ESA2010/BPM6, re-domiciling, contract manufacturing, and aircraft leasing. Implications for IMF analysis and policy work - Use “core domestic demand” adjusting domestic demand for intangible and aircraft investments. - Rely on complementary statistics in DSA: public debt to revenues, per capita debt, rather than ratio to headline GDP. - Contract manufacturing and IP operations complicate current account analysis; apply caution in economic models and cross-country comparisons. Institutional response, staged approach, and planned data products - CSO convened Economic Statistics Review Group (ESRG) with contributors from CSO, Central Bank, government, academia, business, unions, IMF (STA), Eurostat, OECD, UN, KPMG. - Staged approach balancing costs, stability, repeatability, confidentiality. - Key follow-up steps and planned publications: - GNI* series beginning mid-2017: reduces GNI for undistributed profits of foreign-owned Irish firms (on portfolio investments) and depreciation pertaining to gross earnings of foreign-owned domestic capital; complementary adjusted BOP presentation. - Preliminary Central Bank estimate: GNI* ≈ two-thirds of GDP in 2015 (CBI, 2017). - Annual time series and corresponding BOP measures to be published beginning July 2017; develop quarterly GNI* during 2017; further work on IP relocations and IIP in 2018. - Additional statistics on multinationals without split between on- and offshore operations: - Structural macro indicators: breakdown of NFC sector into foreign and domestic subsectors (annual sector accounts publication beginning October 2017; possible quarterly in 2018). - Cyclical indicators: quarterly underlying investment and domestic demand adjusted for IP relocation, contract manufacturing, aircraft leasing, and re-domiciled firms; adjusted trade data; quarterly GVA data for multinational-dominated sectors (planned 2018); quarterly NNP by end-2018; monthly production and turnover data adjusted for multinational activity by early 2018. - Communication and cooperation improvements; CSO appointed head of communications and restructured information functions. Limitations remaining after planned publications - GNI* will be a lower bound for domestic economy size because it removes depreciation and undistributed profits for all multinationals, not only offshore/IP-related activities. - Some elements will remain unavailable: disaggregation of exports of financial services, additional details on royalty flows, dividends, and related-party borrowing. - Calculating productivity for domestic economy may require capital stock adjustments for IP assets. - CSO to consider classifications proposed by FitzGerald (2016) and Honohan (2016) to allow “trimmed” accounts separating multinational-related distortions. Notable historical revisions - July 2016 revision to 2015 GDP driven by a Euro 300 billion increase in the capital stock; revision moved 2015 GDP from 7.8 to 26.3 percent. *Source: International Monetary Fund* ### 1. Broader Measures of Well-Being _____________________________________________________ 4 ### 1. Broader Measures of Well-Being ### Overview and Purpose - Provides a brief overview of income distribution and the welfare system in Ireland, with a focus on the crisis and post-crisis period. - Emphasizes that Ireland’s flexible economy and strong social safety net helped mitigate adverse effects of the property-driven crisis. - Notes ongoing needs to address lingering impact on those hardest hit, including the long-term unemployed and unemployed youth. - Highlights ambition to reduce consistent poverty to 2 percent by 2020. ### Caveats on Analysis - Quantitative analysis focuses on basic aspects of income distribution due to data limitations. - Economic inequality is a holistic concept beyond narrow income measures; public services (health, education) affect household living standards and inequality in ways that are hard to quantify. - Latest available social and income-distribution data do not reflect more recent improvements in the Irish economy. ### Structure of the Paper - Section A: overview of economic and social developments from crisis to recovery. - Section B: causes of relatively high market-income inequality in Ireland. - Section C: summary of tax-benefit system, focusing on personal income taxation, labor market policies, and social benefits’ impact on income disparities and poverty. - Section D: conclusions. ### Key Findings (summary) - Ireland is characterized by one of highest dispersions of market income among EU (and OECD) countries. - Ireland’s tax-benefit system is one of the most effective in the EU in redistributing income, mitigating income disparities across a range of factors (including regions); a relatively progressive tax system funds a robust system of social benefits, a significant share of which is means-tested. - Despite severe financial crisis and substantial budget cuts, the government preserved most welfare expenditure, cushioning the worst effects of the crisis. - During the crisis, the elderly were shielded more than younger generations; with recovery and declining unemployment (including youth), intergenerational distribution has shown some improvement. - The welfare system is efficient but complex, covers a relatively high number of individuals and families, and represents a sizable portion of public expenditures. - Policy emphasis: continue efforts to get more people into secure, better-paying jobs, enhance active labor-market policies, better align education with enterprise needs, and address childcare provision gaps to support female labor market participation. ### Box 1 — Ireland: Broader Measures of Well-Being (OECD Better Life Index) - The OECD Better Life Index is a multidimensional metric covering civic engagement, housing, household income, work-life balance, skills, and health status. - Ireland performs well in: housing (despite supply shortfall), personal security, health status, education and skills, social connections, subjective well-being, work-life balance, and environmental quality. - Ireland ranks below average in: income and wealth, and civic engagement. ### A. From Crisis to Recovery — Major Developments and Statistics - Real estate bust plus Great Recession had striking impact; labor market consequences were rapid and deep, particularly for younger generations. - Total unemployment: - rose to almost 15 percent in 2011–12 from less than 5 percent in 2007. - Youth joblessness: - peaked at 30 percent from less than 10 percent over the same period. - Per-capita market income: - declined by about 17 percent on average, with burden disproportionately borne by lower-income deciles. - Wage entry of new hires: - collapsed by 20–25 percent compared to existing workers or job changers. - Worsening of market-income distribution (Gini coefficient) was among the steepest in EU countries. - Regional dispersion: - increased, with Border, Midland, and South-East regions falling further from national average. ### Social Payments and Tax-Benefit Reforms During Crisis - Number of recipients of welfare social payments: - peaked in 2012 at 1.47 million, or 32 percent of the total population, compared to 24 percent in 2007. - Fiscal consolidation required to restore public finances and debt sustainability. - Social benefit recalibration measures included: - tightening eligibility criteria, - strengthening means-testing, - shortening duration of some benefits, - reducing allowances in some cases (including universal Child Benefits, unemployment payments, and welfare payments to one-parent families). - Universal Social Charge (USC) introduced, replacing two flat contribution-rate levies (the health and income levies), increasing the progressivity of the income tax system. ### Effectiveness of Social Transfers - During apex of the crisis (2010–12), social transfers (including pensions) reduced share of total population at risk of poverty to around 15 percent from over 50 percent (before transfers). - In 2010–11, improvement due to social transfers was about 25 percentage points in absolute terms, corresponding to poverty reduction of about 50 percent — the largest in EU countries. - The Irish tax-benefit system reduced relatively high market-income inequality to the EU average in terms of disposable income (after taxes and transfers). - Disposable-income inequality: remained relatively unchanged during 2008–10, increasing in 2010–13; nonetheless Ireland compares favorably to other crisis-hit countries. ### Intergenerational and Distributional Effects - Welfare system protected elderly more than young during crisis: - Pensioners were mainly affected by reductions in supplementary entitlements, while pension benefits were increased in the 2009 and 2016 budgets. - Working-age individuals faced larger scale rate reductions (including child benefits) and reductions in supplementary payments. - Traditional income metrics may understate crisis severity because of household over-indebtedness: - Negative wealth from collapsed real-estate prices sharply increased wealth inequality. - Measures of economic stress indicate that the gap between elderly and other age groups widened significantly during the crisis. - Material deprivation and financial stress for young and working-age groups deteriorated substantially until 2012–13; trends for the elderly were smoother. - Debt distribution is skewed towards the young. ### Recovery Trends and Remaining Challenges (as of early 2017 / 2015 data referenced) - Economic recovery is firmly underway; unemployment and youth joblessness have declined steadily since 2012: - Total unemployment: about 6½ percent in early 2017. - Youth joblessness: about 14½ percent in early 2017. - Both unemployment measures are well below EU averages and projected to continue to decline. - Labor market participation has not recovered to pre-crisis levels; part-time employment has increased, particularly for workers aged 15–24 years. - Long-term unemployment: - declined from 9 percent in 2012 to 4.2 percent in 2016 (broadly in line with EU average). - Material deprivation and financial stress: - younger groups show signs of improvement but remained, as of 2015, disadvantaged relative to EU average. *Source: International Monetary Fund* ### 11. High market-income inequality in Ireland is mainly driven by the lower end of income ### 11. High market-income inequality in Ireland is mainly driven by the lower end of income ### Key findings on inequality drivers - The share of market income accruing to the top decile is about 37 percent, partly driven by the growing role of multinational enterprises (MNEs) offering high-paid jobs to high-skill workers; the high-end share is not excessive by international comparison. - The income share of the bottom 20 percent of households is the lowest in the OECD (OECD, 2015). - The share of low-wage earners in Ireland is about 22 percent of total employees versus about 17 percent EU average. - Earnings dispersion in Ireland has widened over time and is among the largest in the EU. ### Labor market dynamics and work intensity - Long-term unemployment is improving but remains relatively high: as of end-2016, long-term unemployed stood at just over 83 thousand (3.8 percent of the labor force); almost three times higher than in 2007 (for the EU, the increase was 1½ times over the same period). - Long spells of unemployment deplete labor skills, hindering return to work. - Labor market participation is low compared to EU peers, especially for women; availability and cost of childcare are key barriers. - Around 27.4 percent of inactive women aged 20–64 do not work because they must look after children or incapacitated adults (4.5 percent of men); 26 percent of women who work part-time cite the same reason (3.6 percent of men). - People living in households with very low work intensity: 18.8 percent in 2015—the highest in Europe. - The share of children living in jobless households is second only to that of Bulgaria. ### Education, skills, and intergenerational mobility - Ireland performs generally well in educational attainment; the share of students leaving school early is relatively low. - Ireland lags EU peers on young adults not in education, employment, or training (NEET); percentage of young people NEET shown in the source figures (2015). - Unemployment among those with low educational achievement remains elevated: 13½ percent as of 2016Q3. - Skill shortages have emerged in sectors such as information and communication technology (ICT); need to upskill and reskill adult population via increased participation in further education and training. - Policy frameworks: Action Plan for Education (2016) focuses on disadvantaged students; National Skills Strategy and new National Skills Council to prioritize skills needs; Regional Skills Fora to facilitate employer-educator dialogue. - Intergenerational mobility is low at both ends of the income distribution; higher income inequality is associated with lower intergenerational mobility and higher inequality of opportunity. ### Tax-benefit system, redistribution, and incentives - Ireland’s tax-benefit system is among the most effective in redistributing income compared to EU peers. - About 60 percent of the average 25-percentage point difference in Ireland’s market- and disposable-income Gini coefficient during the 2007–15 period was driven by social benefits (largely means-tested). - About one-fourth of the improvement was due to direct taxes (broadly in line with the EU average). - 12 percent of the improvement was through pensions, the lowest in the EU. - Personal income taxation is progressive: - Those at the top decile pay about 59 percent of total income tax, although their share of market income is about 37 percent. - PIT operates with a two-rate structure: 20 percent on income within the standard band and 40 percent on income above the standard band. - Shortcomings in direct taxation: - Some 36 percent of income earners are currently exempted from income tax and about 29 percent from the USC. - Entry to the second PIT bracket occurs at a relatively low level. - The standard rate band threshold for a single individual, €33,800, is now below the national average wage, €36,815. - Policy options discussed: - Consider merging the USC into a more comprehensive PIT with a review of income brackets (including possible introduction of a third bracket). - Compensate potential regressivity by means-tested transfers to low-income households. - Decrease the number of products with reduced and zero VAT rates and align self-assessed property values to market values. - Conduct a thorough review of tax expenditures to support revenue enhancement. ### Pensions and social insurance (summary of Box 2) - Pension system structure: - Pay-as-you-go public pension pillar supplemented by voluntary second pillar schemes and private pension plans. - Public pillar comprises contributory and non-contributory elements; non-contributory is means-tested and paid at age 66. - Old-age contributory pension provides flat-rate benefits depending on contribution period without reference to pre-retirement earnings. - Social Insurance (PRSI): - PRSI is levied at a single rate of 4 percent on gross wage income and funds PRSI pensions and other benefit payments (disability, maternity, illness). - Since 2014, PRSI is payable also on unearned income, such as income from investments (including bank deposits) and rents. - Recent reforms to financial viability: - Revenue measures: increases in rates of contribution, broadening of the base, abolition of employee ceiling for charging PRSI, abolition of PRSI relief for employee pension contributions, abolition of employee PRSI-free allowance. - Expenditure savings: stricter entitlement conditions, reductions in level and duration of entitlement (notably for jobseeker and illness benefits), increase in pension age to 66 years. - State pension age will increase to 67 years in 2021 and 68 years from 2028. ### Labor market policies and activation - Pathways to Work is the overarching strategy to increase engagement of long-term and young jobseekers. - Institutional and programmatic changes: - Intreo: Department of Social Protection “one-stop-shop” combining welfare income benefits, community welfare services, and employment supports. - Consolidation to sixteen Education and Training Boards from 33 Vocational Education Committees. - Local Development Committees established in each of the 31 local authority areas to improve service delivery integration. - LMP spending and outcomes: - Ireland’s LMP spending surged to over 3 percent of GDP during the crisis; with recovery LMP expenditure scaled back but remains above the EU average. - Share of jobseekers participating in activation programs is low compared to best performers (Denmark, Sweden, Netherlands). - Spending per LMP participant is relatively low versus best performers. - Jobseekers per caseworker fell from 800 in 2013 to 500 in 2015 but remains relatively high compared to best practices. - Program evaluation and resource targeting: - Reviews underway (e.g., Back to Education Allowance raised concerns about effectiveness; evaluation of Intreo underway). - Recommendation to streamline initiatives, channel scarce resources to most effective programs, and reduce jobseekers per caseworker to improve effectiveness. ### Policy recommendations and measures noted - Address childcare access and affordability to increase female labor force participation and reduce inactivity traps. - Broaden tax base and consider merging USC into PIT with bracket reform and possible third bracket; offset regressivity with means-tested transfers. - Align property tax bases to market values and reduce number of reduced and zero VAT rates. - Review tax expenditures comprehensively to support revenue. - Continue reforms to LMPs: evaluate programs, streamline initiatives, reduce jobseekers per caseworker, and target resources to effective activation measures. - Improve upskilling and reskilling via National Skills Strategy, National Skills Council, and Regional Skills Fora to address ICT and other skill shortages. - Build on recent social insurance and pension measures to safeguard financial viability, including contribution and entitlement reforms and planned increases in state pension age. *Sources: Eurostat; and IMF staff.* ### 24. Ireland’s total spending on social protection benefits is in line with the EU average but ### 24. Ireland’s total spending on social protection benefits is in line with the EU average but ### Social protection spending levels and composition - Ireland’s cash social benefit spending in per-capita terms, measured in purchasing powers standards, is broadly in line with the simple average of EU countries. - Social benefits in cash account for about 60 percent of total social protection spending; lower than the EU average. - If spending for pensions is excluded, Ireland’s per-capita cash social benefit spending is somewhat higher than the EU average. - Ireland’s social spending absorbs a larger share of general government’s total revenue. - When in-kind social benefits are included, Ireland’s social spending accounts for a slightly larger share of general government primary expenditure than the EU simple average. ### Targeting, redistribution, and poverty reduction - Almost a third of social transfers in Ireland is means-tested, the second largest share in the EU. - For the bottom two deciles, social transfers make up about three-quarters of total income, with more than half of these transfers related to unemployment benefits and family-children allowances. - Considering all social benefits including pensions, Ireland’s welfare system is more focused on poverty reduction (measured by the difference between the share of population at risk of poverty before and after transfers) than on income redistribution (measured by the difference between market and disposable income). - If pensions are excluded, Ireland’s efficiency in redistributing income and fighting poverty is well-above EU peers; suggesting that the degree of income redistribution other EU countries achieve through pension spending, Ireland realizes through social benefits. ### Conclusions and policy recommendations - Ireland’s tax-benefit system is effective in redistributing income and alleviating poverty. Despite severe fiscal consolidation during the crisis, most welfare expenditure was preserved, providing an important cushion for households. - A relatively progressive tax system funds a robust system of social transfers, a significant share of which is means-tested. The system is particularly efficient in redistributing income and reducing the population at risk of poverty. - The crisis period shielded the elderly more than younger generations, which face more precarious job opportunities than before the crisis; it remains unclear whether this represents a structural change. - Important structural challenges persist, particularly regarding intergenerational (and regional) disparities. - Recommended multi-pronged approach to reinforce more inclusive growth: - Support unemployed workers to upskill and reskill through continued and more effective active labor market policies. - Better align education paths with market needs while providing equal opportunities for disadvantaged children. - Revise personal income taxation. - Support transition to work through additional (temporary) in-work benefits. - Improve childcare availability and affordability. - These measures may mitigate market-income inequality and reduce pressure on the welfare system. ### Household deleveraging (contextual findings included in the same chapter) - Irish households deleveraged to about 150 percent of disposable income and about 19 percent of total assets at end-2016––its lowest level in a decade. - Household debt includes loans and other accounts payables, and is seasonally-adjusted. - In the run-up to the financial crisis household financial liabilities climbed to a peak of nearly 240 percent of disposable income in late 2009 from 115 percent in early 2003. - The household leverage ratio (debt to financial and housing assets) increased to a record high of nearly 30 percent from 15 percent in 2003. - During 2003–07 the saving rate averaged 7½ percent. - Euro area reference statistics shown in the chapter: - Euro area average = 27.8 - EA average = 103.6 *Sources: Eurostat; Euromod; Central Statistics Office; European Commission; and IMF staff.* ### 4. The extent of household debt accumulation in Ireland in the pre-crisis period was ### 4. The extent of household debt accumulation in Ireland in the pre-crisis period was ### Extent of pre-crisis accumulation and international comparison - The rapid increase in household debt in Ireland in 2002–08 was exceptional and similar in magnitude only to Denmark. - Irish household debt-to-disposable-income was among the highest in Europe when the global financial crisis unfolded. - Combined with an overvaluation in house prices, high household debt amplified household vulnerabilities and likely contributed to a prolonged adjustment process. - Empirical evidence (cited) suggests economic downturns tend to be more severe and prolonged when preceded by excessive increases in household debt. ### Deleveraging dynamics and drivers (post-2009) - Adverse economic shift in 2009 (rising unemployment, tightening lending standards) prompted households to begin reducing nominal debt almost immediately. - Household debt as a ratio of disposable income continued to increase in 2009 because disposable income contracted significantly. - 2010–11: household debt ratio started to moderate initially due to significant net debt repayments. - From 2011 onwards: moderation also driven by recovery of disposable income. - Recent years: moderation mainly driven by strong increase in disposable income as new borrowing picked up and net repayments slowed. - Irish household debt registered a decline of about 90 percentage points of disposable income from its peak in late 2009. - The sharp deleveraging was accompanied by a significant level of defaults and was partly driven by: - strong growth of disposable income in recent years, - low level of new lending, - intensified supervisory efforts promoting “sustainable solutions” for distressed borrowers. ### Debt service burden and interest dynamics - Interest burden stood at more than 10 percent of household disposable income in 2007 and fell significantly in recent years due to: - strong recovery of disposable income, and - lower interest rates. - Despite high debt levels, the debt service burden is similar to that in the euro area across most age cohorts, explained mainly by: - high income levels among those that hold mortgage; - long debt maturity; - significantly lower interest rates, largely attributed to prevalence of “tracker” rate mortgages with full pass-through to mortgage interest rates. - Proportion of long maturity loans (over 30 years) increased from 10 percent to 35 percent between 2004 and 2007 (Connor and others, 2012). ### Distribution across households, cohorts, and equity positions - ECB’s Household Finance and Consumption Survey (2016) indicates about 57 percent of Irish households held debt in 2013/14—well above the euro area average of 42 percent. - About 12 percent of households had negative equity—also among the highest in the euro area—largely reflecting younger cohorts who bought homes near the peak of the property market. - Household debt among young Irish households is well above that in euro area peers; debt in this borrower group is more concentrated in property than in comparator countries (UK, US, euro area). - Deleveraging proceeded faster among older households; young households who saw large increases in their debt-to-income ratio from 2006 to 2010 deleveraged only modestly due to weak disposable income growth and slow amortization rates. - Conclusion from Lydon and McIndoe-Calder (2017): deleveraging for young households still has some way to go. ### Composition of household debt holders and market structure - Household debt mainly consists of loans from Monetary Financial Institutions (MFIs) and Other Financial Institutions (OFIs). - About 2½ percent of total household loans is provided by the general government and the non-financial corporate (NFC) sector. - The share of MFI loans averaged about 80 percent of household total liabilities in the pre-crisis period and receded to 62 percent in 2016q3. - Decline in MFI share reflects securitization of loans, retained securitization, sales of distressed loans by MFIs to non-MFIs, and new lending by non-MFIs. - New lending by non-MFIs may be driven by tight credit conditions in the banking system and more stringent regulations. - Retained securitizations represent a significant percentage of overall non-MFI lending to Irish households (Central Bank of Ireland preliminary Q3 2016 analysis). ### Determinants of household debt (cross-country regression framework) - Data sample: 2003Q1–2016Q3 for eleven euro area countries (Austria, Belgium, Finland, France, Germany, Greece, Italy, Ireland, the Netherlands, Spain, Portugal); some countries have shorter samples due to data constraints. - Dependent variable: household debt as a share of gross disposable income. - Methodology: instrumental variable two stage least squares (2SLS) with country fixed effects and a time dummy to control for common euro area macro effects; variable lags, financial assets, and employment used as instruments. - Explanatory variables included: - Demography (share of young population): younger households tend to incur more debt consistent with life-cycle model. - House prices-to-disposable-income ratio: higher house prices increase borrowing via higher collateral values and wealth effects. - Unemployment rate (difference from long-run average): high unemployment positively affects household debt ratios, possibly reflecting income shocks or distress and limited debt repayment capacity. - Home-ownership rate: homeowners tend to have more debt; higher housing assets reduce borrowing constraints and raise collateral for consumer loans. - Real interest rate on mortgages: higher rates reduce affordability and lower household borrowing. - Institutional structure (“Getting Credit” indicator): better information sharing and stronger legal rights correlate with higher credit to households. - Public debt (public debt-to-GDP): higher public debt may crowd out loans to households; Ricardian effects may influence household saving behavior. - Data sources: Haver (household debt-to-disposable income, public debt-to-GDP, interest rates on mortgages), Eurostat (home ownership, share of population age 25–44), OECD (house price-to-income ratios), World Bank (“Getting Credit” indicator). ### Estimation results and interpretation - Fixed effects specifications presented (Hausman tests rejected random effects). - Specifications exhibited relatively low explanatory power (0.18–0.35). - Findings: - Household indebtedness is higher in countries with a high share of young people and high home ownership. - Higher house price-to-income ratio has a positive effect on household debt. - Higher mortgage interest rates and lower public debt contribute to lower household indebtedness. - High unemployment (relative to its long-run average) positively affects household debt ratios. - Better information on borrower characteristics and stronger legal rights (higher “Getting Credit” values) correlate with higher household debt. - A pre-crisis dummy (value one in 2003Q1–2007Q4) shows that, on average, household debt was higher in the pre-crisis period. ### Summary statistics (2003Q1–2016Q3) - Full sample (excluding Ireland) mean values: - Debt-to-disposable income mean: 99.8 - Public debt as a share of GDP mean: 100.1 - Real interest rate on mortgages mean: 3.5 - Home ownership mean: 71.7 - Population age 25–44 mean: 28.8 - House price to income ratio mean: 110.3 - World Bank “Getting Credit” mean: 61.8 - Unemployment (diff. from long-term average) mean: 0.000; min: -2.446; max: 2.853 - Full sample (excluding Ireland) min and max for select variables: debt-to-disposable income min 22.4, max 267.2; public debt min 37.3, max 193.7; real interest rate min 0.56, max 6.52. - Ireland mean values: - Debt-to-disposable income mean: 186.9 - Public debt as a share of GDP mean: 61.9 - Real interest rate on mortgages mean: 3.1 - Home ownership mean: 74.4 - Population age 25–44 mean: 30.8 - House price to income ratio mean: 119.2 - World Bank “Getting Credit” mean: 84.9 - Unemployment (diff. from long-term average) mean: 0.000; min: -5.292; max: 7.137 - Ireland min and max for select variables: debt-to-disposable income min 112.7, max 237.2; public debt min 24.7, max 117.9; real interest rate min 2.1, max 5.0. *Source: IMF staff compilation from Central Bank of Ireland, Central Statistics Office, Eurostat, Haver, OECD, World Bank, and cited studies (as presented in the chapter).* ### 14. While the model provides useful information regarding some of the determinants of ### 14. While the model provides useful information regarding some of the determinants of household debt, some important caveats should be recognized. ### Caveats on the model and data - Estimations have relatively low explanatory power, suggesting time-varying factors (e.g., sentiment about future economic activity) are not fully captured. - Sample covers a highly volatile period including boom-bust cycles (including Ireland), elevated public debt levels, and an unusually accommodative monetary policy stance. - Widespread uncertainty in the post-crisis period may have affected household saving-borrowing behavior and may not be fully captured. - Analysis is based on macro-level data and ignores the distribution of debt across households and asymmetries between borrowers and creditors. - Two-stage instrumental variable methodology used, but endogeneity cannot be ruled out, particularly since some variable lags are used as instruments. ### Impact of identified determinants on Ireland’s deleveraging (model-based estimates) - Method: model’s coefficients combined with actual values of identified determinants to estimate household debt in Ireland (replicates hump shape pattern of Irish debt ratio). - Key model-derived movements: - Estimated debt ratio increases from about 140 percent of disposable income in early 2005 to nearly 185 percent at end-2009. - Drivers cited: higher house prices, rising share of young prior to the crisis, favorable consumer sentiment and economic conditions in the euro area (captured by time dummies). - From 2010 onwards, the estimated model explains more than half of the actual deleveraging. - Moderation in estimated debt ratio largely driven by decline in unemployment (improved economic conditions and lower distress, especially after 2013), decline in share of homeownership and young, lower access to credit, and moderation of house prices (mainly up to 2014). - At 2016Q3: - Estimated debt was just below 140 percent of disposable income. - Actual debt ratio declined more rapidly, leaving an unexplained gap of about 15 percentage points of disposable income (down from nearly 55 percentage points in late 2009). - Interpretation: All else equal, continued reduction in the unexplained gap would be consistent with further deleveraging in the near term. ### Key statistical estimates from Table 2 (Instrumental variable estimation, two-stage least square (GLS2LS), Fixed Effects 2003q1-2016q3) - Selected coefficient estimates (preserve original significance notation): - House price to income: 0.491***; 0.478***; 0.456***; 0.550***; 0.494***. - Real interest rate on mortgages: -0.791; -2.677***; - 0.427; -4.379**; -4.106**. - Share of population at age 25-44: 7.293***; 8.187***. - Public debt: - 0.076; -0.272***; -0.127**; -0.128***; -0.028. - Home ownership: 0.014; 1.337***; 0.143; -0.055; 0.696*. - Getting Credit: 0.837***; 0.719***; 0.682**; 0.597***; 0.483***. - Unemployment 1/: 2.940***; 2.326***; 3.360***; 2.6269***; 2.605***; 2.451***. - Pre-crisis: -5.448**; -12.621***; -4.614***; -3.538***; -14.419**; -14.500***. - Model fit and sample: - R2 (within): 0.649; 0.527; 0.623; 0.619; 0.612; 0.639. - R2 (overall): 0.311; 0.347; 0.214; 0.327; 0.204; 0.177. - # obs.: 395; 395; 401; 407; 402; 395. - Hausman test p-value H0: RE H1: FE: 0.000 for all specifications shown. - # countries: 11 in all specifications. - Note: Unemployment 1/ is defined as difference from the country’ long-term average. Significance notation: *** 1 percent; ** 5 percent; * 10 percent. ### Key takeaways on Ireland’s household deleveraging and structure - Household debt declined sharply in recent years but remained above the euro area average and pre-property-boom levels in Ireland. - A significant share of households, particularly young and high income households, remain heavily indebted with negative equity. - Composition shifts in debt holders: - Banking system still holds the lion’s share of household loans. - Share of household loans held by nonbanks registered a twofold increase compared to the early 2000s and stabilized at just below 40 percent of total household loans in recent years. - Increase largely reflects securitization of loans by MFIs, sale of distressed assets by MFIs to non-MFIs, and new lending by non-MFIs. - Cross-country correlates of higher household debt-to-disposable income: - High proportion of young. - High home ownership rates. - Better access to credit. - High unemployment (relative to long-term average). - High house price-to-income ratio. - Lower public debt-to-GDP ratio and lower real interest rate on mortgages also contribute to higher household debt. - Model conclusion (with caveats): Identified determinants contributed to more than half of the decline in household debt since 2010; unexplained gap narrowed from 55 percentage points of disposable income in late-2009 to about 15 percentage points at 2016Q3. Continued reduction in the unexplained gap would be consistent with further deleveraging in the near term. *Source: IMF staff calculations and analysis as presented in the supplied chapter text.* ### 7. Employing non-Irish workers is common in Ireland, and their share in employment in ### 7. Employing non-Irish workers is common in Ireland, and their share in employment in ### Employment patterns and skills - Employing non-Irish workers is common in Ireland; their share in employment in multinational-dominated sectors is somewhat higher than in the broader economy. - This reflects the open character of the Irish economy and labor market, and likely signals skills mismatches in the domestic labor market—shortages of local high-skilled professionals for high-value added jobs of multinationals (IMF, 2016). - Job creation, 2012–2015: - Indigenous sector: over 115 thousand jobs created between 2012 and 2015. - MNEs: 8 thousand jobs created between 2012 and 2015; MNE job creation jumped in 2015 to 82 thousand, just above half of total new jobs created that year. - High rate of vacancies (job vacancies per 100 jobs taken up) in multinational-dominated sectors, such as the financial sector and ICT, may suggest untapped employment potential. ### Multipliers and stabilization role of multinationals - Multinational-dominated sectors have relatively low multipliers but provide a buffer during domestic downturns. - Output multipliers: - Multinational-dominated sector: 1.2. - Indigenous sector: 1.4. - Employment effects from a €1m increase in final demand for output in a given sector: - Multinational-dominated sector: 3 additional jobs. - Indigenous sector: 10 additional jobs. - The lower multipliers/employment effects are consistent with specialized, export-oriented activities of multinationals, but strong access to external finance gives a positive macroeconomic stabilization impact during downturns. ### External sector: multinationals and external accounts - Multinationals had a sizable impact on the Net International Investment Position (NIIP), especially in 2015. - Foreign investment in Ireland has grown significantly and become the key driver of NIIP; the large size of assets and liabilities reflects the scale of multinational operations. - Recent deterioration of NIIP has been mostly driven by multinationals’ intangible operations related to balance-sheet restructuring and thus has not affected the external sustainability of core domestic sectors. - Multinationals dominate Irish exports and concentrate in a few export categories: - IDA (2011): exports of multinationals accounted for 75 percent of total in 2011. - Trade data (excluding contract manufacturing): multinational-dominated activities in exports of goods and services accounted for close to 70 percent of total in 2015; concentrated in chemicals, selected manufacturing products, and computer and financial services. - Contract manufacturing: - Approximately 25 percent of GDP in 2016 (up from 5 percent of GDP in 2013) relates to contract manufacturing, with important implications for the trade balance. - While the trade balance for goods and services is 23.2 percent of GDP, without contract manufacturing, it would be close to zero. - The large scale and low value added per unit of multinational exports reduced the ratio of domestic GVA in gross exports: - Share of domestic GVA in gross exports fell from 62 percent to 56 percent between 1995 and 2011. - Share of domestic GVA in indigenous sector exports is relatively high; short production cycle of multinationals and their increased importance in exports weigh down the overall share. ### Policy implications and risks from multinationals - Multinationals present both opportunities and challenges: - Opportunities: channel products efficiently to various markets; potential partnerships for Irish-owned businesses; multinationals invest in R&D, increasing labor productivity. - Risks: high concentration of multinational operations; potential effects from tax changes in key partners (including the US) and broader international tax cooperation discussions. - Boxed findings on offshore and tax risks: - Contract manufacturing is the most important part of offshore production; contract manufacturing goods exports accounted for a third of 2015 GDP and for about a quarter of 2016 GDP. - The complex international tax system complicates assessment of potential impacts from tax changes; Ireland’s attractiveness derives from factors beyond low tax rates (legal and regulatory system, workforce, flexible labor market, EU membership, English environment). - Destination-based tax systems and measures with less favorable treatment of imports would likely have the largest impact on exporters, including those in Ireland. - Policy priorities to increase benefits while mitigating risks: - Continue building fiscal buffers and broaden the tax base. - Fortify the business environment to maintain competitiveness: improve infrastructure, strengthen human capital (including through higher female labor force participation and investment in tertiary and technical education), promote innovation and diversification in the SME sector, and increase local sourcing in Ireland by multinationals. ### Importance for public finances - Multinationals affect government revenues directly (CIT) and indirectly (taxes on compensation and consumption). - Key fiscal facts: - CIT share of total tax revenues is about double the EU average and is concentrated among few companies. - Multinationals pay about 15 percent of total compensation of employees, hence affect social contributions and income taxes; through wage-linked consumption they affect VAT receipts. - IMF staff estimates top 50 companies account for about 10 percent of non-CIT tax receipts. - Offshore activities of multinationals are large and portable and can quickly affect public debt sustainability through impacts on tax revenues and measured GDP: - Staff estimates suggest offshore activities accounted for about 25 percent of GDP in 2016. - The concentration risk of multinational-driven CIT reinforces the importance of strong fiscal buffers and saving revenue windfalls rather than funding permanent expenditure increases. - Alternative metrics to assess fiscal stance are needed because headline (measured) GDP overstates underlying economic activity; planned publication of additional metrics beginning in July will help strip out global activities by multinationals. ### Structural reform recommendations - Strategy must reflect Ireland’s growth model—leveraging multinationals while insulating against risks and supporting the domestic economy: - Enhance labor skills: align education paths with business needs to address skills shortages identified in the 2016 National Skill Bulletin. - Improve the business environment: address gaps in contract enforcement, procedures for registering property, financial market development, and construction permits. - Address infrastructure needs: inadequate infrastructure is an important obstacle in doing business. - Promote SME innovation: R&D is concentrated in large, mostly foreign-owned enterprises; share of R&D expenditures by small firms in business R&D expenditures remains just above 13 percent. - Public-sector support for business innovation is mainly tax credits, which may be less effective for start-ups. - Promote innovation through expansion of government support for SME-driven R&D, including direct funding measures; monitor IP activity at firm level; increase collaboration with research centers and multinationals through Knowledge Transfer Ireland; assure broader non-bank financing options. - These efforts aim to improve the share of domestic value added in exports, increase employment of skilled labor, and raise the economic multiplier of multinational operations. ### Statistical challenges - Measurement challenges arise from the large scale, complex and changing nature of multinational activities relative to the domestic economy. - Multinationals’ investment in intangible and internationally mobile capital assets (including aircraft leasing) and offshore contract manufacturing have large statistical impacts not in line with their relevance to underlying domestic activity. - The complexity was particularly striking in 2015, with multinational intangible operations related to balance-sheet restructuring (and related contract manufacturing) accounting for a large portion of the 26.3 percent headline GDP growth. *International Monetary Fund (excerpted chapter).* ### 2. Why are alternative metrics important? While Ireland’s national accounts statistics are ### 2. Why are alternative metrics important? While Ireland’s national accounts statistics are ### Why alternative metrics are needed - Headline aggregates (GDP, headline balance of payments) no longer provide an accurate picture of underlying performance within Ireland because multinational activities can: - Mask trends in underlying growth rates, trade, and investment developments. - Make it more difficult to gauge the cyclical position of the economy and the appropriate setting for economic policies. - Introduce volatility and lumpiness in investment and income flows that complicate assessment. - Standard metrics can distort analysis of: - Labor productivity and economic well-being. - Fiscal sustainability. - External competitiveness. - Headline data limit meaningful cross-country comparisons and can misrepresent Ireland’s relative position. ### How multinationals affect national accounts (Boxes A1–A3 summaries) - Expenditure approach: - Offshore production and proceeds for invested capital (such as license fees) by Irish multinationals are part of net exports of goods and services. - Investment in intellectual property (IP) affects capital formation, capital stock, and imports. - Current statistics do not provide a breakdown for contract manufacturing and give only partial information on IP investment by multinationals, preventing clear separation of domestic demand and multinational-driven components. - Production approach: - Gross Value Added (GVA) includes both domestic and offshore value added from multinationals. - Current statistics do not provide a breakdown between domestic and offshore production of multinationals, complicating derivation of domestic measures such as labor productivity. - Income approach: - Investment profits by Irish-domiciled companies, including from offshore activities, are part of GNP/GNI. - While income data for re-domiciled companies are available, current statistics do not separately report profits of multinationals from offshore activities with weak links to employment. - Consequently, the labor share for domestic production cannot be derived, limiting analysis of potential output and the cyclical position. - Specific IP-related operations and their statistical impacts: - Investment into IP (purchase and import of IP) is registered as an increase in investment and imports with no immediate impact on GDP but with a negative immediate effect on the current account. - Transferring IP assets (relocating balance sheets to an Irish subsidiary) does not affect capital formation or imports immediately but increases the capital stock and affects the IIP and, over time, net exports through royalties and trade effects. - Balance of Payments and NIIP: - Multinational activities affect virtually all parts of the BOP and NIIP (trade balance, exports of goods and services, imports, income balance, financial account items including FDI, portfolio investment, and other investment). - Contract manufacturing is recorded as export on a net basis and thus does not affect imports. ### Historical metrics and their limitations - Historically, GNP was used as an alternative to GDP to address multinational effects; GNP = GDP less net factor income to non-residents from Ireland. - The gap between Ireland’s GDP and GNP is among the highest in the world and has grown, driven by multinational operations. - GNP grew on average about a percentage point a year slower than GDP over nearly two decades. - GNP has become increasingly problematic as a substitute due to: - Increased relevance of ownership of intellectual property under ESA2010/BPM6. - Significant re-domiciling of activities to Ireland. - Large-scale contract manufacturing and aircraft leasing, especially in 2015, that affected GDP, GNP, and domestic demand. ### Implications for IMF analysis and policy work (Box A4) - Producing measures of underlying domestic economic conditions: - Use of “core domestic demand” which adjusts domestic demand for intangible and aircraft investments. - Debt- and fiscal-analysis adjustments: - Rely more on complementary statistics in DSA analysis, such as public debt to revenues and per capita debt, rather than the ratio of debt to headline GDP. - External analysis and EBA methodology: - Contract manufacturing and IP-related operations complicate current account analysis and its determinants. - General caution: - Special attention is required when applying economic models; cross-country comparisons need caveats recognizing Ireland’s special circumstances. ### Institutional response, staged approach, and planned data products - ESRG and CSO process: - CSO convened an Economic Statistics Review Group (ESRG) led by the governor of the Central Bank of Ireland, with members from CSO, government, academia, business, unions, and observers from the IMF (STA) and Eurostat; contributions from OECD, UN, Central Bank of Ireland, and KPMG. - The group identified indicators to support understanding of Ireland’s highly globalized economy. - A staged approach was chosen, balancing implementation costs, stability, repeatability, and confidentiality concerns. - Key follow-up steps (CSO plans and ESRG recommendations): - Publication, beginning in mid-2017, of a GNI* series that reduces GNI for undistributed profits of foreign-owned Irish firms (on portfolio investments) and depreciation pertaining to the gross earnings of foreign-owned domestic capital; a complementary adjusted presentation of the balance of payments will also be provided. - A preliminary estimate by the Central Bank of Ireland suggests GNI* was equivalent to approximately two-thirds of GDP in 2015 (CBI, 2017). - Annual time series for GNI* and corresponding BOP measures to be published beginning July 2017. - Develop quarterly GNI* series during 2017; further work on impact of IP relocations on IIP in 2018. - Publication of additional statistics on multinationals over time, without a split between on- and offshore operations: - Structural macroeconomic indicators: breakdown of the NFC sector in the institutional sector accounts into broadly defined foreign and domestic subsectors (annual sector accounts publication beginning October 2017 with large cases only), with consideration of quarterly publication and fuller breakdown in 2018. - Cyclical indicators: quarterly publication of underlying investment and domestic demand measures adjusted for IP relocation, contract manufacturing, aircraft leasing, and re-domiciled firms; adjusted trade data at current and constant prices; quarterly GVA data for multinational-dominated sectors (planned to begin in 2018); quarterly NNP data by end-2018; monthly production and turnover data adjusted for multinational activity and alternatively weighted indices by early 2018. - Additional details on cross-border economic activity in gross fixed capital formation, domestic demand, and exports and imports. - Communication and cooperation improvements: - Continued collaboration with domestic partners and international statistical forums. - CSO appointed a head of communications and is restructuring information functions. - Limitations remaining after planned publications: - The planned GNI* will represent a lower bound for the size of the domestic economy because it removes depreciation and undistributed profits for all multinationals, not only those pertaining to offshore and IP-related activities. - Some elements will remain unavailable: disaggregation of exports of financial services and additional details on royalty flows, dividends, and related-party borrowing will not be fully available, implying continuing gaps for external assessment and proxies for underlying net exports of goods and services. - Calculating productivity for the domestic economy may require capital stock adjustments for IP assets. - CSO will continue to consider data classifications proposed by FitzGerald (2016) and Honohan (2016) to allow for “trimmed” accounts separating multinational-related distortions, weighing costs and analytical benefits. - Notable historical revisions and impacts: - The July 2016 revision to 2015 GDP was driven by a Euro 300 billion increase in the capital stock and associated activities; the revision moved 2015 GDP from 7.8 to 26.3 percent (see Annex 1, Post Program Monitoring 6). *Source: IMF staff.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17172.pdf_