## _cr05369

## Source details

**Canonical URL:** [_cr05369](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05369.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05369.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05369.pdf.json)

---

### Executive Summary — Key Findings
- Real GNP grew by 6½ percent per year on average between 1990–99 and by 4¾ percent per year during the 2000–04 cycle.
- Real GNP expanded by 5½ percent in 2004.
- Employment grew by 3 percent in 2004; unemployment roughly unchanged at 4½ percent in 2004 (first quarter: 4¼ percent noted elsewhere).
- HICP inflation fell to 2¼ percent in 2004.
- Real effective exchange rate appreciation has raised Ireland’s cost levels above those of its main trading partners; nominal effective exchange rate increased by about 14 percent since 2002.
- House price appreciation slowed to 3–5 percent (annual rate) in recent months.
- Mortgage credit growth remains high; household debt as a share of disposable income continues to rise sharply (household debt exceeds 110 percent of disposable income; 120 percent at end-2004 cited in Executive Board summary).
- Fund assessment: the 2005 budget implies sizable fiscal stimulus and is ill-advised given the economy is near full employment.
- Institutional commitments: Ireland has accepted the obligations of Article VIII, Sections 2, 3, and 4; subscribed to the Special Data Dissemination Standard.

### Outlook: Growth, Capacity, and Inflationary Risks
- Staff macro projections (Percentage change):
  - Real GNP: 2002 1.5; 2003 2.8; 2004 5.5; 2005 5.1; 2006 4.9.
  - Real GDP: 2002 6.1; 2003 3.7; 2004 4.9; 2005 5.4; 2006 5.2.
  - Real domestic demand: 2002 3.4; 2003 3.3; 2004 4.0; 2005 4.6; 2006 4.9.
  - Private consumption: 2002 2.8; 2003 2.6; 2004 3.2; 2005 4.5; 2006 5.7.
  - Residential investment: 2002 5.1; 2003 14.4; 2004 12.2; 2005 2.0; 2006 -1.0.
  - Output gap (percent of potential output): 2002 2.2; 2003 -0.8; 2004 -0.5; 2005 0.0; 2006 0.7.
  - Consumer Prices: 2002 4.7; 2003 4.0; 2004 2.3; 2005 2.3; 2006 2.5.
  - Average unemployment rate: 2002 4.4; 2003 4.6; 2004 4.5; 2005 4.2; 2006 4.0.
- Near-term staff view:
  - Project real GNP growth in 2005–06 of about 5 percent, driven by acceleration in private consumption, strong employment and income growth, fiscal stimulus in 2005, and withdrawals from SSIAs beginning mid-2006.
  - Residential investment expected to decline modestly starting next year.
  - Staff baseline: HICP inflation to increase slightly to 2½ percent next year.
- Supplement (revisions & H1 2005):
  - Real GNP growth projection for 2005 marked down by 0.6 percentage points to 4½ percent.
  - Real GDP growth in 2004 revised down to 4½ percent (chain-linking and revised net factor income).

### Fiscal Policy: Avoiding Procyclicality and Building Buffers
- Assessment:
  - Public finances are strong; gross public debt about 30 percent of GDP.
  - Budget 2005 implies a fiscal deterioration: swing in overall balance of 1.7 percent of GDP driven mainly by higher social welfare payments (0.6 percent of GDP), income tax credits/rate bands (0.4 percent of GDP), and higher public sector pay (0.3 percent of GDP).
- Staff fiscal projections and key table figures:
  - Overall balance (percent of GDP): 2002 -0.4; 2003 0.2; 2004 1.3; 2005 -1.0; 2006 -0.5; 2007 -0.5.
  - Cyclically adjusted (percent of GDP): 2002 -1.2; 2003 0.6; 2004 1.6; 2005 -1.0; 2006 -0.7; 2007 -0.7.
  - Excluding one-off factors (percent of GDP): 2002 -1.2; 2003 0.2; 2004 0.7; 2005 -0.5; 2006 -0.8; 2007 -0.8.
  - Gross public debt: 2002 32.7; 2003 32.1; 2004 29.6; 2005 29.6; 2006 29.2; 2007 29.0.
- Staff near-term recommendations:
  - Fiscal tightening desirable given cyclically advanced position and accommodative euro-area monetary policy.
  - Budget execution for remainder of 2005 should remain prudent; any revenue windfalls should be saved.
  - Recommend improvement in cyclically adjusted fiscal balance of ½ percent of GDP in 2006; balanced budget target in 2006 noted as consistent.
  - If aggregate demand weakens abruptly, allow automatic stabilizers to operate fully and avoid specific housing-market support measures.
- Medium/long-term fiscal issues:
  - Age-related spending on health and pensions projected to rise by about 5 percentage points of GDP by 2050.
  - National Pensions Reserve Fund (NPRF): government setting aside 1 percent of GNP annually; NPRF currently about 10 percent of GNP; staff expect pre-funding to cover about one third of increase in pension spending.
  - Staff: gradual reduction in gross public debt would help prepare for higher age-related spending.
- Composition and tax recommendations:
  - Restrain growth of non-interest current spending (non-interest current spending rose by more than 3 percent of GDP between 2000–04).
  - Broaden tax base: limit property-related allowances, preserve nominal ceiling on mortgage interest tax relief (MITR), and introduce a property tax (authorities currently no plans to raise MITR ceiling; limited appetite for property tax).
  - Improve value for money: five-year capital envelopes introduced; staff suggest five-year envelopes for current spending and extending fiscal projections to at least five years.
- Indexation debate:
  - Staff suggest automatic indexation of tax credits/bands and social welfare payments to prices.
  - Authorities resist automatic indexation, citing discretion over work incentives and need for policy room; staff note many major industrial countries have automatic indexation.

### Housing Market Assessment and Risks
- Housing market:
  - House price appreciation slowed to 3–5 percent (annual rate) since mid-2003.
  - Valuation measures: price-earnings ratio about double its historical average and one-and-a-half times its 2002 level.
  - Composition: authorities estimate ~one sixth of houses built 2000–04 are second homes or buy-to-let; market analysts indicate a much higher percentage.
- Risks to forecast:
  - Upside: stronger fiscal stimulus effects; recovering domestic demand.
  - Downside: housing market could slow more quickly than envisaged, adversely affecting employment and wealth.
  - Main external risks: oil prices and potential disorderly resolution of global imbalances reducing external demand and inward FDI.
- Macro linkage:
  - House price boom does not appear to have depressed household saving; price declines would not necessarily weaken consumption directly.

### Labor Market and Wage Policy
- Labor market performance:
  - Labor market flexibility described as good; rapid employment growth since early 1990s driven by higher participation and immigration.
  - Unemployment declined from one of the highest to the lowest in Europe over fifteen years; staff analysis: more than half of the fall is structural.
  - Tax wedge among the lowest in industrial countries.
- Wage policy guidance:
  - Given high labor costs, wage moderation needed in upcoming national wage agreement (covering 2006–08) and next public sector benchmarking.
  - Benchmarking: first exercise reduced rigidity of pay relativities; second exercise (beginning H2 2005, report in 2007) should focus on recruitment/retention, valuation of pensions, flexibility of work practices, and transparency.
  - Staff warned of spillovers from excessive public sector pay to private sector.

### Financial Sector and Stability
- Banking system status:
  - Profitability and capitalization strong; nonperforming loans low (non-performing loans: 1.0, 1.0, 1.0, 1.0, 0.9, 0.8 for 1999–2004/2005 entries).
  - Credit growth—while slowing—remains high; property-related lending accounts for more than half of bank lending stock.
  - Net interest margins declined as reliance on more expensive wholesale funding increased.
  - Household debt: exceeds 110 percent of disposable income; only one tenth of households have debt service burdens greater than 23 percent of disposable income.
- Supervisory priorities:
  - Implement Basel II; strengthen stress-testing and credit standards.
  - Consider methodological improvements to stress tests: incorporate second-round effects; increase variety of shocks; enhance treatment of collateral realizability.
  - FSAP Update planned for 2006; interim update to Financial Stability Report planned.
- Competition and regulatory issues:
  - Obstacles to competition identified in personal current accounts and SME lending.
  - Policy steps: removal of double stamp duty on switching financial cards; voluntary code on switching current accounts under review.
  - Staff recommendation: extend codes of conduct to promote competition and eventually remove regulation of certain fees.
- Financial sector indicators (selected exact figures from Table 6 and summaries):
  - Annual credit growth rates (to private sector): 21.3, 21.3, 15.1, 15.0, 17.9, 26.6 (series over years).
  - Annual mortgage credit growth rates: 22.4, 24.3, 17.8, 23.8, 25.5, 26.5.
  - Personal lending as share of total loans: 53.7, 52.1, 52.2, 55.3, 55.6, 55.8.
  - Commercial property lending as percent of total loans: 12.4, 15.0, 16.4, 17.0, 19.7, 21.2.
  - Risk-weighted capital/asset ratios of domestic banks: 10.8, 10.7, 10.6, 12.3, 13.9, 12.6.
  - Liquid assets of all banks to total assets (liquid asset ratio): 32.0, 32.0, 30.0, 30.0, 33.6, 33.0.

### Pensions, Household Saving, and Long-Term Challenges
- Saving and pensions:
  - Authorities concerned households may not be saving enough for retirement.
  - SSIAs: individuals receive a 25 percent tax credit on contributions to SSIAs (up to a ceiling); introduced 2001–02; must be held five years to avoid exit tax.
  - Take-up of Personal Retirement Saving Accounts (launched 2002) has been disappointing.
  - Pensions Board estimate: based on a desired average replacement rate of 65 percent, annual saving shortfall is about 5 percent of GNP; shortfall acute in middle three quintiles.
  - Staff policy suggestions: automatic enrolment (with opt-out) to raise voluntary saving; target tax incentives at lower- and middle-income workers; improve financial education.
  - Authorities: favorable tax treatment of SSIAs boosted SSIA saving, but overall effect on saving unclear.
- Long-term fiscal preparedness:
  - NPRF: government sets aside 1 percent of GNP annually; NPRF about 10 percent of GNP; staff expect it to cover ~one third of increased pension spending.
  - Staff recommend gradual reduction in gross public debt to prepare for age-related spending increases.

### Key Quantitative Indicators (selected exact figures)
- Growth and prices:
  - GNP (2001–06): 3.8, 1.5, 2.8, 5.5, 5.1, 4.9.
  - GDP (2001–06): 6.0, 6.1, 3.7, 4.9, 5.4, 5.2.
  - HICP (annual average): 4.0, 4.7, 4.0, 2.3, 2.3, 2.5.
  - Unemployment rate (percent): 3.8, 4.4, 4.6, 4.5, 4.2, 4.0.
- Public finance (percent of GDP; selected):
  - General government balance: 0.9, -0.4, 0.2, 1.3, -1.0, -0.5 (2000–05 series with projections).
  - General government gross debt: 35.9, 32.7, 32.1, 29.6, 29.6, 29.2.
- External and financial vulnerability (selected):
  - Current account (percent of GDP, memoranda): -0.6, -1.3, -1.4, -0.4, -1.0, -1.2 (2001–06).
  - Balance of goods and services (percent of GDP): 15.0, 16.6, 15.4, 15.6, 15.0, 15.1.
  - Nominal effective exchange rate (1995=100): 89.2, 90.7, 96.7, 99.7, 99.4 (series).
  - Household debt: exceeds 110 percent of disposable income; cited as 120 percent of disposable income at end-2004 in Executive Board summary.
  - Mortgage credit growth (annual rates): 22.4, 24.3, 17.8, 23.8, 25.5, 26.5.
- Memorandum for 2004:
  - Area: 70.3 thousand square kilometers.
  - Population (million): 4.0.
  - GDP per capita (in SDRs): 31727.9.

### Staff and Executive Board Policy Priorities (summary)
- Near-term:
  - Fiscal restraint to help relieve potential overheating and build a cushion against downside risks.
  - Wage moderation to keep wage growth in line with productivity.
  - Continued supervisory efforts to maintain financial stability; strengthen stress-testing and credit standards.
- Medium-term:
  - Improve value for money in public services; consider multi-year fiscal frameworks and extended fiscal projections.
  - Broaden the tax base while preserving appropriate low business and labor taxes; review property-related tax reliefs.
  - Address pension saving shortfall through a combination of automatic enrolment, targeted incentives, and financial education.
  - Foster competition in banking, insurance, professional services, and retail; extend codes of conduct and improve disclosure where appropriate.

*IMF staff report (2005), mission comprised Mr. Morsink (head), Ms. Honjo, Ms. Iakova, and Ms. Moreno Badia (all EUR).*

### 2005. The mission comprised Mr. Morsink (head), Ms. Honjo, Ms. Iakova, and

### _cr05369 - 2005. The mission comprised Mr. Morsink (head), Ms. Honjo, Ms. Iakova, and

### Executive Summary — Key Findings
- Economic performance has been impressive; real GNP grew by 6½ percent per year on average between 1990–99 and by 4¾ percent per year during the 2000–04 cycle.
- Real GNP expanded by 5½ percent in 2004.
- Labor market: rapid employment growth supported by immigration; unemployment roughly unchanged at 4½ percent in 2004.
- Inflation and competitiveness:
  - HICP inflation fell to 2¼ percent in 2004.
  - Real effective exchange rate appreciation over the past few years has raised Ireland’s cost levels above those of its main trading partners.
- Housing and household balance sheets:
  - House price appreciation slowed to 3–5 percent (annual rate) in recent months.
  - Mortgage credit growth remains high and household debt as a share of disposable income continues to rise sharply.
- Policy stance:
  - The 2005 budget implies sizable fiscal stimulus; staff view this as ill-advised given the economy is near full employment.
  - Authorities agreed to publication of the staff report.
- Institutional commitments:
  - Ireland has accepted the obligations of Article VIII, Sections 2, 3, and 4 (Appendix I).
  - Ireland has subscribed to the Special Data Dissemination Standard (Appendix II).

### Background — Recent Performance and Structural Context
- Growth drivers and channels:
  - Recovery after 2001–02 downturn; export growth rebounded with global upturn.
  - Investment accelerated strongly; consumption growth was less buoyant.
  - Real GNP growth in 2004: 5½ percent.
- Labor market and wages:
  - Employment grew by 3 percent in 2004, boosted by immigration from new EU member states.
  - Compensation per employee is now higher in Ireland than in the EU-15 or the U.K. (2004 levels).
- Housing market and construction:
  - Pace of house price increases slowed to 3–5 percent annual rate since mid-2003.
  - Construction sector is large: the ratio of gross value added in construction to GNP is surpassed only by Spain in Europe.
  - Staff analysis suggests estimated house price overvaluation in Ireland is relatively large compared to other countries (acknowledged uncertainty in precise estimates).
- Public finances and political context:
  - Center coalition government in power since June 1997; general elections must take place by mid-2007.

### Outlook: Growth, Capacity, and Inflationary Risks
- Staff macro projections (Percentage change, unless otherwise indicated):
  - Real GNP: 2002 1.5; 2003 2.8; 2004 5.5; 2005 5.1; 2006 4.9.
  - Real GDP: 2002 6.1; 2003 3.7; 2004 4.9; 2005 5.4; 2006 5.2.
  - Real domestic demand: 2002 3.4; 2003 3.3; 2004 4.0; 2005 4.6; 2006 4.9.
  - Private consumption: 2002 2.8; 2003 2.6; 2004 3.2; 2005 4.5; 2006 5.7.
  - Public consumption: 2002 8.6; 2003 2.5; 2004 2.9; 2005 4.5; 2006 2.9.
  - Fixed investment: 2002 3.0; 2003 3.4; 2004 9.2; 2005 4.3; 2006 4.0.
  - Residential investment: 2002 5.1; 2003 14.4; 2004 12.2; 2005 2.0; 2006 -1.0.
  - Net exports (contribution to growth): 2002 3.1; 2003 1.2; 2004 2.3; 2005 1.7; 2006 1.3.
  - Output gap (in percent of potential output): 2002 2.2; 2003 -0.8; 2004 -0.5; 2005 0.0; 2006 0.7.
  - Consumer Prices: 2002 4.7; 2003 4.0; 2004 2.3; 2005 2.3; 2006 2.5.
  - Average unemployment rate: 2002 4.4; 2003 4.6; 2004 4.5; 2005 4.2; 2006 4.0.
- Near-term prospects and risks:
  - Staff project real GNP growth in 2005–06 of about 5 percent, driven by acceleration in private consumption, strong employment and income growth, fiscal stimulus in 2005, and withdrawals from SSIAs beginning mid-2006.
  - Business investment expected to remain robust; residential investment projected to decline modestly starting next year.
  - Net exports expected to contribute to growth but at a declining rate as domestic demand outpaces trading partners.
  - Shared view: economy about at full employment; projected growth in 2005–06 somewhat above potential and could lead to upward pressures on wages and prices.
  - Staff baseline projection: HICP inflation to increase slightly to 2½ percent next year.

### Fiscal Policy: Avoiding Procyclicality and Building Buffers
- Assessment:
  - Public finances are strong, but the 2005 budget implies sizable fiscal stimulus.
  - Fund view: such stimulus is ill-advised for an economy close to full employment.
- Policy recommendations and implementation issues (from Box 1 and main text):
  - Need for fiscal tightening to dampen aggregate demand in the short term and to build a cushion against medium-term downside risks, notably in the housing market.
  - Further efforts needed to improve value for money in delivery of public services.
  - Fund has called for a medium-term expenditure framework; spending envelopes introduced for capital spending but not for current spending.
  - Views diverged on the extent of institutional innovation needed to enhance focus on strategic fiscal issues.

### Labor Market and Wage Policy
- Labor market characteristics:
  - Labor market flexibility described as good.
  - Unemployment rate in first quarter: 4¼ percent; near most estimates of the NAIRU.
- Wage policy concerns and recommendations:
  - Given high labor costs, wage moderation is needed in the upcoming national wage agreement and the next public sector benchmarking exercise.
  - Methodology and transparency of benchmarking could be improved.
  - The present three-year national wage agreement contained considerable wage moderation and offered no fiscal concessions; progress in limiting public sector wages has been more limited.

### Financial Sector and Stability
- Current position:
  - Banking system profitability and capitalization are strong.
  - Credit growth—especially to the property sector—remains high.
- Priorities and recommendations:
  - Continued supervisory efforts are needed to maintain financial stability.
  - Priorities include further strengthening stress-testing and credit standards, and preparing an update to the Financial Stability Report.
  - An FSAP Update is planned for 2006.

### Structural Issues and Long-Term Challenges
- Population aging and retirement saving:
  - Important progress made in preparing for population aging.
  - Concern: households may not be saving enough for retirement.
  - Policy discussion on options to raise household saving; SSIAs details:
    - Individuals receive a 25 percent tax credit on contributions to SSIAs (up to a ceiling).
    - SSIAs were introduced in 2001–02 and must be held for five years to avoid an exit tax.
- Competition and product-market reform:
  - Product market reform is well-advanced, but pace of regulatory reform has been slower than recommended by the Fund.
  - Agreement that better regulation is needed to stimulate competition in some sectors, including banking and insurance, professional services, and retail.

### Selected Quantitative Indicators and Risks
- Housing and household finance:
  - House price appreciation slowed to 3–5 percent (annual rate) in recent months.
  - Residential investment: 2004 12.2 percent; projected 2005 2.0 percent; projected 2006 -1.0 percent.
  - Mortgage credit growth remains high; household debt as percent of disposable income rising sharply.
- Exchange rates and competitiveness:
  - Nominal effective exchange rate increased by about 14 percent since 2002.
  - Economy-wide ULC- and CPI-based real effective exchange rates have appreciated substantially since 2002; pace slowed in 2004.
  - Despite REER appreciation, pipeline of inward FDI remains healthy and prospects for export growth continue to be strong.
  - Ireland's share of industrial country exports of goods and services appears to have stabilized after rising in the late 1990s.

*IMF staff report (2005), mission comprised Mr. Morsink (head), Ms. Honjo, Ms. Iakova, and Ms. Moreno Badia (all EUR).*

### 10. The housing market is widely regarded as headed for a soft landing, though

### 10. The housing market is widely regarded as headed for a soft landing, though 

### Housing market assessment
- Survey evidence: expectations of house price appreciation have declined in line with the easing of actual house price appreciation.
- Authorities' view: underlying demand for housing is relatively strong; number of dwellings per capita in Ireland is still low compared to other advanced economies in Europe.
- Valuation measures: house prices are relatively high on a variety of measures, including the price-earnings ratio in the housing market, which is still about double its historical average and one-and-a-half times its 2002 level.
- Composition of recent construction: authorities cited estimates that only about one sixth of the houses built between 2000–04 are second homes or buy-to-let properties; market analysts indicate a much higher percentage falls into these two categories.

### Risks to the forecast and macro linkages
- Balance of risks: authorities and staff saw risks to the forecast as broadly balanced.
- Upside risks:
  - Stronger-than-expected effects of fiscal stimulus.
  - Recovering confidence on domestic demand, especially private consumption and residential investment.
- Downside risks:
  - Housing market could slow more quickly than envisaged, with adverse consequences for employment and wealth.
  - Main external risks: oil prices and the possibility of a disorderly resolution of global imbalances, which could sharply dampen external demand and inward foreign direct investment.
- House prices and consumption: the house price boom does not appear to have depressed household saving, so price declines would not necessarily weaken consumption directly.

### Fiscal policy: overview and recent performance
- Public debt and tax structure:
  - Gross public debt is about 30 percent of GDP.
  - Taxes on labor and business income are relatively low.
- Fiscal stance history:
  - General government fiscal position has been either close to balance or in surplus since 1996.
  - Fiscal policy was expansionary during 2001–02, contractionary during 2003–04 (when the output gap was negative).
- Revenue windfalls:
  - Between 1991–2003, revenue windfalls (reflecting higher-than-projected economic growth) were usually associated with increased spending.
- 2004 improvement: general government balance improved by 1.1 percent of GDP to a surplus of 1.3 percent of GDP, reflecting higher-than-projected growth and one-off factors (receipts from revenue investigations and underspending of the capital budget).

### Box 2 — Favorable Fiscal Surprises: findings
- Primary drivers of favorable surprises between 1995–2003:
  - Primarily fortunate circumstances (stronger-than-expected economic growth and buoyant asset prices).
  - Prudence also played a role (under-projection of revenue elasticity).
- Behavioral response:
  - Revenue overperformance tended to be associated with higher-than-projected expenditure (some of the good luck was spent, more so than in other industrial countries).
  - Favorable surprises on the overall fiscal balance were not much greater than the average for other industrial countries.

### Budget 2005 and projected fiscal path
- Budget 2005 implies a fiscal deterioration:
  - Swing in the overall balance of 1.7 percent of GDP, reflecting mainly:
    - Higher social welfare payments (0.6 percent of GDP; for old age pensions, child benefit, and unemployment assistance).
    - Increased income tax credits and rate bands (0.4 percent of GDP).
    - Higher public sector pay (0.3 percent of GDP).
- Subsequent developments:
  - Revenues in 2004 and the first few months of 2005 have been stronger than expected.
  - Supreme Court ruling: government must reimburse certain nursing home charges received over the past 30 years.
- Staff projection:
  - Cyclically adjusted general government balance excluding one-off factors will decline by more than 1 percent of GDP to a deficit of about ½ percent of GDP.

### Tabled staff projections (as reported)
- General Government Balances (In percent of GDP) — Staff projections:
  - Overall balance: 2002 -0.4; 2003 0.2; 2004 1.3; 2005 -1.0; 2006 -0.5; 2007 -0.5
  - Cyclically adjusted: 2002 -1.2; 2003 0.6; 2004 1.6; 2005 -1.0; 2006 -0.7; 2007 -0.7
  - Excluding one-off factors: 2002 -1.2; 2003 0.2; 2004 0.7; 2005 -0.5; 2006 -0.8; 2007 -0.8
  - o.w. Revenue investigations: 2002 0.0; 2003 0.0; 2004 0.5; 2005 0.1; 2006 0.0; 2007 0.0
  - Reimbursement of nursing home charges: 2002 0.0; 2003 0.0; 2004 0.0; 2005 -0.6; 2006 0.0; 2007 0.0
  - Gross public debt: 2002 32.7; 2003 32.1; 2004 29.6; 2005 29.6; 2006 29.2; 2007 29.0

### Staff fiscal recommendations for near term
- Fiscal tightening is desirable given Ireland’s cyclically advanced position and accommodative euro area monetary policy.
- Budget execution for remainder of 2005 should remain prudent; any revenue windfalls should be saved (as in 2004).
- Recommend an improvement in the cyclically adjusted fiscal balance of ½ percent of GDP in 2006.
- Staff noted that a balanced budget target in 2006 would be consistent with the call for fiscal tightening.
- Authorities' contingency: if aggregate demand weakens unexpectedly and abruptly (e.g., sharper housing slowdown), allow automatic stabilizers to operate fully.

### Medium- and long-term fiscal issues and policy
- Long-term pressures:
  - Age-related spending on health and pensions projected to rise by about 5 percentage points of GDP by 2050.
- National Pensions Reserve Fund (NPRF):
  - Government is setting aside every year 1 percent of GNP in the NPRF to prepare for future old-age and civil service pension spending (this does not affect the fiscal balance, but does add to gross debt).
  - NPRF currently amounts to about 10 percent of GNP.
  - Staff: pre-funding welcomed but expected to cover only about one third of the increase in pension spending.
  - Staff suggested the NPRF avoid potential conflicts of interest in investment strategy (recently authorized but not yet undertaken investments in domestic private public partnerships).
- Staff recommendation: a further gradual reduction in gross public debt would help prepare for higher age-related spending.
- Authorities’ view: decline in government infrastructure spending over long term could provide room for higher age-related spending; staff cautioned scope for reducing infrastructure spending might not be large (between 2002–04, Ireland spent 4¾ percent of GNP while the industrial country average was 3 percent of GDP).

### Composition of adjustment and tax recommendations
- Expenditure side:
  - Staff suggested restraining growth of non-interest current spending; noted non-interest current spending rose by more than 3 percent of GDP between 2000–04, reflecting across-the-board increases.
  - Continued high level of government investment is appropriate given Ireland’s relatively low level of public capital.
- Revenue side:
  - Agreement that Ireland’s relatively low levels of business and labor taxes are appropriate and that the tax net should be broadened.
  - Authorities reviewing property-related tax reliefs.
  - Staff suggestions:
    - Establish across-the-board limits on allowances to curtail property-related tax reliefs.
    - Preserve the nominal ceiling on mortgage interest tax relief (MITR).
    - Introduce a property tax.
  - Authorities’ position:
    - No plans at present to raise the MITR ceiling.
    - Limited appetite for a property tax, recalling short-lived experience with a property tax on high-value homes between 1983 and 1996.

### Public services, fiscal frameworks, and transparency
- Value for money:
  - Authorities agreed further efforts needed to improve value for money in delivery of public services.
  - Introduced five-year capital envelopes and guidelines for appraisal and management of capital expenditure proposals.
  - Authorities noted intent to increase competition at tendering stage and improve contracting arrangements for construction projects.
- Multi-year budgeting and projections:
  - Authorities felt experience with capital envelopes should be assessed before adopting multi-year envelopes for current spending.
  - Staff suggested extending fiscal projections (currently only three years) to at least five years.
- Health sector reforms:
  - Progress in implementation of the government’s reform plan launched in mid-2003, including establishment of a single national entity to manage health services, modernization of management planning, and introduction of a plan linking services to staffing.

### Indexation of tax credits and social payments: disagreement
- Staff suggestion: automatically index tax credits and bands and social welfare payments to prices.
- Authorities’ argument:
  - Changes in real burdens of tax credits and bands affect work incentives and should be explicit policy decisions, not automatic side effects of inflation.
  - Lack of indexation provides room for maneuver for consolidation if necessary.
  - For consistency, excise rates would also need to be automatically indexed.
- Staff observation:
  - Current system gives rise to periodic, lumpy adjustments, partly underlying fiscal stimulus in 2005.
  - Most major industrial countries (Canada, France, the U.K., and the U.S.) have adopted automatic indexation to prices.
- Staff conclusion: benefits of fiscal neutrality and reduced procyclicality need to be weighed against loss of fiscal discretion.

### Third-party assessment of fiscal policy: proposals and reservations
- Staff view: broader third-party assessments (e.g., building on National Economic and Social Council or establishing a fiscal council) would enhance public debate and help avoid procyclicality and build a fiscal cushion.
- Authorities’ view:
  - Agreed on need to deepen public understanding of fiscal issues and to expand parliamentary examination of budgetary material (commitment in the 2005 Budget).
  - Not convinced about merits of broader third-party assessment; noted existing academics and private analysts contribute views.
  - Concerned public debate focuses on specific budget measures instead of strategic issues.
  - Doubtful whether Ireland’s budgetary performance points to need for major institutional innovations; questioned effectiveness of fiscal councils elsewhere and risk of such a council becoming a venue for special interests.

### Labor market and wage policy: assessment and recommendations
- Labor market performance:
  - Labor market flexibility relatively good.
  - Rapid employment growth since early 1990s driven by rising labor force participation (including by women) and immigration.
  - Decline in unemployment reflects rapid growth of aggregate demand and reforms of tax and benefit systems.
  - Tax wedge is now one of the lowest among industrial countries.
  - Authorities allowed immigrants from new EU member states full access to the labor market; immigrants played key role in relieving labor shortages.
- Box 3 — Fall in unemployment:
  - Unemployment declined from one of the highest to the lowest level in Europe over the past fifteen years.
  - Staff analysis: more than half of the fall in unemployment is structural.
  - Drivers include reduction in taxes on labor, lower tax burden on second earner, stricter enforcement of benefit eligibility, reduction in effective net benefit replacement ratios, coordinated wage negotiations, and active labor market policies.
- Wage policy going forward:
  - With labor costs already high relative to euro area partners, authorities and staff agreed wage moderation is needed to preserve competitiveness.
  - National wage agreements and public sector benchmarking are important in wage setting.
  - For the next national wage agreement (covering 2006–08), authorities noted need to account for lower expected inflation and lower projected productivity growth.
- Public sector benchmarking:
  - Authorities satisfied with first exercise; it reduced rigidity of pay relativities and enhanced service delivery.
  - For the second exercise (beginning second half of 2005, reporting in 2007), authorities want greater focus on recruitment and retention, better valuation of pensions, and more emphasis on flexibility of work practices, especially in education and health.
  - Authorities recognize importance of transparency but cite limits on disclosure of confidential information.
  - Staff noted risk of spillovers from excessive public sector pay increases to the private sector.

### Financial sector
- Heading indicates need for continued supervisory efforts; detailed content on financial sector supervision is not included in the supplied text.

*Source: IMF staff report content provided in the supplied document.*

### 23. Banking system profitability and capitalization are strong, but vulnerabilities

### 23. Banking system profitability and capitalization are strong, but vulnerabilities

### Banking system findings and vulnerabilities
- Credit growth—while slowing—remains high; property-related lending accounts for more than half of the stock of bank lending.
- Net interest margins have declined as reliance on more expensive wholesale funding has increased.
- Household debt has risen sharply and now exceeds 110 percent of disposable income.
- Authorities argued awareness efforts (central bank public warnings about the eventual rise in interest rates; roundtable discussions with heads of financial institutions organized by the central bank and financial regulator) have helped to cool the housing market.
- Authorities said a drop in house prices remains a possibility, but the banking system could withstand a considerable fall, as shown by the scenario analysis in the September 2004 Financial Stability Report.
- Only one tenth of households have debt service burdens greater than 23 percent of disposable income.
- International diversification of banks’ assets is increasing, but much of this lending is also property-related.
- The central bank and financial regulator have established a financial stability committee, which recently conducted a crisis simulation exercise.
- Authorities noted that asset-covered securities provide relatively inexpensive funding for mortgage lenders.

### Supervisory priorities and stress testing
- Supervisory priorities: implement Basel II and further strengthen stress-testing and credit standards.
- Basel II requires establishing more risk-based capital requirements.
- Authorities were satisfied with the latest stress-testing exercise, but are considering methodological improvements, including:
  - incorporating second-round effects;
  - increasing the variety of shocks;
  - enhancing the treatment of the realizability of collateral.
- A recent review of credit standards at major mortgage lenders found standards are generally good, but there is a need to tighten lending criteria and establish stricter guidelines for credit officers.
- In the insurance sector, authorities plan to introduce a supervisory regime for reinsurance companies in late 2005 or early 2006, in line with the EU Reinsurance Directive.
- An interim update on financial stability issues to complement the Financial Stability Report is currently being planned.

### Competition and regulatory issues in the financial sector
- A recent report commissioned by the Competition Authority found obstacles to competition in personal current accounts and lending to small- and medium-sized enterprises.
- Authorities noted:
  - the double stamp duty charge on switching financial cards has already been removed;
  - banks have recently agreed to a voluntary code of behavior on switching current accounts (this voluntary code is now being reviewed).
- Authorities are reluctant to eliminate the legal requirement to notify fees on current accounts before they are satisfied that competition has been improved.
- In the non-life insurance sector, greater disclosure of information on claims histories by insurers would facilitate entry; authorities are addressing practical issues like the appropriate level of detail and the precise mechanism for disclosure.
- Staff recommendation: codes of conduct to promote competition could usefully be extended, with the eventual objective of removing the regulation of certain fees.

### Household debt, pensions, and saving for retirement
- Household debt: exceeds 110 percent of disposable income.
- Only one tenth of households have debt service burdens greater than 23 percent of disposable income.
- Authorities expressed concern that households are on the whole not saving enough for retirement.
- State-funded old-age pension is relatively frugal and provides a flat share of average earnings; private pensions cover only about half of those at work and many—especially defined-contribution schemes—provide only low replacement rates.
- Take-up of Personal Retirement Saving Accounts (launched in 2002) has been disappointing despite media campaigns.
- The Pensions Board cited estimates that, based on a desired average replacement rate of 65 percent and a number of other assumptions, the annual saving shortfall is about 5 percent of GNP.
- The saving shortfall is especially acute in the middle three quintiles of the income distribution.
- Staff observed households at the peak of their life-cycle earnings (aged 45–60) have relatively low saving (see Box 4).
- Staff findings from Household Budget Surveys: young and poor households save very little; booming house prices do not seem to have reduced saving.

### Policy options and recommendations on pensions and saving
- National Pensions Review (due to be completed later this year) is examining policy options to raise household saving.
- Authorities noted trade-offs:
  - raising the state-funded old-age pension would involve considerable additional government spending and higher taxes;
  - making additional (second pillar) saving mandatory could increase labor costs, imply a government guarantee, and lead to a race to the bottom in occupational pensions;
  - encouraging voluntary saving through greater tax incentives could be costly in terms of foregone revenue.
- Staff suggestions:
  - automatic enrolment (with an opt-out clause) can be effective in raising voluntary saving;
  - fiscal cost of tax incentives can be reduced by targeting them at lower- and middle-income workers;
  - devote more effort to improving financial education.
- Authorities observed the favorable tax treatment of SSIAs has boosted saving in the form of SSIAs, but the effect on overall saving is not clear.

### Macro-fiscal and labor policy priorities
- Key fiscal priorities: help relieve potential overheating and build a cushion against downside risks.
- Public debt is low and fiscal positions have been generally prudent, but the 2005 budget is imparting considerable fiscal stimulus, adding pressures on capacity constraints.
- Guidance:
  - In the remainder of 2005, budget execution needs to remain prudent and any revenue windfalls should be fully saved.
  - In 2006, underlying fiscal adjustment of ½ percent of GDP would be desirable.
- If aggregate demand weakens unexpectedly and abruptly, automatic stabilizers should be allowed to operate fully and specific measures to prop up the housing market should be avoided.
- Composition of adjustment:
  - Restrain growth of current spending to limit inefficiencies.
  - Broaden the tax base by limiting property-related capital allowances, preserving the nominal ceiling on mortgage interest tax relief, and introducing a property tax.
- Improve value for money in public services:
  - Introduce five-year envelopes for current spending;
  - Extend fiscal projections to five years;
  - Improve government procurement practices;
  - Focus on quantified performance targets.
- Consider automatic indexation of tax credits, bands and excise duties, and social welfare payments to consumer price developments to improve fiscal neutrality and reduce procyclicality.
- Develop mechanisms to build public awareness and understanding of fiscal issues.

- Labor/wage guidance:
  - With labor costs already high, keep wage growth in line with productivity growth to maintain competitiveness.
  - Strong case for moderating overall wage increases under the forthcoming national wage agreement and the next public sector benchmarking exercise.
  - Wage agreement should preserve flexibility given differential productivity across firms.
  - Next benchmarking exercise should avoid putting upward pressure on wages elsewhere, promote verifiable modernization in the public sector, and be as transparent as possible.

### Statistics and data improvements
- National accounts improvements planned for later this year: chain-linked deflators, inclusion of financial intermediation services, a quarterly general government balance, and annual sectoral financial accounts.
- Next steps: overhaul earnings data and calculate a production-side estimate of GDP.
- Staff recommendation: expedite work programs to improve earnings data and introduce a production-side estimate of GDP.

*Source: _cr05369 - 23. Banking system profitability and capitalization are strong, but vulnerabilities*

### 42. It is proposed that the next Article IV consultation be held on the standard 12-

### _cr05369 - 42. It is proposed that the next Article IV consultation be held on the standard 12-

### Proposed consultation timing
- It is proposed that the next Article IV consultation be held on the standard 12-month cycle.

### National accounts (constant prices) — key annual growth rates and contributions (2001–06)
- GNP: 3.8, 1.5, 2.8, 5.5, 5.1, 4.9
- GDP: 6.0, 6.1, 3.7, 4.9, 5.4, 5.2
- Domestic demand: 3.8, 3.4, 3.3, 4.0, 4.6, 4.9
  - Private consumption: 5.5, 2.8, 2.6, 3.2, 4.5, 5.7
  - Public consumption: 10.9, 8.6, 2.5, 2.9, 4.5, 2.9
  - Gross fixed investment: -1.6, 3.0, 3.4, 9.2, 4.3, 4.0
- Net exports (contribution to GDP growth): 2.8, 3.1, 1.2, 2.3, 1.7, 1.3
  - Exports of goods and services: 8.4, 5.7, -0.8, 4.4, 5.6, 5.2
  - Imports of goods and services: 6.7, 3.3, -2.3, 2.7, 5.0, 5.0

### Prices, wages and employment
- Harmonized Index of Consumer Prices (annual average): 4.0, 4.7, 4.0, 2.3, 2.3, 2.5
- Average hourly earnings, manufacturing: 10.3, 8.6, 4.7, 4.8, ...... 
- Output, manufacturing 2/: 10.0, 7.6, 4.6, 0.4, ......
- Unit wage costs (manufacturing) 2/: -2.6, -8.2, -4.1, 0.2, ......
- GNP/employment: 0.6, -0.3, 0.9, 2.4, 3.0, 3.2
- Employment: 3.1, 1.8, 1.9, 3.0, 2.0, 1.6
- Unemployment rate (in percent): 3.8, 4.4, 4.6, 4.5, 4.2, 4.0

### Money and credit; financial and asset markets (end-period)
- M3 (end-period; break in series noted): 17.2, 9.3, ...22.5,16.8...
- Private sector credit: 15.1, 15.0, 17.9, 26.6, 26.7,...
- Three-month treasury bill: 3.3, 2.9, 2.1, 2.2, 2.2,...
- 10-year government bond: 5.1, 4.3, 4.3, 3.7, 3.6,...
- ISEQ index (annual change): 4/ -0.3, -30.0, 23.2, 26.0, 9.6,...
- House prices (permanent tsb index/ESRI): 4/4.4,13.3,13.7,8.6,6.5,...

### Public finance (percent of GDP)
- General government balance: 0.9, -0.4, 0.2, 1.3, -1.0, -0.5
- Primary balance: 2.4, 1.0, 1.5, 2.5, 0.3, 0.8
- General government debt: 35.9, 32.7, 32.1, 29.6, 29.6, 29.2

### External trade and balance of payments (percent of GDP and SDRs)
- Balance of goods and services (Percent of GDP): 15.0, 16.6, 15.4, 15.6, 15.0, 15.1
- Current account (Percent of GDP): -0.6, -1.3, -1.4, -0.4, -1.0, -1.2
- Official reserves (In billions of SDRs, end-period.): 4/ 4.5, 4.0, 2.8, 1.9, 1.7,...

### Effective exchange rates (1995=100, annual average)
- Nominal: 6/ 89.2, 90.7, 96.7, 99.7, 99.4,...
- Real (CPI based): 6/ 94.4, 98.8, 106.8, 110.2, 109.6,...

### Memorandum items for 2004
- Area: 70.3 thousand square kilometers
- Population (in million): 4.0
- GDP per capita (in SDRs): 31727.9

### Table 2 — Contributions to GDP Growth (annual percent change) (2001–06)
- Domestic demand: 3.2, 2.9, 2.7, 3.3, 3.7, 4.0
  - Private consumption: 2.8, 1.4, 1.3, 1.5, 2.1, 2.7
  - Public consumption: 1.4, 1.1, 0.3, 0.4, 0.6, 0.4
  - Fixed investment: -0.3, 0.6, 0.7, 1.8, 0.9, 0.8
    - Structures: 0.5, 0.6, 0.6, 0.9, 0.4, 0.3
      - Residential investment: 0.3, 0.3, 0.8, 0.7, 0.1, -0.1
    - Equipment: -0.9, 0.0, 0.1, 0.9, 0.5, 0.5
  - Change in stocks: -0.6, -0.2, 0.4, -0.5, 0.1, 0.1
- Net exports: 2.8, 3.1, 1.2, 2.3, 1.7, 1.3
  - Exports: 9.0, 6.2, -0.8, 4.6, 5.9, 5.4
  - Imports: -6.1, -3.1, 2.0, -2.3, -4.1, -4.1
- Statistical discrepancy: -0.1, 0.1, -0.2, -0.7, 0.0, 0.0
- GDP (annual percent change): 6.0, 6.1, 3.7, 4.9, 5.4, 5.2
- GNP (annual percent change): 3.8, 1.5, 2.8, 5.5, 5.1, 4.9
- Memorandum: Current account (as a percent of GDP): -0.6, -1.3, -1.4, -0.4, -1.0, -1.2

### Table 3 — Summary of Balance of Payments (2001–06) (In percent of GDP unless noted)
- Current account balance: -0.6, -1.6, -1.9, -0.6, -1.5, -2.0
  - Balance of goods and services: 17.3, 21.2, 20.8, 22.7, 23.8, 25.8
    - Goods balance: 30.5, 35.4, 33.4, 31.9, 33.5, 36.5
      - Exports of goods: 86.7, 89.5, 79.2, 79.4, 83.6, 89.5
      - Imports of goods: -56.2, -54.1, -45.8, -47.6, -50.0, -53.1
    - Services balance: -13.2, -14.3, -12.6, -9.1, -9.7, -10.6
      - Credit: 27.0, 30.2, 33.6, 37.9, 38.7, 40.2
      - Debit: -40.1, -44.5, -46.2, -47.0, -48.4, -50.8
      - Of which: Royalties — Credit: 0.2, 0.3, 0.2, 0.2, ...... — Debit: -10.6, -11.7, -14.3, -14.3, ......
  - Income balance: -18.3, -23.5, -23.1, -23.7, -26.2, -28.8
    - Credit: 32.2, 28.9, 28.5, 31.0, ...... 
    - Debit: -50.5, -52.4, -51.6, -54.7, ......
  - Current transfers (net): 0.3, 0.7, 0.4, 0.3, 0.9, 0.9
- Capital and financial account balance: 0.4, 1.1, 3.0, 4.8, ...... 
  - Capital account balance: 0.7, 0.5, 0.4, 0.4, ...... 
  - Financial account: -0.3, 0.6, 2.6, 4.5, ...... 
    - Direct investment: 6.2, 19.8, 20.7, 2.1, ...... 
    - Portfolio investment: -25.2, -38.4, -49.1, -20.9, ...... 
    - Other investment: 19.0, 18.8, 29.3, 22.0, ...... 
    - Reserve assets: -0.4, 0.3, 1.8, 1.2, ...... 
- Net errors and omissions: -0.3, -0.5, 1.1, 4.2, ...... 
- Memorandum items (percent of GDP): Current account balance: -0.6, -1.3, -1.4, -0.4, -1.0, -1.2
  - Balance on goods and services: 15.0, 16.6, 15.4, 15.6, 15.0, 15.1
  - Goods balance: 26.4, 27.7, 24.8, 21.8, 21.2, 21.3
  - Services balance: -11.4, -11.1, -9.4, -6.2, -6.1, -6.2
  - Income balance: -15.8, -18.4, -17.1, -16.2, -16.5, -16.8
  - Current transfers: 0.3, 0.6, 0.3, 0.2, 0.6, 0.6
  - Capital and financial account balance: 0.3, 0.9, 2.2, 3.3, ...... 
    - Of which: Direct Investment: 5.4, 15.5, 15.3, 1.5, ...... — Portfolio Investment: -21.8, -30.0, -36.4, -14.3, ...... — Other Investment: 16.5, 14.7, 21.7, 15.0, ...... 

### Table 4 — General Government Finances (percent of GDP) (2000–05; projections included)
- Current balance: 8.0, 5.3, 3.5, 3.9, 4.6, 2.7
- Current revenue: 34.6, 32.7, 31.7, 32.8, 33.7, 33.2
  - Tax revenue (including taxes on capital): 26.9, 25.0, 24.1, 25.0, 25.8, 25.4
  - Social security receipts: 4.2, 4.3, 4.3, 4.4, 4.5, 4.4
  - Miscellaneous: 3.5, 3.4, 3.4, 3.4, 3.4, 3.3
- Current expenditure: 26.6, 27.4, 28.2, 28.9, 29.1, 30.4
  - Interest payments: 2.0, 1.5, 1.4, 1.3, 1.2, 1.3
  - Goods and services: 5.2, 5.3, 5.8, 6.1, 6.1, 6.1
  - Compensation of employees: 8.0, 8.5, 8.6, 8.8, 8.7, 9.0
  - Current transfers: 10.7, 11.3, 11.7, 11.9, 12.2, 13.0
  - Depreciation: 0.7, 0.8, 0.8, 0.8, 0.9, 1.0
- Current expenditure, excluding interest: 24.6, 25.9, 26.8, 27.6, 27.9, 29.1
- Capital balance: -3.6, -4.4, -3.9, -3.7, -3.3, -3.8
  - Capital receipts (excluding taxes on capital): 1.1, 1.0, 1.1, 1.1, 1.1, 1.0
  - Gross capital formation: 3.7, 4.3, 4.2, 3.9, 3.6, 3.9
  - Capital transfers: 1.1, 1.1, 0.8, 0.9, 0.8, 0.9
- General government balance: 4.4, 0.9, -0.4, 0.2, 1.3, -1.0
- Primary balance: 6.4, 2.4, 1.0, 1.5, 2.5, 0.3
- Memorandum:
  - Structural (as a percent of potential GDP): Government balance (including one-off factors): 2.4, -0.5, -1.2, 0.6, 1.6, -1.0
    - Revenue 1/: 35.6, 33.7, 32.8, 33.9, 34.8, 34.2
    - Expenditure: 33.2, 34.2, 34.0, 33.3, 33.2, 35.2
  - Government balance (excluding one-off factors): 2.4, -0.5, -1.2, 0.2, 0.7, -0.5
  - Primary balance: 4.4, 1.0, 0.1, 1.9, 2.8, 0.3
  - General government gross debt (as percent of GDP): 38.3, 35.9, 32.7, 32.1, 29.6, 29.6
  - Growth in nominal GDP: 15.2, 12.0, 10.9, 5.3, 8.5, 8.4
- Note: Revenues in 2002 exclude UMTS receipts of 0.2 percent of GDP.

### Table 5 — Medium-Term General Government Finances (staff projections; percent of GDP)
- 2003–2010 staff projections include:
  - Total revenue: 33.9 (2003), 34.8 (2004), 34.2 (2005), 33.8 (2006), 33.7 (2007), 33.7 (2008), 33.7 (2009), 33.7 (2010)
  - Taxes and social security contributions: 29.4, 30.3, 29.9, 29.6, 29.6, 29.6, 29.6, 29.6
  - Total expenditure: 33.7, 33.5, 35.2, 34.3, 34.2, 34.2, 34.2, 34.2
  - Primary expenditure: 32.4, 32.3, 33.9, 33.0, 33.0, 33.0, 33.0, 33.0
    - Gross fixed investment: 3.9, 3.6, 3.9, 3.8, 3.8, 3.8, 3.8, 3.8
    - Government consumption: 15.7, 15.7, 16.1, 15.9, 15.9, 15.9, 15.9, 15.9
    - Current transfers: 11.9, 12.2, 13.0, 12.3, 12.3, 12.3, 12.3, 12.3
  - Interest payments: 1.3, 1.2, 1.3, 1.3, 1.2, 1.2, 1.2, 1.2
  - Budget balance: 0.2, 1.3, -1.0, -0.5, -0.5, -0.5, -0.5, -0.5
- Memorandum items:
  - Nominal GDP growth in percent: 5.3, 8.5, 8.4, 8.0, 7.4, 6.9, 6.8, 6.7
  - Gross debt: 32.1, 29.6, 29.6, 29.6, 29.0, 29.0, 29.0, 29.0
  - Structural budget balance, including one-offs 2/: 0.6, 1.6, -1.0, -0.7, -0.7, -0.5, -0.5, -0.5
  - Structural budget balance, excluding one-offs 2/: 0.2, 0.7, -0.5, -0.8, -0.8, -0.5, -0.5, -0.5
  - Output gap: -0.8, -0.5, 0.0, 0.7, 0.4, 0.0, 0.0, 0.0

### Table 6 — Indicators of External and Financial Vulnerability (selected items)
- External indicators (1999–2004)
  - Exports (annual percent change, value in U.S. dollars): 12.2, 10.1, 9.6, 10.8, 13.0, 14.5
  - Imports (annual percent change, value in U.S. dollars): 9.3, 12.7, 7.4, 7.6, 12.0, 13.2
  - Terms of trade (goods, annual percent change): -2.5, -3.1, 2.0, 2.0, -0.5, -3.9
  - Current account balance: 0.6, -0.1, -0.6, -1.3, -1.4, -0.4
  - Capital and financial account balance: -1.8, 9.3, 0.3, 0.9, 2.2, 3.3
    - Inward portfolio investment: 71.2, 81.4, 86.0, 58.3, 69.2, 74.8
    - Inward foreign direct investment: 19.1, 27.1, 19.3, 24.1, 17.7, 7.7
    - Other investment liabilities (net): -1.1, -8.8, 16.5, 14.7, 21.7, 15.0
  - Total external debt 1/: 2.8, 2.0, 1.8, 0.6, 0.0, 0.0
    - External debt to exports ratio: 4.0, 2.6, 2.4, 0.8, 0.0, 0.0
    - External interest payments to exports (in percent): 0.3, 0.2, 0.1, 0.2, 0.0, 0.0
  - U.S. dollar per euro (period average): 1.10, 0.90, 0.90, 0.91, 1.11, 1.2
  - U.K. £ per euro (period average): 0.70, 0.60, 0.60, 0.60, 0.70, 0.7
- Financial markets indicators
  - General government debt: 48.7, 38.3, 35.9, 32.7, 32.1, 29.6
  - Government bond yield (10-year, end-period): 5.6, 5.1, 5.1, 4.3, 4.3, 3.7
  - Spread of government bond yield with Germany (end of period): 0.6, 0.2, 0.6, 0.2, 0.3, 0.3
  - Real government bond yield (10-year, period average, based on national CPI): 3.1, -0.1, 0.1, 0.3, 0.6, 1.9
  - Annual change in ISEQ index (in percent, end of period): 0.4, 14.1, -0.3, -30.0, 23.2, 26.0
  - Personal lending interest rate: 10.5, 11.8, 10.6, 10.4, 9.9, 9.9
  - Variable mortgage interest rate: 4.2, 6.0, 4.6, 4.2, 3.5, 3.5
- Financial sector risk indicators
  - Annual credit growth rates (to private sector): 21.3, 21.3, 15.1, 15.0, 17.9, 26.6
  - Annual deposit growth rates: 8.1, 15.6, 15.6, 9.6, 11.9, 14.1
  - Personal lending as a share of total loans (excluding financial intermediation and government): 53.7, 52.1, 52.2, 55.3, 55.6, 55.8
    - Of which: House mortgage finance: 39.7, 39.0, 38.8, 42.4, 44.4, 44.9
    - Other housing finance: 0.9, 1.0, 0.9, 0.8, 0.4, 0.3
    - Other personal lending: 13.0, 12.2, 12.5, 12.0, 10.8, 10.6
  - Annual mortgage credit growth rates: 22.4, 24.3, 17.8, 23.8, 25.5, 26.5
  - Commercial property lending as percent of total loans (excluding financial intermediation): 12.4, 15.0, 16.4, 17.0, 19.7, 21.2
  - Foreign-currency denominated assets (percent of total assets): 41.0, 41.5, 44.6, 40.1, 32.5, 29.4
  - Foreign-currency denominated liabilities (percent of total liabilities): 42.8, 44.4, 47.4, 42.9, 34.2, 32.2
  - Contingent and off-balance sheet accounts (percent of total assets): 400.5, 465.1, 591.8, 505.2, 537.7, 662.0
  - Non-performing loans (in percent of total loans): 1.0, 1.0, 1.0, 1.0, 0.9, 0.8
  - Total provisions for loan losses (in percent of total loans): 1.1, 1.1, 1.1, 1.1, 0.9, 0.7
  - Risk-weighted capital/asset ratios of domestic banks: 10.8, 10.7, 10.6, 12.3, 13.9, 12.6
  - Bank return on assets: 1.3, 1.2, 0.9, 1.0, 0.9, ...
  - Bank return on equity: 23.0, 22.0, 16.0, 18.0, 17.8, ...
  - Liquid assets of all banks to total assets (liquid asset ratio): 32.0, 32.0, 30.0, 30.0, 33.6, 33.0
  - Liquid assets of all banks to short-term liabilities (in percent): 39.0, 44.0, 37.0, 37.0, 34.0, 40.0
  - Deposits to M3 ratio 5/6: 1.0, 1.0, 1.0, 1.0, 1.5, 1.4
  - Loan-to-deposit ratio vis-à-vis Irish residents 2/7: 1.3, 1.4, 1.4, 1.4, 1.5, 1.6 — vis-à-vis total 2/7: 1.5, 1.5, 1.6, 1.5, 1.6, 1.7
  - Concentration ratios: No. of banks accounting for 25 percent of total assets: 3.0, 3.0, 3.0, 3.0, 2.0, 2.0 — No. of banks accounting for 75 percent of total assets: 23.0, 23.0, 21.0, 19.0, 18.0, 17.0
  - Share of state-owned banks in total assets: 3.0, 2.0, 1.0, 0.0, 0.0, 0.0
  - Share of foreign-owned banks in total assets: 37.0, 39.0, 42.0, 29.0, 31.0, 34.0

### Appendix I — Ireland: Fund Relations (As of April 30, 2005)
- Membership: Joined 8/08/57; Article VIII
- General Resources Account: Quota SDR Million: 838.40 (100.00)
  - Fund holdings of currency: 578.05 (68.95)
  - Reserve position in Fund: 260.36 (31.05)
- SDR Department: Net cumulative allocation 87.26 (100.00); Holdings 58.45 (66.99)
- Outstanding Purchases and Loans: None
- Financial Arrangements: None
- Projected Payments to the Fund (SDR Million; based on existing use of resources and present holdings of SDRs):
  - Charges/Interest: 2005: 0.53; 2006: 0.72; 2007: 0.72; 2008: 0.73; 2009: 0.72
  - Total: 0.53; 0.72; 0.72; 0.73; 0.72
- Exchange arrangement:
  - As of January 1, 1999, the euro became the currency of Ireland and the irrevocably fixed conversion rate between the euro and the Irish pound is 0.787564.
  - Ireland maintains an exchange system free of restrictions, other than those in accordance with UN Security Council resolutions and EU regulations.
- Article IV Consultations:
  - Last Article IV discussions were conducted in Dublin during July 8–20, 2004.
  - The staff report (Country Report No. 04/348) was considered by the Executive Board on October 29, 2004 (EBM/04/102).
  - Article IV consultations with Ireland are currently on the standard 12–month cycle.
- Technical Assistance: None
- Resident Representative: None

### Appendix II — Statistical Issues (summary)
- Data provision is adequate for surveillance; Ireland adheres to Eurostat and ECB statistical requirements and the Fund’s Special Data Dissemination Standard (SDDS).
- CPI: published monthly; weights of current index December 2001=100 based on 1999–2000 Household Budget Survey; weights updated every 5 years.
- National accounts: based on constant 1995 prices; plans to introduce chain-linking in 2005; quarterly national accounts published within 3 months.
- Employment, earnings, unit wage costs, and national income and expenditure available with a 3–7 month lag; some non-SDDS series published with longer lags.
- Plans to introduce sectoral balance sheet data in 2005 and to extend scope and consistency of earnings data; no overall earnings index currently.
- Plans to start publishing a quarterly general government balance in 2005.
- Quarterly balance of payments data are BPM5-compliant though historical data start only in 1998; some discrepancies between national accounts and BOP exports/imports noted.
- Data compilation: Central Statistics Office, integrated computer data processing system introduced in late 2001.

### Appendix II — Table of Common Indicators Required for Surveillance (as of June 6, 2005) — selected entries
- Exchange Rates: latest observation 6/6/05; Date received 6/6/05; Frequency: Daily (D)
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Apr 2005; Date received 5/31/05; Frequency: Monthly (M)
- Reserve/Base Money: Apr 2005; Date received 5/31/05; Frequency: Monthly (M)
- Broad Money: Apr 2005; Date received 5/31/05; Frequency: Monthly (M)
- Consolidated Balance Sheet of the Banking System: Apr 2005; Date received 5/31/05; Frequency: Monthly (M)
- Interest Rates: latest observation 6/6/05; Date received 6/6/05; Frequency: Daily (D)
- Consumer Price Index: Apr 2005; Date received 5/12/05; Frequency: Monthly (M)
- Revenue, Expenditure, Balance and Composition of Financing – General Government: 2004; Date received 3/3/2005; Frequency: Annual (A)
- Central Government revenue/expenditure: May 2005; Date received 6/2/2005; Frequency: Monthly (M)
- Stocks of Central Government and Central Government-Guaranteed Debt: 2005 Q1; Date received 5/4/2005; Frequency: Quarterly (Q)
- External Current Account Balance: Q4, 2004; Date received 3/24/05; Frequency: Quarterly (Q)
- Exports and Imports of Goods and Services: Q4, 2004; Date received 3/24/05; Frequency: Quarterly (Q)
- GDP/GNP: Q4, 2004; Date received 3/31/05; Frequency: Quarterly (Q)
- Gross External Debt: Q4 2004; Date received 3/31/05; Frequency: Quarterly (Q)

*Prepared by the European Department; Approved by Alessandro Leipold and Michael Hadjimichael; September 30, 2005.*

### 1. This supplement reports on recent developments since the staff report was issued.

### _cr05369 - 1. This supplement reports on recent developments since the staff report was issued.

### Staff appraisal and policy priorities
- Developments support the thrust of the staff appraisal.
- With the economy "in the neighborhood of full employment," continued rapid growth of domestic demand could give rise to wage pressures and further erode competitiveness.
- Key policy priorities:
  - Fiscal restraint, to help relieve potential overheating and to build a cushion in the event that downside risks materialize.
  - Wage moderation, to keep wage growth in line with productivity growth.
  - Continued efforts to maintain financial stability.

### Revisions to national accounts data (1995–2004)
- Two methodological improvements incorporated:
  - Chain-linked deflators.
  - A better measure of financial intermediation services.
- Effects on growth measures:
  - Average annual real GDP and real GNP growth rates over the period as a whole are virtually unchanged.
  - Growth was slightly weaker during the late 1990s boom and slightly stronger during the downturn of 2001–03.
  - Real GDP growth in 2004 was revised down to 4½ percent, reflecting a lower contribution from net exports.
  - A reduction in net factor income cut real GNP growth to 4 percent.

### Recent developments in 2005 (first half)
- Domestic demand growth was very strong in the first half of 2005.
  - Private consumption grew by about 5 percent year-on-year, supported by rapid employment and income growth.
  - Machinery and equipment investment increased by over 25 percent, reflecting in part purchases of aircraft.
  - Net exports subtracted about 2 percentage points from GDP growth, reflecting in part a slowdown in partner-country growth.
  - House price increases continued to slow, consistent with a soft landing for the housing market.
  - Private sector credit growth remained very high.
- Labor market and inflation:
  - Employment and the labor force grew by about 5 percent year-on-year in the second quarter, reflecting increases in the working age population—due in part to large net immigration—and in labor force participation.
  - The unemployment rate fell slightly over the year to 4¼ percent.
  - Despite higher oil prices, HICP inflation was steady at about 2 percent, in line with the euro area average.

### Short-term outlook and forecasts
- The short-term growth forecast has been revised down, but the economic outlook remains strong.
  - The real GNP growth projection for 2005 has been marked down by 0.6 percentage points to 4½ percent, reflecting mainly the soft patch in exports in the first half.
  - Higher oil prices are expected to dampen household disposable incomes and corporate profitability going forward.
  - Strength of consumption and business investment in the first half of the year resulted in an upward revision to domestic demand for the year as a whole.
  - The staff’s new forecast is somewhat below the Department of Finance’s projection of 5 percent.
  - In 2006, domestic demand is expected to ease slightly, reflecting in part higher oil prices, and the contribution from net exports to rise slightly, as export growth returns to trend.

*Source: _cr05369 - 1. This supplement reports on recent developments since the staff report was issued.*

### 5. Recent fiscal developments are consistent with a projected general government

### 5. Recent fiscal developments are consistent with a projected general government deficit of about 1 percent of GDP in 2005

### Fiscal outturn and projection
- Revenue continued to exceed the budget profile in 2005, driven by VAT and excise receipts, stamp duties, and collections from revenue investigations.
- Expenditure was slightly lower than projected to date, but staff assume expenditure will be in line with the budget for the year as a whole.
- Staff projection of the general government deficit for 2005 is about 1 percent of GDP and is similar to the Department of Finance’s revised forecast (published in September).
- Table-level staff projection (Table 5, Medium-Term General Government Finances, staff projections):
  - Total revenue: 33.6 (2005)
  - Total expenditure: 34.4 (2005)
  - Budget balance: -1.1 (2005)
  - Primary balance: 2.6 (2005)
  - General government gross debt: 29.4 (2005)

### Macroeconomic context and near-term outlook
- Recent growth and prices:
  - Real GDP growth: 4.5 percent (2004), projected 4.5 percent (2005)
  - Real GNP growth: 4.0 percent (2004), projected 4.5 percent (2005)
  - HICP inflation (annual average): 2.3 percent (2004), 2.3 percent (2005)
  - Unemployment rate: 4.5 percent (2004), 4.2 percent (2005)
- Demand composition (selected contributions to GDP growth, 2005 projections):
  - Domestic demand: 5.7 (contribution in 2005, Table 2)
  - Private consumption contribution: 4.8 (2005)
  - Public consumption contribution: 4.1 (2005)
  - Gross fixed investment contribution: 8.4 (2005)
  - Net exports contribution: -0.3 (2005)
- External sector:
  - Balance of goods and services (Percent of GDP): 13.5 (2004), 13.2 (2006 projection)
  - Current account (Percent of GDP): -0.8 (2004), -1.9 (2005), -2.2 (2006 projection)
  - Current account balance (Table 3, in billions of euro): -1.2 (2003), -3.1 (2005), -3.7 (2006 proj.)
- Monetary and financial conditions:
  - M3 (end-period percent change): 22.5 (2004), 17.7 (2005, as of July 2005)
  - Private sector credit growth: 26.6 (2004), 26.7 (2005)
  - Three-month treasury bill rate (end-period): 2.2 (2004), 2.1 (2005)
  - 10-year government bond yield (end-period): 3.7 (2004), 3.2 (2005)
  - Nominal effective exchange rate (1995=100, annual average): 99.7 (2004), 96.8 (2005, as of June 2005)
  - Real effective exchange rate (CPI based): 110.2 (2004), 106.8 (2005, as of June 2005)

### Key public finance statistics (selected exact figures)
- From Table 4 (In percent of GDP):
  - Current balance: 4.7 (2004), 2.8 (2006 proj.)
  - Current revenue: 33.1 (2004), 33.3 (2005), 32.9 (2006 proj.)
  - Tax revenue (including taxes on capital): 24.2 (2004), 25.4 (2005), 25.2 (2006 proj.)
  - Current expenditure: 28.0 (2004), 28.5 (2005), 30.1 (2006 proj.)
  - Interest payments: 1.2 (2004), 1.2 (2005), 1.3 (2006 proj.)
  - General government balance: 1.4 (2004), -1.1 (2005), -0.7 (2006 proj.)
  - Primary balance: 2.6 (2004), 0.1 (2005), 0.6 (2006 proj.)
  - General government debt: 29.0 (2004), 29.4 (2005), 29.3 (2006 proj.)
- Medium-term staff projection (Table 5, staff projections):
  - Structural budget balance, including one-offs (as percent of potential GDP): 0.4 (2004), -1.1 (2005), -0.8 (2006 proj.)
  - Output gap: 0.4 (2004), 0.2 (2006 proj.)

### Executive Board policy recommendations and assessment (selected)
- Growth and risks:
  - Directors expected strong short-term growth driven by consumption and business investment; residential investment likely to decline modestly starting next year.
  - Main risks: further rise in oil prices, abrupt slowdown in global growth, sharp decline in the housing market.
  - Economy viewed as close to full employment; inflation projected to rise next year.
- Fiscal policy recommendations:
  - With euro area monetary policy accommodative from Ireland’s perspective, fiscal policy should help relieve potential overheating.
  - Call for prudent budget execution and saving any revenue windfalls in the remainder of 2005.
  - Underlying fiscal tightening in 2006, in line with the authorities’ medium-term objective of close to balance or surplus.
  - Build a fiscal cushion in good times to prepare for downside risks.
  - If aggregate demand weakens abruptly, allow automatic stabilizers to operate fully and avoid specific measures to prop up the housing market.
- Composition of fiscal adjustment:
  - Restrain growth of current spending.
  - Broaden the tax base by:
    - Limiting property-related capital allowances.
    - Preserving the nominal ceiling on mortgage interest tax relief.
    - Introducing a property tax.
- Public expenditure management and fiscal institutions:
  - Improve value for money in public services.
  - Suggestions: introduce five-year envelopes for current spending; extend fiscal projections to five years; strengthen procurement practices; focus on quantified performance targets.
  - Consider automatic indexation of tax credits and bands, excise duties, and social welfare payments to consumer prices to improve fiscal neutrality and reduce procyclicality.
  - Enhance public understanding of fiscal issues; most Directors did not see a case for creating a fiscal council in Ireland’s circumstances.
- Labor market and wage policy:
  - Commended openness and flexibility of labor market and low labor tax wedge.
  - Recommended moderate wage increases under forthcoming national wage agreement and public sector benchmarking.
  - Wage agreement should preserve flexibility; benchmarking exercise should be transparent and promote verifiable modernization.
- Financial sector and housing market:
  - Banking system profitability and capitalization are strong; nonperforming loans are low.
  - Vulnerabilities: high credit growth, property-related lending > 50 percent of bank lending stock, declining net interest margins, rapidly rising household debt (120 percent of disposable income at end-2004).
  - Recommended continued supervisory efforts: enhance and increase frequency of stress-testing, strengthen credit standards, prepare interim updates to the Financial Stability Report.
  - Directors welcomed the FSAP update planned for 2006.
- Pensions and ageing:
  - Ireland well placed to cope with fiscal impact of population ageing, given low debt and accumulation in the National Pensions Reserve Fund.
  - Concern that households are not saving enough for retirement; authorities considering further policy responses.
  - Encourage longer active participation in the labor force; Ireland’s effective retirement age is one of the highest among industrialized countries.
- Competition and structural reforms:
  - Strengthen competition to sustain productivity growth and external competitiveness.
  - In banking: extend codes of conduct to promote competition; ultimately remove regulation of certain fees.
  - In non-life insurance: greater disclosure of aggregate claims histories.
  - Improve regulation in retail and professional services; continue efforts to improve timeliness and reliability of statistics.

### Banking and financial vulnerability indicators (selected exact figures)
- Household debt: 120 percent of disposable income at end-2004.
- Financial sector indicators (Table 6 highlights):
  - Annual credit growth rates (to private sector): 26.6 (2004), 26.7 (2005)
  - Annual mortgage credit growth rates: 25.5 (2004), 26.5 (2005)
  - Personal lending as a share of total loans: 55.6 (2004), 55.8 (2005)
  - Non-performing loans (in percent of total loans): 0.93 (2004), 0.82 (2005)
  - Risk-weighted capital/asset ratios of domestic banks: 13.9 (2004), 12.6 (2005)
  - Liquid assets of all banks to total assets (liquid asset ratio): 33.6 (2004), 33.0 (2005)

*Source: _cr05369 — IMF staff report excerpt.*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05369.pdf_