## _cr06293 - 2006. The mission comprised Mr. Morsink (head), Ms. Iakova, and Ms. Moreno

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---

### Executive summary
- Economic performance remains strong but growth has become heavily reliant on building investment and competitiveness has eroded.
- Key vulnerabilities:
  - The share of the construction sector in GDP is high and likely to fall over the next few years.
  - Rapid credit growth could lead to overheating and wage pressures that would further undermine competitiveness.
  - Ireland is vulnerable to external shocks.
- Key policy directions recommended:
  - Continue strengthening regulatory and supervisory framework, especially for insurance (FSAP Update).
  - Staff recommends modest fiscal tightening for 2007 to dampen aggregate demand, build a cushion against a hard landing, and prepare for population aging.
  - Continued wage moderation and labor market flexibility to support competitiveness.

### Background: recent performance and structural features
- Recent outcomes and drivers:
  - Real GNP growth was among the highest in industrial countries in recent years.
  - Unemployment rate was among the lowest.
  - HICP inflation declined to close to the euro area average.
  - Employment growth was rapid, reflecting strong immigration and rising labor force participation.
  - Prudent government spending and low taxes on labor and business income supported labor supply and investment.
  - Participation in EMU lowered interest rates; favorable demographics boosted the working-age population.
- Structural concerns:
  - The construction sector’s share of economic activity has increased and is now one of the highest in Europe.
  - Bank credit to property-related sectors has grown rapidly and now accounts for more than half of total bank lending.
  - Household debt as a share of household disposable income rose to about 130 percent in 2005.
  - Labor productivity growth has declined with expansion of labor-intensive construction and services sectors.
  - The ULC-based real effective exchange rate has appreciated; contribution of net exports to growth has fallen steadily since 2001.
  - External current account registered a deficit of about 2 percent of GDP in 2005.

### Outlook: short-term strength, medium-term risks
- Staff and authorities’ projection:
  - Staff project real GNP growth in 2006–07 of about 5½ percent, driven by private consumption (boosted by strong employment and income growth and maturing Special Saving Incentive Accounts).
  - Business investment expected to remain robust; residential investment likely to expand in 2006 before plateauing in 2007.
  - HICP inflation expected to fall back to 2 percent over the medium term as the impact of higher energy prices fades.
- Risks and dynamics:
  - Given large construction sector, its share of activity is expected to decline over the next few years.
  - Most estimates of underlying housing demand are lower than the current pace of house completions.
  - Staff view: house prices are somewhat overvalued; CBI officials: somewhat overvalued; DOF officials: in line with fundamentals.
  - Abrupt contraction of the construction sector is the key risk and could occur without a fall in house prices.
  - Rapid wage growth would undermine competitiveness; the real effective exchange rate is slightly higher than most estimates of equilibrium.
  - Export market share projected to continue a gentle decline and current account deficit to widen further.
  - Officials expect strong net immigration to continue to dampen wage pressures; productivity growth likely to increase to about 2 percent.
  - Small open economy vulnerability: a disorderly unwinding of global imbalances could sharply appreciate the euro and dampen exports; reversal in global financial market conditions could worsen investor sentiment.

### Financial stability: assessment and recommendations
- FSAP Update findings:
  - Financial system continues to perform well; banking system is well-capitalized and profitable; nonperforming loans are low.
  - Rapid credit growth is a vulnerability: concentration of lending in property-related sectors and increased reliance on wholesale funding as lending growth exceeded deposit growth.
  - Wholesale funding is mostly euro-denominated (reducing exchange rate risk) but is more expensive than retail funding and more sensitive to changes in international sentiment.
- Stress test results and liquidity:
  - Recent stress tests indicate major lenders have adequate buffers: even extreme scenarios with sharp rises in unemployment and sharp declines in house prices leave capital adequate in every bank.
  - A substantial withdrawal of private sector deposits would not exhaust liquid assets at major lenders given banks’ ample liquidity.
  - Staff cautioned the long period of strong performance limits ability to quantify macro–credit risk relationships.
- Regulatory and supervisory actions and recommendations:
  - Financial Regulator increased risk weighting from 50 percent to 100 percent on the portion of each residential mortgage loan that exceeds 80 percent of the value of the property.
  - Financial Regulator has implemented a risk-based supervisory framework and overhauled insurance regulation since 2003.
  - Staff priorities for further strengthening:
    - Continue to strengthen on-site supervision of insurers, focusing on overall risk management and corporate governance assessments.
    - Enhance public disclosure requirements for insurers in line with international best practice.
    - Reorganize the insurance supervision department to enable more specialization and stronger on-site supervision.
    - Consider making the Prudential Director a member of the Board on par with the Consumer Director.
  - Central Bank officials plan to implement an improved liquidity management framework for banks in line with international best practice.

### Fiscal policy: position, 2006 outcomes, and recommendations
- Recent fiscal outcomes:
  - General government fiscal position has been close to balance or in surplus for the past decade.
  - In 2005, the general government recorded a surplus of 1 percent of GDP.
  - Staff’s estimate of net debt fell to 18 percent of GDP.
  - The 2005 fiscal outturn was considerably better than expected, mainly reflecting strong property-related revenues.
- Near-term guidance:
  - Authorities and staff agreed budget execution for the remainder of 2006 should remain prudent and any windfall revenues should be saved.
  - Given likely overperformance of property-related revenues, officials and staff expected the fiscal balance in 2006 to be stronger than anticipated in the Budget.
  - Staff project a surplus of ½ percent of GDP for 2006.
- Policy rationale:
  - Staff recommends modest fiscal tightening for 2007 to dampen aggregate demand, build a cushion against the risk of a hard landing, and prepare for population aging.
  - Fiscal cushions also useful to address vulnerabilities from rapid credit growth and potential external shocks.

### Fiscal stance for 2007 (detailed)
- Staff observed that the Budget 2006 projection for 2007 would imply fiscal stimulus of more than 1 percentage point of GDP.
- Staff suggested that fiscal tightening of ½ percentage point of GDP (implying a surplus of 1 percent of GDP in 2007) would be desirable.
- Rationale for tightening:
  - Short term: Ireland’s advanced cyclical position and still-accommodative euro area monetary policy mean tighter fiscal policy is needed to dampen aggregate demand and avoid wage pressures that would undermine competitiveness.
  - Medium term: Risk of a sharp fall in tax revenue due to domestic or external shocks; a larger fiscal cushion would allow automatic stabilizers to work fully in a downturn. During the 2000–02 downturn, the fiscal balance deteriorated by nearly 5 percentage points of GDP.
  - Long term: Projected rise in age-related spending through 2050 will be only partly offset by the National Pensions Reserve Fund and the eventual decline in government investment spending (as a share of GDP); greater pre-funding would allow for a smoother tax burden over time.
- General government balances and projections (as presented):
  - Budget 2006: -0.6 -0.8 -0.8
  - Staff projections 1/: 0.2 1.5 1.0 0.5 -0.6 -0.6
  - 1/ Staff projections adjust the Budget 2006 projections for staff's macroeconomic and revenue buoyancy assumptions.
- Spending priorities, absorptive capacity, and revenue measures:
  - Authorities’ position: continued high level of government investment is appropriate given Ireland’s relatively low level of public capital; improve public services in education, health, and childcare ahead of general elections due by mid-2007.
  - Staff cautions: recent rapid increases in current spending had strained absorptive capacity; growth rate of current spending needed to slow.
  - Suggested revenue-side measures to broaden the tax base: phasing out the remaining property-based incentive schemes, reducing mortgage interest tax relief, or introducing a property tax.
  - Officials acknowledged economic desirability of broadening the tax base but noted popular opposition to increasing property-related taxes.
- Improvements to the fiscal framework:
  - Department of Finance will publish an annual pre-budget report with updated three-year economic and fiscal projections.
  - Staff suggested the report and the Budget could emphasize countercyclical policy in the short term, fiscal cushions to prepare for medium-term risks, and increasing pre-funding of age-related spending over the long term.
  - DOF enhancing capacity to do long-term fiscal projections; spending departments required to prepare targets for outputs and report on fulfillment.
  - Staff suggested extending multi-year envelopes to current spending to improve value for money.
  - Minister for Finance intends to meet annually with the parliamentary Finance and Public Services Committee to discuss the economic and fiscal outlook.

### Wage policy and competitiveness
- Concerns and indicators:
  - Rapid wage growth relative to trading partners and appreciation of the euro have contributed to an appreciation of the ULC-based real effective exchange rate.
  - There is no evidence of fundamental misalignment at present, but the real effective exchange rate is slightly higher than most equilibrium estimates.
- Policy focus:
  - Continued wage moderation and labor market flexibility are essential to support competitiveness.
  - Agreed objective for prospective wage growth: keep in line with the sum of projected productivity growth (about 2 percent) and inflation (about 2 percent).
  - Staff noted recent increase in headline inflation was due to higher global energy prices and mortgage costs and should not be allowed to feed into wage growth.
  - Employment protection: Ireland’s employment protection legislation is less restrictive than the OECD average, but more restrictive than in the UK or the US.
  - Social partners reached a 27-month agreement that implies annual wage increases of about 4½ percent and some increase in firing costs.
  - Staff recommendation: preserve firm-level flexibility and minimize increases in restrictiveness of employment protection legislation.

### Financial sector supervision and regulatory guidance
- Key messages:
  - Maintain the soundness of the financial system; general approach of the Central Bank and the Financial Regulator is appropriate for a mature and sophisticated—but still relatively small—financial market.
  - Stress tests should be done more frequently and the stress testing framework should continue to be upgraded.
  - Increase in the risk weighting on high loan-to-value residential mortgages signaled need for banks to differentiate between higher- and lower-risk lending within an asset class.
  - Financial Regulator should continue to monitor banks’ risk management practices, including for commercial property lending.
  - Recent strengthening of the regulatory and supervisory framework is welcome and should continue, especially for insurance.

### Executive Board assessment and main findings (selected)
- Ireland’s economic performance remains strong: real GNP growth was among the highest in industrial countries; unemployment was among the lowest; HICP inflation declined to close to the euro area average.
- Strengths cited: prudent government spending, low taxes on labor and business income, flexible labor and product markets, favorable demographics, and EMU participation.
- Concerns noted: growth has become increasingly unbalanced with heavy reliance on building investment; rapid bank credit growth to property-related sectors; household debt about 130 percent of disposable income in 2005; declining productivity growth and erosion of competitiveness.
- External position: after being in balance for several years, the external current account registered a deficit of about 2½ percent of GDP in 2005.

### Key quantitative indicators (preserved exactly)
- Real GNP growth in 2006–07: "about 5½ percent" (staff projection).
- Staff project a surplus of "½ percent of GDP for 2006."
- Staff suggested fiscal tightening of "½ percentage point of GDP" for 2007 (implying a surplus of "1 percent of GDP in 2007").
- Budget 2006 projections line: "-0.6 -0.8 -0.8".
- Staff projections line 1/: "0.2 1.5 1.0 0.5 -0.6 -0.6".
- Household debt as share of household disposable income: "about 130 percent in 2005."
- Current account (Percent of GDP): narrative "about 2½ percent of GDP in 2005"; table entries include "-2.6", "-3.0", "-3.2" in various projections.
- Bank lending to property-related sectors: "now accounts for more than half of total bank lending."
- Unemployment rate (in percent): "2005 = 4.3" (table entries).
- HICP (annual average): "2005 = 2.2"; "2006 examples = 2.7–2.8."
- Real GDP (annual percent change): example "2005 = 4.7"; "2006 projections include 5.4 or 5.8."
- General government balance examples: "-0.4 (2002), 0.2 (2003), 1.5 (2004), 1.0 (2005), 0.7 or -0.4 (2006 in variants)."
- General government gross debt examples: "27.4 (2005 revised), 25.9 (2006 in some tables)."
- Nominal effective exchange rate (1995=100, annual average): "2005 = 98.3"; present rate (July 17, 2006) US$ per euro = "1.2541"; nominal effective rate = "99.8" (as of April 2006 in one table variant).

*Source: IMF — Staff Report and Public Information Notice for the 2006 Article IV Consultation with Ireland (Supplementary Information, July 18, 2006; PIN No. 06/88, August 7, 2006).*

### 2006. The mission comprised Mr. Morsink (head), Ms. Iakova, and Ms. Moreno

### _cr06293 - 2006. The mission comprised Mr. Morsink (head), Ms. Iakova, and Ms. Moreno

### Executive Summary
- Economic performance remains strong but growth has become heavily reliant on building investment and competitiveness has eroded.
- Key vulnerabilities identified:
  - The share of the construction sector in GDP is high and likely to fall over the next few years.
  - Rapid credit growth could lead to overheating and wage pressures that would further undermine competitiveness.
  - Ireland is vulnerable to external shocks.
- Key policy directions recommended:
  - Continue strengthening regulatory and supervisory framework, especially for insurance (FSAP Update).
  - Staff recommends modest fiscal tightening for 2007 to dampen aggregate demand, build a cushion against a hard landing, and prepare for population aging.
  - Continued wage moderation and labor market flexibility to support competitiveness.

### Background: recent performance and structural features
- Recent outcomes:
  - Real GNP growth was among the highest in industrial countries in recent years.
  - Unemployment rate was among the lowest.
  - HICP inflation declined to close to the euro area average.
  - Employment growth was rapid, reflecting strong immigration and rising labor force participation.
- Policy and cyclical drivers:
  - Prudent government spending and low taxes on labor and business income supported labor supply and investment.
  - Participation in EMU lowered interest rates.
  - Favorable demographics boosted the working-age population.
- Structural concerns:
  - The construction sector’s share of economic activity has increased and is now one of the highest in Europe.
  - Bank credit to property-related sectors has grown rapidly and now accounts for more than half of total bank lending.
  - Household debt as a share of household disposable income rose to about 130 percent in 2005.
  - Labor productivity growth has declined with expansion of labor-intensive construction and services sectors.
  - The ULC-based real effective exchange rate has appreciated; contribution of net exports to growth has fallen steadily since 2001.
  - External current account registered a deficit of about 2 percent of GDP in 2005.

### Outlook: short-term strength, medium-term risks
- Staff and authorities’ projection:
  - Staff project real GNP growth in 2006–07 of about 5½ percent, driven by private consumption (boosted by strong employment and income growth and maturing Special Saving Incentive Accounts).
  - Business investment expected to remain robust; residential investment likely to expand in 2006 before plateauing in 2007.
  - HICP inflation expected to fall back to 2 percent over the medium term as the impact of higher energy prices fades.
- Risks and dynamics:
  - Given large construction sector, its share of activity is expected to decline over the next few years.
  - Most estimates of underlying housing demand are lower than the current pace of house completions.
  - Staff view: house prices are somewhat overvalued; CBI officials: somewhat overvalued; DOF officials: in line with fundamentals.
  - Abrupt contraction of the construction sector is the key risk and could occur without a fall in house prices.
  - Rapid wage growth would undermine competitiveness; the real effective exchange rate is slightly higher than most estimates of equilibrium.
  - Export market share projected to continue a gentle decline and current account deficit to widen further.
  - Officials expect strong net immigration to continue to dampen wage pressures; productivity growth likely to increase to about 2 percent.
  - Small open economy vulnerability: a disorderly unwinding of global imbalances could sharply appreciate the euro and dampen exports; reversal in global financial market conditions could worsen investor sentiment.

### Financial stability: assessment and recommendations
- FSAP Update findings:
  - Financial system continues to perform well; banking system is well-capitalized and profitable; nonperforming loans are low.
  - Rapid credit growth is a vulnerability: concentration of lending in property-related sectors and increased reliance on wholesale funding as lending growth exceeded deposit growth.
  - Wholesale funding is mostly euro-denominated (reducing exchange rate risk) but is more expensive than retail funding and more sensitive to changes in international sentiment.
- Stress test results and liquidity:
  - Recent stress tests indicate major lenders have adequate buffers: even extreme scenarios with sharp rises in unemployment and sharp declines in house prices leave capital adequate in every bank.
  - A substantial withdrawal of private sector deposits would not exhaust liquid assets at major lenders given banks’ ample liquidity.
  - Staff cautioned the long period of strong performance limits ability to quantify macro–credit risk relationships.
- Regulatory and supervisory actions and recommendations:
  - Financial Regulator increased risk weighting from 50 percent to 100 percent on the portion of each residential mortgage loan that exceeds 80 percent of the value of the property.
  - Financial Regulator has implemented a risk-based supervisory framework and overhauled insurance regulation since 2003.
  - Staff priorities for further strengthening:
    - Continue to strengthen on-site supervision of insurers, focusing on overall risk management and corporate governance assessments.
    - Enhance public disclosure requirements for insurers in line with international best practice.
    - Reorganize the insurance supervision department to enable more specialization and stronger on-site supervision.
    - Consider making the Prudential Director a member of the Board on par with the Consumer Director.
  - Central Bank officials plan to implement an improved liquidity management framework for banks in line with international best practice.

### Fiscal policy: position and recommendations
- Recent fiscal outcomes:
  - General government fiscal position has been close to balance or in surplus for the past decade.
  - In 2005, the general government recorded a surplus of 1 percent of GDP.
  - Staff’s estimate of net debt fell to 18 percent of GDP.
  - The 2005 fiscal outturn was considerably better than expected, mainly reflecting strong property-related revenues.
- Near-term guidance:
  - Authorities and staff agreed budget execution for the remainder of 2006 should remain prudent and any windfall revenues should be saved.
  - Given likely overperformance of property-related revenues, officials and staff expected the fiscal balance in 2006 to be stronger than anticipated in the Budget.
  - Staff project a surplus of ½ percent of GDP for 2006.
- Policy rationale:
  - Staff recommends modest fiscal tightening for 2007 to dampen aggregate demand, build a cushion against the risk of a hard landing, and prepare for population aging.
  - Fiscal cushions also useful to address vulnerabilities from rapid credit growth and potential external shocks.

### Wage policy and competitiveness
- Concerns:
  - Rapid wage growth relative to trading partners and appreciation of the euro have contributed to an appreciation of the ULC-based real effective exchange rate.
  - There is no evidence of fundamental misalignment at present, but the real effective exchange rate is slightly higher than most equilibrium estimates.
- Policy focus:
  - Continued wage moderation and labor market flexibility are essential to support competitiveness.
  - Officials expect productivity growth improvements (about 2 percent) from TFP growth, capital deepening, and improving educational attainment.
  - Authorities note a healthy pipeline of inward foreign direct investment.

*IMF staff report (Article IV consultation) — mission comprised Mr. Morsink (head), Ms. Iakova, Ms. Moreno Badia, with participation by Mr. O’Brien (MFD) and Mr. Charleton (OED).*

### 14. For 2007, staff called for modest fiscal tightening, in contrast to the substantial

### _cr06293 - 14. For 2007, staff called for modest fiscal tightening, in contrast to the substantial

### Fiscal stance for 2007
- Staff observed that the Budget 2006 projection for 2007 would imply fiscal stimulus of more than 1 percentage point of GDP.
- Staff suggested that fiscal tightening of ½ percentage point of GDP (implying a surplus of 1 percent of GDP in 2007) would be desirable.
- Rationale for tightening:
  - Short term: Ireland’s advanced cyclical position and still-accommodative euro area monetary policy mean tighter fiscal policy is needed to dampen aggregate demand and avoid wage pressures that would undermine competitiveness.
  - Medium term: Risk of a sharp fall in tax revenue due to domestic or external shocks; a larger fiscal cushion would allow automatic stabilizers to work fully in a downturn. During the 2000–02 downturn, the fiscal balance deteriorated by nearly 5 percentage points of GDP.
  - Long term: Projected rise in age-related spending through 2050 will be only partly offset by the National Pensions Reserve Fund and the eventual decline in government investment spending (as a share of GDP); greater pre-funding would allow for a smoother tax burden over time.

### General government balances and projections (as presented)
- Budget 2006: -0.6 -0.8 -0.8
- Staff projections 1/: 0.2 1.5 1.0 0.5 -0.6 -0.6
- 1/ Staff projections adjust the Budget 2006 projections for staff's macroeconomic and revenue buoyancy assumptions.

### Spending priorities, absorptive capacity, and revenue measures
- Authorities’ position:
  - Continued high level of government investment is appropriate given Ireland’s relatively low level of public capital.
  - Important to further improve public services, especially in education, health, and childcare, noting pressures ahead of general elections, due by mid-2007.
- Staff agreement and cautions:
  - Recent rapid increases in current spending had strained absorptive capacity; growth rate of current spending needed to slow.
  - Suggested revenue-side measures to broaden the tax base: phasing out the remaining property-based incentive schemes, reducing mortgage interest tax relief, or introducing a property tax.
  - Officials acknowledged economic desirability of broadening the tax base but noted popular opposition to increasing property-related taxes.

### Improvements to the fiscal framework
- Department of Finance will publish an annual pre-budget report with updated three-year economic and fiscal projections.
- Staff suggested the report and the Budget could emphasize:
  - Countercyclical policy in the short term.
  - Fiscal cushions to prepare for medium-term risks.
  - Increasing pre-funding of age-related spending over the long term.
- Institutional reforms and practices:
  - DOF enhancing capacity to do long-term fiscal projections.
  - Spending departments required to prepare targets for outputs and report on fulfillment.
  - Staff suggested extending multi-year envelopes to current spending to improve value for money.
  - Minister for Finance intends to meet annually with the parliamentary Finance and Public Services Committee to discuss the economic and fiscal outlook.

### Wage policy, competitiveness, and labor market flexibility
- Staff and authorities concerned social partnership negotiations could undermine competitiveness.
- Agreed objective for prospective wage growth: keep in line with the sum of projected productivity growth (about 2 percent) and inflation (about 2 percent).
- Staff noted recent increase in headline inflation was due to higher global energy prices and mortgage costs and should not be allowed to feed into wage growth.
- Employment protection:
  - Ireland’s employment protection legislation is less restrictive than the OECD average, but more restrictive than in the UK or the US.
  - Social partners reached a 27-month agreement that implies annual wage increases of about 4½ percent and some increase in firing costs.
- Staff recommendation: Continued wage moderation and labor market flexibility, allowing firm-level flexibility and minimizing increases in the restrictiveness of employment protection legislation.

### Staff appraisal — economic outlook and risks
- Recent performance:
  - In 2005, real GNP growth was the fastest in the EU15; unemployment rate was among the lowest in industrial countries; inflation close to the euro area average.
  - Robust performance supported by prudent fiscal policy, low taxes on labor and business income, and labor market flexibility.
- Emerging imbalances and risks:
  - Growth has become unbalanced with heavy reliance on building investment.
  - House prices accelerated and may be somewhat overvalued.
  - Bank credit has grown rapidly, especially to property-related sectors; banks’ reliance on wholesale funding—mainly from the euro area—has increased.
  - Competitiveness erosion due to faster wage growth in Ireland compared to trading partners, declining productivity growth, and the appreciation of the euro against the U.S. dollar.
- Short- to medium-term outlook (2006–07):
  - Growth likely to remain strong but unbalanced; domestic demand projected to drive growth with continued gentle decline in export market share and further widening of the current account deficit.
  - Bank credit expected to continue expanding rapidly, exacerbating financial sector risks.
  - With the economy close to full employment, rapid growth may lead to overheating, putting pressure on wages and eroding competitiveness.
  - A contraction of the construction sector to a more sustainable size over the medium term is likely to be smooth, but an abrupt correction cannot be ruled out.
  - Ireland is vulnerable to external shocks; a hard landing would have adverse consequences for financial institutions and public finances.
  - Recent stress tests indicate major lenders have adequate buffers to cover a range of shocks.

### Financial sector supervision and regulation
- Key task: maintain the soundness of the financial system.
- Assessment:
  - General approach of the Central Bank and the Financial Regulator is appropriate for a mature and sophisticated—but still relatively small—financial market.
  - Stress tests should be done more frequently and the stress testing framework should continue to be upgraded.
  - Increase in the risk weighting on high loan-to-value residential mortgages signaled need for banks to differentiate between higher- and lower-risk lending within an asset class.
  - Financial Regulator should continue to monitor banks’ risk management practices, including for commercial property lending.
  - Recent strengthening of the regulatory and supervisory framework is welcome and should continue, especially for insurance.

### Fiscal policy recommendations (summary)
- Fiscal policy should be countercyclical and prudent.
- Modest tightening in 2007 recommended; fiscal stimulus in 2007 would be unwarranted.
- Slow growth of current spending to slightly below nominal GDP growth to guard against inefficiencies.
- Improve public services focusing on value for money: monitor government outputs and extend multi-year envelopes to current spending.
- Broaden the tax base by phasing out property-based tax incentive schemes, reducing mortgage interest tax relief, or introducing a property tax.
- Further improve public debate on fiscal priorities; planned transparency improvements are welcome.

_italics_Source: _cr06293 - 14. For 2007, staff called for modest fiscal tightening, in contrast to the substantial_

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

### _cr06293 - 24. It is proposed that the next Article IV consultation be held on the standard 12-month

### Executive Board assessment and main findings
- Ireland’s economic performance remains strong: real GNP growth was among the highest in industrial countries; unemployment was among the lowest; HICP inflation declined to close to the euro area average.
- Strengths cited:
  - Prudent government spending led to declining government debt.
  - Low taxes on labor and business income encouraged labor supply and investment.
  - Flexible labor and product markets supported growth.
  - Favorable demographics and EMU participation supported labor supply and lower interest rates.
- Concerns noted:
  - Growth has become increasingly unbalanced, with heavy reliance on building investment and a large construction sector share.
  - Bank credit to property-related sectors has grown rapidly and now accounts for more than half of total bank lending.
  - Household debt as a share of household disposable income rose to about 130 percent in 2005.
  - Productivity growth has declined as construction and labor-intensive services expanded.
  - Competitiveness has eroded due to faster wage growth relative to trading partners, declining productivity growth, and the appreciation of the euro; contribution of net exports to growth has fallen since 2001.
- External position: after being in balance for several years, the external current account registered a deficit of about 2½ percent of GDP in 2005.

### Macroeconomic outlook and staff projections
- Directors expected economic growth in 2006–07 to remain strong, driven by domestic demand and accompanied by:
  - A widening current account deficit.
  - Continued rapid credit growth.
- Table highlights (selected projections and actuals as reported):
  - GDP (annual percent change): 2005 = 4.7; 2006 (staff projection examples across tables) = 5.4 or 5.8; 2007 projections in tables vary (examples include 5.4, 5.6, 5.8, 5.1).
  - GNP (annual percent change): 2005 = 5.4 (reported revised and previous variants), 2006 examples = 4.6 or 6.2 depending on table variant.
  - Unemployment rate: 2005 = 4.3 (table entries include 4.3–4.4 across years).
  - HICP (annual average): 2005 = 2.2; 2006 examples = 2.7–2.8.
  - Current account (Percent of GDP): 2005 reported as -2.6 (revised table) and -2.5 (narrative: about 2½ percent of GDP in 2005).
  - General government balance (percent of GDP): recent values reported around 1.0 (2004), 0.5–0.7 (2005), and projections for 2006–07 include 0.7, -0.4, or -0.6 depending on table variant.
  - General government gross debt (percent of GDP): examples reported 27.4 (2005) and 25.9 (2006) in different table variants.
- Memorandum: GDP per capita (in SDRs) reported as 32,035 (one table) and 32,203 (revised table) for 2005.

### Risks and vulnerabilities
- Financial and housing sector risks:
  - Rapid credit growth to property-related sectors and concentrated bank lending increase vulnerability to a correction in property prices.
  - Household debt at about 130 percent of disposable income in 2005 is among the highest in Europe.
  - A contraction of the construction sector to a more sustainable size is likely to be smooth, but an abrupt correction cannot be ruled out.
- Competitiveness and external risks:
  - Erosion of competitiveness (due to higher wage growth, lower productivity growth, euro appreciation) has reduced net exports’ contribution to growth.
  - Ireland’s small, highly open economy is vulnerable to external shocks.
- Financial sector soundness:
  - The Financial System Stability Assessment Update finds soundness indicators generally strong and major lenders have adequate buffers to cover a range of shocks.
  - Recent increase in risk-weighting on high loan-to-value residential mortgages is an important signal to differentiate higher- and lower-risk lending.

### Policy recommendations and staff advice
- Fiscal policy:
  - Most Directors considered that a modest fiscal tightening would be desirable in 2007 given strong domestic demand, potential risks of a hard landing, and the need to prepare for population aging.
  - Slowing the growth of current spending to slightly below nominal GDP growth was recommended to prevent emerging inefficiencies.
  - Several Directors emphasized the need to improve public services and encouraged focusing on value for money, including monitoring government outputs and extending multi-year envelopes to current spending.
  - A number of Directors saw less merit in fiscal tightening at the current juncture, noting needs for further spending to achieve social goals and recent euro area monetary tightening.
- Labor market and wages:
  - Continued wage moderation and labor market flexibility are essential to support competitiveness.
  - Implementation of the new social partnership agreement should preserve firm-level flexibility in wage increases and minimize increases in employment protection restrictiveness.
- Financial sector regulation and supervision:
  - The Financial Regulator should continue to monitor banks’ risk management, including commercial property lending.
  - Further updating of the stress-testing framework and strengthening of the regulatory and supervisory framework—especially for insurance—were recommended.

### Key quantitative indicators (selected, preserved exactly as reported)
- Household debt as share of household disposable income: "about 130 percent in 2005."
- Current account (Percent of GDP): "about 2½ percent of GDP in 2005" (narrative); table entries include -2.6, -3.0, -3.2 in various staff/revised projections.
- Bank lending to property-related sectors: "now accounts for more than half of total bank lending."
- Unemployment rate (in percent): 2005 = 4.3 (table entries).
- HICP (annual average): 2005 = 2.2; 2006 examples = 2.7–2.8.
- Real GDP (annual percent change): examples include 2005 = 4.7; 2006 projections include 5.4 or 5.8 in different table variants.
- General government balance (In percent of GDP): sample entries include -0.4 (2002), 0.2 (2003), 1.5 (2004), 1.0 (2005), 0.7 or -0.4 (2006 in variants).
- General government gross debt (In percent of GDP): sample entries include 27.4 (2005 revised), 25.9 (2006 in some tables).
- Nominal effective exchange rate (1995=100, annual average): 2005 = 98.3; present rate (July 17, 2006) US$ per euro = 1.2541; nominal effective rate = 99.8 (as of April 2006 in one table variant).

*Source: IMF — Staff Report and Public Information Notice for the 2006 Article IV Consultation with Ireland (Supplementary Information, July 18, 2006; PIN No. 06/88, August 7, 2006).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06293.pdf_