Ireland

Politics:

• Analysis

  Ireland politics: 2013 budget cuts have unsettled Labour

  Following the announcement of the 2013 budget on December 5th, Ireland's coalition government-comprising the centre-right Fine Gael party and the smaller centre-left Labour Party-is looking more unsettled than at any time since it took office in March 2011. The government retains an impregnable majority in parliament, but tensions within Labour over the direction of fiscal policy have escalated. A pattern of parliamentary rebellion has spread to more senior members of the party and there have been the first murmurs of a heave against the current leadership.

  The 2013 budget framework contained no major surprises. The need for an overall adjustment of EUR3.5bn had been set out well in advance under the terms of Ireland's bail-out agreement with the troika comprising the European Commission, the IMF and the European Central Bank (ECB). On December 5th, the budget law was approved by parliament without the defection of any Labour backbenchers. However, when legislation to enact some of its more controversial provisions came before parliament on December 13th, the party's chairman, Colm Keaveney, voted against it and resigned the party whip, becoming the fifth Labour member of parliament (MP) to leave the parliamentary party since the government took office.

  Labour MPs concerned about impact on low-income families

  Surprisingly, the budget's major innovation, the introduction of an unpopular property tax that will come into force from mid-2013, sailed through without much discussion. However, the property tax replaces the EUR100 local services charge introduced in the 2012 budget and there is concern in government circles that it will meet with a similar level of non-compliance. Less than 50% of households paid the local services charge by the March 31st deadline and 30% had still not paid as of early December.

  The measures that led to Mr Keaveney's rebellion were cuts in two specific areas of social expenditure. The first of these was a reduction of EUR10 in monthly child benefit payments to EUR130 (the cuts are deeper where a family has three or more children). The second was a larger, but more narrowly focused cut of EUR325 to a EUR1,700 annual respite grant for people who provide care for individuals with a disability. This grant is paid in addition to a weekly allowance of up to EUR230, and even after being cut, it will remain significantly above its 2006 level of EUR1,200. However, public sympathy for the difficult role fulfilled by carers meant that the cut to their income became the focal point for wider complaints that the burden of the adjustment in the budget was unfairly skewed towards those at the lower end of the income scale.

  In the government's defence, senior ministers point to an increase in revenue of EUR500m from taxes on wealthier citizens as evidence that the budget is progressive in structure. However, this argument is undermined by the fact that unlike most provisions in the budget, which will take effect in 2013, the highest-profile element of the government's package of wealth taxes-a EUR60,000 cap on pension income eligible for tax relief, which will yield EUR250m to the Exchequer-will not take effect until 2014.

  Concerns about the cuts to child benefit and the carer's grant were raised by about 25 backbenchers across both government parties, but these issues cut much closer to the bone for Labour MPs. The party is ideologically much more predisposed towards social spending than Fine Gael, and a significant amount of its core electoral support comes from recipients of such payments. In addition, in its general election campaign two years ago, Labour had pledged to protect child benefit from Fine Gael cuts.

  Internal unrest raises questions about Labour's leader

  The risk of this kind of controversy has increased with each austerity budget. All the obvious and less socially painful cuts had already been introduced in previous budgets and the government refused to renege on its costly and hard to justify commitments not to increase the headline rate of income tax or to cut either public-sector pay or core social welfare payments. It is arguable that Labour's party managers did well to restrict the rebellion to just one individual. Nevertheless, the rate at which the parliamentary party has been losing MPs could pose a threat to Eamon Gilmore's leadership of the party. He secured a record haul of 37 seats at the 2011 general election, but he has now seen five of his colleagues resign from the parliamentary party in less than two years. Besides being cumulatively damaging, each defection has become more serious in character.

  The resignation in late September of Roisin Shortall, a junior minister in the troubled health department, highlighted Mr Gilmore's inability to balance effectively his responsibilities towards his party and his Fine Gael ministerial colleagues. Ms Shortall remains a vocal critic of the government, but her influence has been limited since her resignation. The same is unlikely to be true of Mr Keaveney, who enjoys a platform as the party's chairman. Mr Gilmore and other senior Labour figures bitterly condemned Mr Keaveney's act of rebellion, probably thinking that he too could be sidelined. However, this backfired when Mr Keaveney insisted, correctly, that he is entitled to remain as chairman of the party, unless and until voted out by Labour's wider membership at a party conference. The next such conference is not scheduled to be held until late 2013.

  In the meantime, Mr Keaveney looks set to remain a thorn in the side of Mr Gilmore and, by extension, the government. The taoiseach (prime minister), Fine Gael's Enda Kenny, has avoided becoming enmeshed in internal Labour Party politics. However, he and Mr Gilmore may need to co-ordinate government policy with a closer eye to Labour Party priorities and sensitivities if tensions within the coalition's junior partner are not to become a risk to the stability of the government. Also, a government that is trying to prevent a mood of non-compliance taking root amongst the public can hardly afford to have backbenchers and ministers rebelling every time a difficult vote has to be taken.

  December 17, 2012

• Background

  Ireland: Political and institutional effectiveness

  Political outlook: Political and institutional effectiveness

  The system of government has traditionally been characterised by consensus in policymaking, in part owing to the non-ideological nature of Irish politics. Effective branches of the public service include the agencies responsible for attracting inward investment and the Ministry of Foreign Affairs. However, politics can also have a strong local focus, which often impedes reform at the national level. The single transferable vote (STV) system, with multi-seat constituencies, causes intense rivalry, even within parties, and parliamentary seats can hang on just a handful of votes. Elected and aspiring politicians ignore even the smallest of such interest groups at their peril, as they could face an electoral challenge from a single-issue protest candidate.

  Some institutional reform is expected during the forecast period (see also Political stability). The structures that failed to prevent the collapse of the banking system and economy have been called into question. Public anger has also been directed at the political and financial elites, with a widespread perception of vested interests, political cronyism and lethargy. The overthrow of the long-established Fianna Fail government in February 2011 showed the effective functioning of democracy, but also the need and appetite for change. All the major parties-Fine Gael, Labour and Fianna Fail-made manifesto commitments to abolish the Seanad (the upper house). Other proposals in the public sphere include the constitutional convention, a smaller lower house, a new appointment system for ministers and the speaker, stronger scrutiny of the executive by parliamentary committees, greater transparency and wider freedom of information. However, because most of the government's time and energy will be focused on tackling the ongoing financial crisis, few if any of these reforms are likely to be enacted. Financial regulation has been tightened since the crisis began to unfold in late 2008, but systemic problems remain.

  The Irish government must function in close relationship with the troika of the European Commission, the IMF and the ECB. It is subject to regular reviews, targets and austerity measures. This is perceived as an encroachment on Irish sovereignty, although the government also received praise initially for taking "ownership" of the programme. The situation gives impetus for reform, but it remains to be seen how constructive the changes will be in the longer term. More broadly, the deepening euro zone crisis risks testing the wider political effectiveness of the EU itself.

  Ireland's "social partnership" arrangement gives interest groups a significant say in a range of policy issues. It has ensured a high level of social cohesion, but has also frequently resulted in hesitation and delay on the part of the executive and a tendency to buy off interest groups by watering down proposals or by granting financial compensation (such as the large pay increases for public-sector workers during the boom years). The system has been put under pressure by the need for pay cuts and other emergency measures to reduce the budget deficit. In June 2010 the government and public-sector unions reached the Croke Park wage agreement, which promised no pay cuts for four years if efficiency savings were made, but it has yet to be fully implemented. However, there has been no indication that Ireland will experience the levels of civil unrest seen in Greece during the crisis.

  June 13, 2012

• Structure

  Ireland: Political structure

  Official name

  Ireland/Eire

  Form of state

  Republic

  Legal system

  Common law; written constitution (1937)

  National legislature

  Bicameral Oireachtas (parliament); Dail (lower house) of 166 members directly elected by proportional representation for a five-year term; Seanad (Senate) of 60 members, 11 nominated by the taoiseach (prime minister), six elected by the universities and 43 by an electoral body comprising various interest groups. The Senate has powers of consultation and amendment only and may not veto proposals emanating from the Dail; it has a maximum period of 90 days to consider bills from the lower house. The Senate serves for the same term as the Dail

  Electoral system

  Universal direct suffrage over the age of 18 using the single transferable vote system of proportional representation in 43 multimember constituencies

  National elections

  Last elections: February 2011 (parliamentary) and October 2011 (presidential). Next parliamentary election due by February 2016; presidential election due in October 2018

  Head of state

  President, directly elected for a seven-year term; largely ceremonial role; currently Michael D Higgins

  National government

  Cabinet headed by the taoiseach, appointed by the president on the basis of ability to gain the support of the Dail. The government comprises Fine Gael and the Labour Party

  Main political parties

  Fianna Fail, Fine Gael, Labour Party, and Sinn Fein are the main parties in the Dail.

  The cabinet

  Taoiseach (prime minister): Enda Kenny (Fine Gael)

  Tanaiste (deputy prime minister) & minister for foreign affairs & trade: Eamon Gilmore (Labour Party)

  Key ministers

  Agriculture, fisheries & food: Simon Coveney (Fine Gael)

  Arts, heritage & the Gaeltacht: Jimmy Deenihan (Fine Gael)

  Children & youth affairs: Frances Fitzgerald (Fine Gael)

  Communications, energy & natural resources: Pat Rabbitte (Labour Party)

  Community, equality & Gaeltacht affairs (Gaelic-speaking regions): Frances Fitzgerald (Fine Gael)

  Education & skills: Ruairi Quinn (Labour Party)

  Enterprise, trade & innovation: Richard Bruton (Fine Gael)

  Environment, community & local government: Phil Hogan (Fine Gael)

  Finance: Michael Noonan (Fine Gael)

  Health & children: James Reilly (Fine Gael)

  Justice & equality & defence: Alan Shatter (Fine Gael)

  Public expenditure & reform: Brendan Howlin (Labour Party)

  Social protection: Joan Burton (Labour Party)

  Transport, tourism & sport: Leo Varadkar (Fine Gael)

  Central Bank governor

  Patrick Honohan

  December 06, 2012

• Outlook

  Ireland: Key developments

  Outlook for 2013-17

  • The Economist Intelligence Unit's central forecast is that the Fine Gael-Labour Party coalition government is likely to serve its full five-year term to 2016, but political stability and government effectiveness will be significantly tested.
  • Economic policy will focus on implementing austerity policies and financial and structural reforms agreed with the EU/IMF in late 2010 in exchange for an EUR85bn (US$110bn) lending facility that expires at the end of 2013.
  • We expect the coalition to honour the previous government's bank debt guarantee, but a debt haircut of the sort that was implemented in Greece in 2012, which had been a part of our central forecast, no longer seems feasible.
  • What will happen beyond 2013 is highly uncertain. The EU/IMF may expand the bail-out over several more years, but this would not resolve the country's excessive debt problem.
  • We forecast that the budget deficit will narrow gradually from 13.3% of GDP in 2011 (revised up to include bank recapitalisation costs), but will still be well above the official deficit target of 3% in 2017.
  • We expect that the current account will remain in surplus and that the surplus will expand as domestic demand weakness persists and competitiveness gains hold up goods and services exports, despite weak demand in core markets.

  Review

  • On November 15th the National Treasury Management Agency sold three-month Treasury bills worth EUR500m. The bid cover ratio was 4.12 and the yield was 0.55%, compared with 3.6 and 0.7%, respectively, in an October issue.
  • On the secondary market, the yield on Ireland's benchmark eight-year bond was 4.3% at end-November compared with 4.6% a month earlier.
  • According to the Central Bank of Ireland, lending to households continued to decline, falling by EUR514m in October compared with September. Private-sector deposits rose by 1.8% in September and 2.4% in October.
  • The number of employed people declined by 0.3% quarter on quarter in July-September. The third-quarter unemployment rate was 14.8%, down from 14.9% in the third quarter of 2011.
  • In October the retail sales volume index rose by 1.3% month on month and 3.1% year on year, driven by a surge in new television sales as Ireland switched from analogue to digital transmission in late October.
  • The foreign trade surplus of EUR2.9bn in September was small compared with previous months, reflecting lower exports in pharmachem industry, which accounts for about 60% of the total value of exports.

  December 06, 2012

Economy:

• Background

  Ireland: Country fact sheet

  Fact sheet

  Annual data	2011a	Historical averages (%)	2007-11
  Population (m)	4.5	Population growth	1.4
  GDP (US$ bn; market exchange rate)	221.3b	Real GDP growth	-0.4
  GDP (US$ bn; purchasing power parity)	189.5b	Real domestic demand growth	-3.8
  GDP per head (US$; market exchange rate)	48,914	Inflation	1.2
  GDP per head (US$; purchasing power parity)	41,891	Current-account balance (% of GDP)	-2.2
  Exchange rate €:US$ (av)	0.72b	FDI inflows (% of GDP)	6.9
  a Economist Intelligence Unit estimates. b Actual.

  Download the numbers in Excel

  Background: After a bitter struggle, the Anglo-Irish Treaty was signed in 1921. It conferred independent dominion status in the British Commonwealth on 26 counties of Ireland, while the other six remained within the UK. The establishment of the Irish Free State was followed by a brief civil war, which ended in 1923. The current constitution came into force in 1937, followed by the declaration of the republic in 1949. Ireland joined the European Economic Community (EEC, now the EU) in 1973 and was one of the founder members of European economic and monetary union (EMU) in 1999.

  Political structure: In every election for 70 years, two broadly centrist parties-Fianna Fail and Fine Gael-had won the lion's share of the popular vote, but this trend was broken at the general election in February 2011, when Fine Gael and the Labour Party emerged as the two largest parties. A general election is held at least once every five years under the single transferable vote system (a form of proportional representation). The head of state is elected by universal suffrage but has no executive powers. A new president, Michael D Higgins, was elected in October 2011.

  Policy issues: Economic policy priorities will be largely dictated by the terms agreed with the EU and IMF in exchange for Ireland's access to an EUR85bn (US$110bn) EU/IMF lending facility until late 2013. These terms aim to narrow the budget deficit to less than 3% of GDP by 2015, boost competitiveness and repair the ailing banking system. The government is expected to maintain its guarantee of most bank liabilities. The Economist Intelligence Unit no longer expects Ireland to undergo a managed debt restructuring when the current EU/IMF bail-out package expires. A new facility or a precautionary credit line may be necessary. Maintaining Ireland's attractiveness as a location for foreign direct investment (FDI) will continue to be a policy priority.

  Taxation: Most tax rates will rise over the forecast period as the government seeks to raise revenue to replace property tax receipts that have evaporated. The low rate of corporation tax, at 12.5%, is unlikely to be increased dramatically, as we expect Ireland to resist pressure from the EU to harmonise euro area corporate tax rates.

  Foreign trade: In 2011 goods exports were worth EUR84.9bn and goods imports were worth EUR48.3bn. Exports are dominated by foreign-owned firms in the technology, financial services and chemicals industries. The current account recorded a small surplus in 2011, of EUR1.8bn (1.1% of GDP), despite deficits on the services and income accounts.

  Major exports 2011	% of total	Major imports 2011	% of total
  Chemicals & related products	60.2	Machinery & transport equipment	25.8
  Machinery & transport equipment	12.0	Chemicals & related products	21.8
  Food, drinks & tobacco	9.7	Mineral fuels, lubricants, & related materials	14.1
  Precision instruments	4.8	Food, drinks & tobacco	12.0
  Leading markets 2011	% of total	Leading suppliers 2011	% of total
  US	21.5	UK	39.2
  UK	15.6	US	12.8
  Belgium	14.8	Germany	7.7
  Germany	6.8	Netherlands	5.7

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  December 06, 2012

• Structure

  Ireland: Economic structure

  Data and charts: Annual trends charts

  
  

  

  December 06, 2012

• Outlook

  Ireland: Country outlook

  Ireland: Country outlook

  FROM THE ECONOMIST INTELLIGENCE UNIT

  POLITICAL STABILITY: The Economist Intelligence Unit's central forecast is that the coalition government of the dominant centre-right Fine Gael and the smaller centre-left Labour Party will serve its full five-year term until early 2016. The government led by Enda Kenny, the prime minister, has a comfortable majority in parliament and the opposition is fragmented. However, the need for continued budgetary retrenchment, reliance on international funding under the EU/IMF bail-out agreement and the government's failure to overcome resistance from international creditors to provide some form of bank debt relief will continue to test political stability and effectiveness. Popular support for the government has declined since the general election in February 2011, exacerbating ideological differences in the coalition. Government ministers are far from agreement on austerity measures worth EUR3.5bn (US$4.5bn) to be introduced in the 2013 budget. There are also tensions between Labour Party ministers and backbenchers, some of whom see the party leader, Eamon Gilmore, and his senior ministerial colleagues as too willing to compromise with Fine Gael. By mid-November 2012 four Labour members had resigned from the parliamentary party, including two who were junior ministers at the time. Although we consider an early election unlikely, not least because of the damage that it would do to investor confidence, the collapse of the government cannot be discounted.

  ELECTION WATCH: We expect the coalition to remain in government until the next general election, in early 2016. Although still too early to determine, the outcome is likely to depend on a range of factors, particularly economic performance and development in the wider euro area. Fianna Fail's performance under its leader, Micheal Martin, will also be an important factor after the collapse of the party's vote at the election in 2011. It remains to be seen whether the party can restore its credibility in the eyes of the electorate before 2016. We believe that despite Sinn Fein's substantial gains in opinion polls, voters would be unlikely to consider the party suitable for government, given its nationalist and leftist ideology, its roots in the politics of Northern Ireland (which is part of the UK) and its past role as the political wing of the disbanded Irish Republican Army (IRA).

  INTERNATIONAL RELATIONS: Ireland will assume the six-month rotating presidency of the EU at the start of 2013 amid widespread public unease about the conditions of its EU/IMF bail-out agreement. However, approval of the proposed euro zone fiscal treaty by referendum in May 2012 and the government's adherence to the terms of the bail-out should ensure continued access to EU financial support. The tone of future relations may depend on whether the government has to apply for a second credit facility from the permanent euro zone bail-out fund, the European Stability Mechanism (ESM), when Ireland's current agreement expires. Technical negotiations with Ireland's EU partners to ease the repayment terms of promissory notes worth EUR31bn that were used to rescue two failed Irish banks have been going on for some time, but the European Central Bank (ECB) has so far resisted any concessions.

  POLICY TRENDS: Economic policy is largely dictated by the terms of the bail-out agreement of November 2010 with the "troika" of the European Commission, the IMF and the ECB. This agreement expires at end-2013, but the financial and economic reform programme agreed at the height of the crisis is likely to anchor policy well beyond 2013. The programme contains a fiscal consolidation plan to at least 2015, as well as financial and structural reforms to boost competition in sheltered service sectors and to repair the banking system The programme's highly ambitious fiscal target--a narrowing of the budget deficit from around 31% of GDP in 2010 (or about 12% excluding measures to rescue the banking system) to less than 3% of GDP by 2015--does not seem achievable, given weak economic growth prospects in Ireland and in the euro zone, Ireland's main export market. We expect the government to maintain its blanket guarantee of the liabilities of the main commercial banks, thereby continuing to backstop private bank debt until it is repaid. It is unlikely that a portion of this debt will be removed from the government accounts as was initially hoped when direct bank recapitalisation by the ESM was first proposed at an EU summit in late June 2012. This leaves a high degree of uncertainty about Ireland's ability to meet its financing needs after the bail-out agreement expires.

  ECONOMIC GROWTH: GDP figures have been volatile since the beginning of 2010, and have undergone substantial revisions in recent quarters, which has not helped to give a clear picture of the economy's direction. An export-driven recovery in the first half of 2011 came to an abrupt halt in the third quarter, but upwardly revised fourth-quarter data meant that real GDP grew by 1.4% in 2011 (revised up from 0.7%). In the first half 0f 2012 GDP remained marginally below the level reached at end-2011. With demand for exports of goods and services unlikely to be sufficiently robust to offset the weakness of domestic demand, we expect the economy to stagnate in the second half of 2012 and in 2013. We forecast that GDP growth will accelerate to 1.4% in 2014 and just under 2% a year in 2015-17.

  INFLATION: EU harmonised consumer price inflation generally accelerated over the first three quarters of 2012, mainly owing to higher global commodity prices. However, as expected, it started to ease in September and October, and this trend should continue into 2013 owing to weak domestic demand, high unemployment and (at best) moderate wage growth, which should offset the effects of further increases in indirect tax rates in the 2013 budget and a weaker euro. Inflation is expected to slow gradually from an average of 1.9% in 2012 to 0.9% in 2013. It is forecast to accelerate moderately from 2014 to reach 2% in 2016-17 as domestic demand strengthens and commodity prices rise.

  EXCHANGE RATES: Although not our central forecast, there is a high risk that several countries will be forced to leave the euro zone in 2012-13. Such fears have caused flight from euro assets, and partly explain the volatility of the single currency, which has fluctuated in a range of US$1.2-1.35:EUR1 during 2012, standing at US$1.3:EUR1 in early December. Even assuming that it survives in its current form, the euro will remain volatile in response to shifting risk appetites, protracted economic weakness and lower reserve accumulation by China. We expect it to average US$1.26:EUR1 in 2013 and US$1.25:EUR1 in 2014-17, but there is a significant risk of sharp movements either way.

  EXTERNAL SECTOR: Import growth has been more subdued than export growth, causing the current account to record surpluses of about 1% of GDP in 2010 and 2011 after ten years in deficit. We expect that it will remain in surplus, and that the surplus will expand as domestic demand weakness persists and competitiveness gains hold up goods and services exports, despite weaker demand in important markets (especially during the first half of the forecast period).

  December 07, 2012

• Forecast

  Ireland: Country forecast summary

  Country forecast overview: Highlights

  • The Economist Intelligence Unit expects the coalition of Fine Gael and the Labour Party to serve a full term to early 2016. It has a majority and the opposition is fragmented. However, prolonged austerity and economic restructuring have eroded public support for the government, which will continue to exacerbate differences in the coalition and hinder effective policymaking.

  • Economic policy will focus on implementing the austerity measures and financial and structural reforms agreed with the "troika" of the European Central Bank (ECB), the IMF and the European Commission. Ireland has resisted pressure to raise its low corporation tax rate of 12.5%, but is likely to accept reform of its corporation tax base within a European framework.
  • The government is expected to continue to honour a state guarantee of senior bank debt and has abandoned an election promise to impose a haircut on unguaranteed senior bondholders in the face of EU opposition. The ECB has so far resisted calls to ease the repayment terms of government promissory notes worth about €30bn (US$38bn) issued in 2010 to prop up two failed banks.
  • We no longer expect Ireland to undergo a managed restructuring of a portion of the bank debt taken on by the sovereign. Although we forecast that the budget deficit will narrow gradually from 13.3% of GDP in 2011, we expect it to remain well above the official deficit target of 3% in 2017.
  • What will happen beyond the current bail-out agreement at the end of 2013 is highly uncertain. Secondary market government bond yields have declined substantially, but a full return to the bond markets when Ireland's lending facility expires is likely to be difficult.
  • The EU/IMF may expand Ireland's bail-out for several more years to cover the country's funding costs. Alternatively, repayment conditions on some public debt could be eased. Neither scenario resolves the country's excessive debt problem. Despite Ireland's greater acceptance of fiscal austerity measures and structural reforms, it will remain vulnerable to events in the rest of the euro area.
  • The export-driven economic recovery that started in the first half of 2011 has stalled. Real GDP is expected to be broadly flat in 2012-13, owing to continuing austerity and weaker demand in Ireland's main export markets: the euro area, the US and the UK. A gradual acceleration in GDP growth is expected from 2014, but output in 2017 will still be below its pre-crisis peak in 2007.

  

  December 06, 2012

View detailed map

Country Briefing

Land area

68,890 sq km

Population

4.25m (2009)

Main towns

Population in '000 (2006)

Dublin metropolitan area: 1,187

Dublin (city, the capital): 506

Cork: 448

Galway: 232

Kildare: 186

Limerick: 184

Climate

Temperate

Weather in Dublin (altitude 13 metres)

Hottest month, August, 16.2°C (average daily temperature); coldest month, February, 3.2°C; driest month, May, 36 mm average rainfall; wettest month, April, 92 mm

Languages

English, Irish (Gaeilge)

Measures

Traditionally UK (imperial) system, now largely converted to metric system

Currency

Euro (€)

Time

GMT in autumn/winter; one hour ahead in spring/summer

Public holidays

January 1st, March 17th (St Patrick's Day), Good Friday, Easter Monday, first Monday in May, first Monday in June, first Monday in August, last Monday in October, December 25th and 26th

March 20, 2012