               EUROPEAN COMMISSION
            Brussels, 5.6.2019
            COM(2019) 501 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2019 National Reform Programme of Belgium and delivering a Council opinion on the 2019 Stability Programme of Belgium

               Recommendation for a

               COUNCIL RECOMMENDATION

               on the 2019 National Reform Programme of Belgium and delivering a Council opinion on the 2019 Stability Programme of Belgium

               THE COUNCIL OF THE EUROPEAN UNION,

               Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,

               Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies
                  1
               , and in particular Article 5(2) thereof,

               Having regard to the recommendation of the European Commission,

               Having regard to the resolutions of the European Parliament,

               Having regard to the conclusions of the European Council,

               Having regard to the opinion of the Employment Committee,

               Having regard to the opinion of the Economic and Financial Committee,

               Having regard to the opinion of the Social Protection Committee,

               Having regard to the opinion of the Economic Policy Committee,

               Whereas:

               (1)On 21 November 2018, the Commission adopted the Annual Growth Survey, marking the start of the 2019 European Semester for economic policy coordination. It took due account of the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The priorities of the Annual Growth Survey were endorsed by the European Council on 21 March 2019. On 21 November 2018, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it did not identify Belgium as one of the Member States for which an in-depth review would be carried out. On the same date, the Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro area, which was endorsed by the European Council on 21 March 2019. On 9 April 2019, the Council adopted the recommendation on the economic policy of the euro area (‘Recommendation for the euro area’).

               (2)As a Member State whose currency is the euro and in view of the close interlinkages between the economies in the economic and monetary union, Belgium should ensure the full and timely implementation of the recommendation for the euro area, as reflected in recommendations (1) to (3) below.

               (3)The 2019 country report for Belgium
                  2
                was published on 27 February 2019. It assessed Belgium’s progress in addressing the country-specific recommendations adopted by the Council on 13 July 2018, the follow-up given to the recommendations adopted in previous years and Belgium's progress towards its national Europe 2020 targets.

               (4)On 26 April 2019, Belgium submitted its 2019 National Reform Programme and its 2019 Stability Programme. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

               (5)Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds ('ESI Funds') for the 2014-2020 period. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council
                  3
               , where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking the effectiveness of the ESI Funds to sound economic governance
                  4
               .

               (6)Belgium is currently in the preventive arm of the Stability and Growth Pact and subject to the debt rule. In its 2019 Stability Programme, the government plans a gradual improvement of the headline balance from a deficit of 0.7% of GDP in 2018 to 0.0% of GDP in 2022. Based on the recalculated structural balance
                  5
               , the medium-term budgetary objective, set at a balanced budgetary position in structural terms, is not planned to be achieved over the period covered by the 2019 Stability Programme. After having peaked at almost 107% of GDP in 2014 and decreasing to 102% of GDP in 2018, the general government debt-to-GDP ratio is expected to decline to 94% by 2022 according to the 2019 Stability Programme. The macroeconomic scenario underpinning those budgetary projections is plausible. At the same time, the measures needed to support the planned deficit targets from 2020 onwards have not been specified, which contributes to the projected deterioration of the structural balance in 2020 under unchanged policies according to the Commission 2019 spring forecast.

               (7)On 5 June 2019, the Commission issued a report prepared in accordance with Article 126(3) of the TFEU due to Belgium's non-compliance with the debt rule in 2018. The report concluded, following an assessment of all the relevant factors, that the current analysis is not fully conclusive as to whether the debt criterion as defined in the Treaty and in Regulation (EC) No 1467/1997 is or is not complied with.

               (8)In its 2019 Stability Programme, Belgium confirms the request of its 2019 Draft Budgetary Plan to avail itself of the flexibility under the preventive arm pursuant to the “Commonly agreed position on Flexibility within the Stability and Growth Pact” endorsed by the ECOFIN Council in February 2016. Belgium requested a temporary deviation of 0.5% of GDP from the adjustment path towards the medium-term budgetary objective in view of the implementation of major structural reforms with a positive impact on the long-term sustainability of public finances. The structural reforms refer to a pension reform, a “tax shift”, a reform of corporate income taxation, a labour market reform as well as a reform of the public administration. The Commission 2019 spring forecast confirms that Belgium respects the minimum benchmark in 2019, providing a safety margin towards the 3% of GDP deficit threshold. All the measures have now been fully legislated, with the exception of the reform of the public administration. Given their nature, and particular the tax shift and its corporate income tax reform, there are still uncertainties surrounding their short-term impact, particularly given its non-budgetary neutral nature, which has worsened the budgetary position. Nevertheless, they have enhanced the economy's growth potential, lowered the unemployment rate and reduced the risks of macroeconomic imbalances, thereby having a positive impact on debt sustainability in the medium to long term. On this basis, Belgium can currently be assessed as qualifying for the requested temporary deviation of 0.5% of GDP in 2019, provided that it adequately implements the agreed reforms, which will be monitored under the European Semester.

               (9)On 13 July 2018, the Council recommended Belgium to ensure that the nominal growth rate of net primary government expenditure ( ) does not exceed 1.8% in 2019, corresponding to an annual structural adjustment of 0.6% of GDP. As Belgium qualifies for the requested temporary deviation of 0.5% of GDP under the structural reform clause, the required structural adjustment for 2019 can be reduced to 0.1% of GDP, corresponding to a nominal growth rate of net primary expenditure that does not exceed 2.8% in 2019. Based on the Commission 2019 spring forecast, there is a risk of a significant deviation from the recommended adjustment path towards the medium-term budgetary objective over 2018 and 2019 taken together.

               (10)In 2020, in view of Belgium's general government debt ratio above 60% of GDP and projected output gap of 0.1%, the nominal growth rate of net primary government expenditure should not exceed 1.6%, in line with the structural adjustment of 0.6% of GDP stemming from the commonly agreed adjustment matrix of requirements under the Stability and Growth Pact. Based on the Commission 2019 spring forecast under unchanged policies, there is a risk of a significant deviation from that requirement in 2020. Belgium is prima facie not forecast to comply with the debt rule in 2019 and 2020. Overall, the Council is of the opinion that the necessary measures should be taken as of 2019 to comply with the provisions of the Stability and Growth Pact. The use of any windfall gains to further reduce the general government debt ratio would be important.The medium- and long-term sustainability of Belgium’s public finances continues to be at risk due to the combination of a high debt-to-GDP ratio and the projected rise in ageing costs, in particular those linked to pensions and long-term care. A set of pension reforms was legislated in 2015, leading to an increase of the statutory retirement age from 65 to 66 years as from 2025 and to 67 as from 2030. Moreover, age and seniority requirements to benefit from early retirement were also made stricter. Nevertheless public expenditure on pensions would still increase by 2.9 percentage points of GDP by 2070, mostly during the next two decades. Furthermore, early retirement conditions for several large groups of civil servants remain more favourable than the standard conditions. Public spending on long-term care is projected to increase by 1.7 percentage points of GDP by 2070, an above average increase starting from what is already one of the highest levels in the EU. The organisational fragmentation of long-term care, with competences currently spread across different administrative levels, challenges some dimensions of spending efficiency, hence the net impact of the recent transfer of responsbilities is not yet clear. Strengthening governance would help to achieve the intended efficiency gains. There might be room to optimise the care-mix to increase the cost-efficiency of the long-term care system.

               (11)The composition and efficiency of public spending can be improved in order to create space for more public investment. In spite of a recent decrease, total expenditure as a share of GDP in Belgium remains among the highest in the euro area. The high level of public expenditure suggests that there is scope for a more spending-based fiscal adjustment. Given the high level of public expenditure, the outcomes of certain policies and the quality of certain public services raises questions of cost efficiency. Spending reviews and policy evaluations can help Belgium prioritise and improve the efficiency of public expenditure. Furthermore, spending reviews could be used to assess the efficiency of the indirect public support for business Research and Development, which is one of the highest in the European Union, as a percentage of GDP and continued to increase last year. Federal and regional authorities have recently expressed interest in integrating spending review in their budgetary mechanism.

               (12)Budget coordination between entities is currently not sufficiently flexible to create room for public investment in large-scale projects. Effective budget coordination is essential in a federal Member State like Belgium, where a large part of the spending power has been devolved to sub-national governments. There is still no formal agreement on annual targets at all levels of government, in spite of the cooperation agreement signed in 2013, complicating budget coordination. In contrast with the practice of previous Stability Programmes, when the Concertation Committee ‘took note’ of the fiscal trajectory, all levels of government approved the overall fiscal trajectory presented in the 2018 Stability Programme and supported the achievement of the fiscal targets by 2020 for all government levels. Although this approval added credibility to the overall trajectory, there was no formal agreement on the annual fiscal targets at each level of government. A lack of agreement on the targets at each level of government may undermine the viability of the overall trajectory towards the medium-term objective. In addition, this prevents the Public sector borrowing requirements section of the High Council of Finance from effectively monitoring compliance with these targets. The 2019 Stability Programme contained only indicative overall and intermediary budgetary targets as elections took place at federal level and at the level of the Regions and Communities on 26 May 2019.

               (13)Recent economic growth has resulted in jobs growth and employment is at the highest level in the past ten years. Nevertheless, transitions from inactivity or unemployment to employment remain low and Belgium is not on track to achieving its Europe 2020 employment target of 73.2%. Strong regional disparities in the labour market persist. Youth unemployment is well above the Union’s average in Brussels. Labour market participation is low for the low-skilled, people with a migrant background, older workers and people with disabilities, suggesting that both structural and group-specific factors hinder their integration in the labour market, while existing activation measures are not equally effective for all population groups. The employment rate of older workers (55-64 years) remains below the EU average and the gap with the Union average continues to increase for those over 60 years. People with a migrant background, in particular women, continue to experience higher unemployment, lower activity rates, higher in-work poverty and over-qualification. While some measures have been taken to support the integration of newly arrivals and to tackle discrimination, a coordinated approach to address the challenges faced by people with migrant background is still lacking. To address low labour market participation, measures have been taken as part of the ‘Jobs Deal’ reform, but their impact remains to be assessed.

               (14)Important financial disincentives to take up employment remain. Although the tax shift reduced the labour tax wedge, it remains on average high at all wage earners, except for the very low wage earners (fifty percent of the average wage). Belgium remains the only Member State in which unemployment benefits are not limited in time, though they gradually fall. There are financial disincentives for beneficiaries of sickness and disability schemes and second earners to take up full-time employment. In particular, single parents (and to a lesser extent couples with children) face limited financial incentives to take up (full-time) employment due to a combination of costs and withdrawal of benefits. Moreover, coordination problems may arise due to the split of responsibilities for the social protection between the federal, regional and local levels. The social security system does not cover all people in employment and some lack social protection coverage.

               (15)The decline in educational performance and the existence of significant disparities in the education system remain a concern. The percentage of young people not mastering basic skills can be improved in particular in the French Community where the share is above the OECD average. The gap in educational outcomes due to socio-economic and migration background is high. Teachers need more support to deal with diversity and there remains a need to adapt teachers' continuous professional development. Reforms to improve educational outcomes and to tackle disparities need to be stepped up to boost knowledge-intensive, sustainable and inclusive growth and social inclusiveness. The implementation of the ‘Pact for Excellence’, the French Community’s flagship school reform to improve basic skills, efficiency, governance and tackle inequalities, is progressing. Decrees on the organization of work of teachers, on the common core school curriculum, on the status of school directors and the reinforcement of the knowledge of French for newcomer pupils have been adopted and will be applicable as from September 2020. The Flemish Community is implementing some reforms in secondary education as of 2019/2020, but early tracking of pupils remains a concern. The impact of these reforms and measures will also depend on their effective implementation and monitoring. The federal Parliament has also lowered the age of compulsory education from six to five years. Given the already high spending levels on education, reforms will need to be implemented with a stronger focus on increasing the efficiency and effectiveness of the system, and its capacity to deliver future-oriented and labour market relevant competences.

               (16)Skills mismatches and low job mobility hamper job and productivity growth. Despite several regional and federal measures taken to address skills shortages and increase activation, including as part of the Jobs Deal, labour shortages are observed in several sectors, in particular in information and communication technologies, construction and health. The growth of the construction sector is held back by lack of skills and labour shortages. There are important needs in terms of re-skilling and upskilling the labour force in some sectors. Adult participation in education and training and job mobility are also low. Poor linguistic skills are an important issue, in particular in Brussels, where around 50% of job offers require the knowledge of both French and Dutch, according to the National Reform Programme. Tertiary education attainment is high, but there are too few graduates in science, technology, engineering and mathematics (STEM). In 2016, Belgium ranked 26th in the EU for tertiary graduates in STEM education with a low rate of new entrants to related tertiary education fields, in particular for women. The overall implementation of the “STEM Action Plan 2012-2020” in Flanders shows progress,but the number of STEM secondary graduates in technical and vocational paths has stagnated since 2010. The French Community has no STEM policy strategy and still needs to implement its recently adopted “Strategy for Digital Education” plan for schools. Shortages of professionals with an entrepreneurship knowledge in science, technology, engineering and mathematics holds back the development of start-ups. The overall level of digital skills is good, but not improving. The National Reform Programme highlights the agreement between Flanders and Wallonia to improve inter-regional labour mobility.

               (17)Research and development is concentrated in a few industries and there is insufficient diffusion of innovation to the rest of the economy, ultimately weighting on productivity growth. Public research appears to be below the Union average in the Regions and Communities other than Flanders. In terms of Research, Development and Innovation, there are also regional and sub-regional disparities. The National Pact for Strategic Investment identifies the reinforcement of digitisation as a promising avenue to boost productivity and the innovation capacity of Belgium. Doing so requires investments in digital infrastructure, including taking effective steps for the successful roll out of 5G, and human capital and entrepreneurial spirit as well as an accelerated take-up of digital technology, in particular by those firms that have been lagging behind so far.

               (18)The quality of road infrastructure is deteriorating after years of low public investment. At the same time, the maintenance of a large and dense network does not seem cost-effective for the regions and local authorities. Roads in Belgium are among the most congested in the Union. The rail infrastructure is dense and of good quality, but completing and upgrading it remains a challenge and there is congestion especially around Brussels and in access to the ports of Antwerp and Zeebrugge. Significant investments are planned in suburban rail infrastructure and signalling, but are being held back notably by budgetary allocation rules across regions. Additionally, distortive incentives and barriers to competition and investment in domestic passenger railway services and intercity coach services constrain the supply and demand of alternative collective and low-carbon transport services. The increasing congestion is partly explained by the continuous increase of passenger cars, incentivised by toll-free roads, the company car deduction and low environmental taxation. High transaction taxes on immovable property and the company car scheme adversely affect mobility. The quality of rail services has decreased and the supply of urban and urban-rural public transport has room for improvement, notably in Wallonia, where access to employment is a major constraint to job seekers. According to the National Reform Programme, important investments and reforms are underway in all regions, while at federal level, and in cooperation with the Regions, the completion of the network of suburban railways around Brussels is progressing. Belgium adopted the law to open domestic railway services, but the share of passenger transport provided under public service obligations with a directly awarded contract remains very high in Belgium. Private bus operators are not allowed to operate intercity coach services. Taxi regulations vary among local authorities. Although regions have developed their own mobility plans, complex coordination prevents a consistent vision for mobility within Belgium, and possibly with border cities and regions. The Rail Regulator has room to develop the scope of its regulating activities.

               (19)There are substantial investment needs to support the energy transition. Renovation of the old building stock, which predates the introduction of energy norms, will help to meet the 2020 and 2030 emission reduction targets. The roll-out of alternative fuel is rather low. There is a need for major investment in power generation, as well as interconnection capacity, smart grids storage and energy efficiency.

               (20)In spite of government efforts, the regulatory and administrative burden on firms remains heavy and weighs on entrepreneurship. Taxation has been alleviated for start-ups and small companies, but remains complex for financial investments. Belgium has reformed its company law code, reducing the number of legal forms for companies, facilitating legal electronic communication, reducing minimum capital requirements and, according to the National reform Programme, reforming the insolvency law to include notably liberal professions. However, in spite these efforts, there are long delays for building permits, costly property registration and lengthy judicial proceedings. Administrative justice is experiencing challenges due to a lack of resources and lengthy proceedings, causing important delays, in particular for buidling permits, but also for procurement procedures. Moreover, coordination in climate, energy, digital and transport policy is complex and not always effective. Cooperation between customs authorities and market surveillance authorities is sub-optimal increasing the risk that non-compliant goods enter the EU through the Belgian borders. Impact assessment could be better integrated in the policy-making process. The quality of digital public services for businesses is low. The lack of digitalisation of the justice system remains a serious challenge, notably for data collection. Completing the digitalisation of justice is an important condition for further improvements of the quality of the justice system, such as updating business processes and better management of human and financial resources at courts.

               (21)Barriers to competition and investment in several business services hamper growth and productivity. Entry rates of new service providers are significantly below the EU-average, while profit rates are above the EU-average. The Commission restrictiveness indicator shows that the Belgian regulatory framework for accountants, tax advisors, architects and real estate agents is considerably more restrictive than the EU average. A recently adopted law has introduced stricter requirements for patent agents. The Federal Planning Bureau estimates that an ambitious reduction of the regulatory burden in legal, accounting and architectural services would increase labour productivity. The regulated fees of notaries for real estate transactions are significant, adding to the high registration taxes. Regions have unevenly reformed the crafts and trade professions. The retail sector still faces operational restrictions that hinder its productivity and discourage investment. The supermarket sector displays a sub-optimal level of competition, mainly due to high concentration and low entry and exit dynamics. According to the Retail Restrictiveness Indicator, Belgium is the sixth most restrictive Member State as regards the operational environment for retailers. The National Reform Programme highlights recent Brussels reforms to facilitate retail establishment. The telecoms market is characterised by a high level of concentration (further accentuated by recent takeovers) and weak competition. This is also illustrated by relatively high prices for fixed services compared to peer countries. In fixed networks, the retail market is characterised by geographically defined duopolies of the incumbent and cable network operators. This may create obstacles to the provision of fixed-mobile convergent bundled services by some operators. The National Reform Programme highlights that the reform of economic law to improve compliance of competition law and the functioning of the Belgian Competition Authority by making procedures more efficient and reduce the risk of further disputes before the Cour des Marchés/Marktenhof has been adopted. The Belgian Competition Authority has limited resources compared to the resources of Competition Authorities of other Member States.

               (22)The programming of EU funds for the period 2021-2027 could help address some of the gaps identified in the recommendations, in particular in the areas covered by Annex D to the country report
                  6
               . This would allow Belgium to make the best use of those funds in respect of the identified sectors, taking into account regional disparities.

               (23)In the context of the 2019 European Semester, the Commission has carried out a comprehensive analysis of Belgium’s economic policy and published it in the 2019 country report. It has also assessed the 2019 Stability Programme and the 2019 National Reform Programme and the follow-up given to the recommendations addressed to Belgium in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Belgium, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

               (24)In the light of this assessment, the Council has examined the 2019 Stability Programme and its opinion
                  7
                is reflected in particular in recommendation (1) below.

               HEREBY RECOMMENDS that Belgium take action in 2019 and 2020 to:

               1.Ensure that the nominal growth rate of net primary government expenditure does not exceed 1.6% in 2020, corresponding to an annual structural adjustment of 0.6% of GDP. Use windfall gains to accelerate the reduction of the general government debt ratio. Continue reforms to ensure the fiscal sustainability of the long-term care and pension systems, including by limiting early exit possibilities from the labour market. Improve the composition and efficiency of public spending, notably through spending reviews, and the coordination of fiscal policies by all levels of government to create room for public investment.

               2.Remove disincentives to work and strengthen the effectiveness of active labour market policies, in particular for the low skilled, older workers and people with a migrant background. Improve the performance and inclusiveness of the education and training systems and address skills mismatches.

               3.Focus investment-related economic policy on sustainable transport, including upgrading rail infrastructure, the low carbon and energy transition and research and innovation, in particular in digitalisation, taking into account regional disparities. Tackle the growing mobility challenges, by reinforcing incentives and removing barriers to increase the supply and demand of collective and low emission transport.

               4.Reduce the regulatory and administrative burden to incentivise entrepreneurship and remove barriers to competition in services, particularly telecommunication, retail and professional services.

               Done at Brussels,

                     For the Council

                     The President

                     (1)

                        OJ L 209, 2.8.1997, p. 1.

                     (2)

                        SWD(2019) 1000 final.

                     (3)

                        Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

                     (4)

                        COM(2014) 494 final.

                     (5)

                        Cyclically-adjusted balance net of one-off and temporary measures, recalculated by the Commission using the commonly agreed methodology.

                     (6)

                        SWD(2019) 1000 final.

                     (7)

                        Under Article 5(2) of Council Regulation (EC) No 1466/97.


               EUROPEAN COMMISSION
            Brussels, 5.6.2019
            COM(2019) 507 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2019 National Reform Programme of Ireland and delivering a Council opinion on the 2019 Stability Programme of Ireland

               Recommendation for a

               COUNCIL RECOMMENDATION

               on the 2019 National Reform Programme of Ireland and delivering a Council opinion on the 2019 Stability Programme of Ireland

               THE COUNCIL OF THE EUROPEAN UNION,

               Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,

               Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies
                  1
               , and in particular Article 5(2) thereof,

               Having regard to Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances
                  2
               , and in particular Article 6(1) thereof,

               Having regard to the recommendation of the European Commission,

               Having regard to the resolutions of the European Parliament,

               Having regard to the conclusions of the European Council,

               Having regard to the opinion of the Employment Committee,

               Having regard to the opinion of the Economic and Financial Committee,

               Having regard to the opinion of the Social Protection Committee,

               Having regard to the opinion of the Economic Policy Committee,

               Whereas:

               (1)On 21 November 2018, the Commission adopted the Annual Growth Survey, marking the start of the 2019 European Semester for economic policy coordination. It took due account of the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The priorities of the Annual Growth Survey were endorsed by the European Council on 21 March 2019. On 21 November 2018, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it identified Ireland as one of the Member States for which an in-depth review would be carried out. On the same date, the Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro area, which was endorsed by the European Council on 21 March 2019. On 9 April 2019, the Council adopted the recommendation on the economic policy of the euro area (‘Recommendation for the euro area’).

               (2)As a Member State whose currency is the euro and in view of the close interlinkages between the economies in the economic and monetary union, Ireland should ensure the full and timely implementation of the Recommendation for the euro area, as reflected in recommendation (1) and (3) below. In particular, focusing economic policy related to investment in the specified areas and introducing tax measures will help address the second euro area recommendation as regards supporting investment, public finances improvements and fight against aggressive tax planning.

               (3)The 2019 country report for Ireland
                  3
                was published on 27 February 2019. It assessed Ireland’s progress in addressing the country-specific recommendations adopted by the Council on 13 July 2018, the follow-up given to the recommendations adopted in previous years and Ireland's progress towards its national Europe 2020 targets. It also included an in-depth review under Article 5 of Regulation (EU) No 1176/2011, the results of which were also published on 27 February 2019
                  4
               . The Commission’s analysis led it to conclude that Ireland is experiencing macroeconomic imbalances. In particular, large stocks of public and private debt and net external liabilities make Ireland vulnerable to adverse shocks but the flow variables have continued to improve. The stock of private debt remains high but economic growth is continuing to help reduce it. The activities of multinationals continue to influence corporate debt. Household debt appears broadly in line with fundamentals although it is high compared with disposable income. Government debt is projected to remain on a downward trajectory, while the deficit is moving closer to a balanced position. House prices have been growing at a rapid pace for a number of years but have slowed down recently. House prices are largely driven by supply constraints and there is no clear evidence of overvaluation. The stock of non-performing loans, although still high, has decreased further even if long-term arrears are falling at a slower pace.

               (4)On 17 April 2019, Ireland submitted its 2019 National Reform Programme and, on 29 April 2019, its 2019 Stability Programme. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

               (5)Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds ('ESI Funds') for the 2014-2020 period. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council
                  5
               , where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking the effectiveness of the ESI Funds to sound economic governance
                  6
               .

               (6)Ireland is currently in the preventive arm of the Stability and Growth Pact and subject to the debt rule. In its 2019 Stability Programme, the government expects the headline balance to improve to 0.2% of GDP in 2019 and to continue to gradually improve thereafter to 1.3% of GDP in 2023. Based on the recalculated structural balance
                  7
               , the medium-term budgetary objective, set at a structural deficit of 0.5% of GDP, is planned to be reached by 2020. According to the Stability Programme, the general government debt-to-GDP ratio is expected to fall to 61.1% in 2019 and to continue declining to 51.6% in 2023. The macroeconomic scenario underpinning those budgetary projections is plausible. At the same time, the measures needed to support the planned deficit targets from 2020 onwards have not been sufficiently specified.

               (7)On 13 July 2018, the Council recommended Ireland to achieve the medium-term budgetary objective in 2019. This is consistent with a maximum nominal growth rate of net primary government expenditure
                  8
                of 7.0% in 2019, corresponding to an allowed deterioration in the structural balance of 0.3% of GDP. Based on the Commission 2019 spring forecast, Ireland is expected to comply with the recommended fiscal adjustment in 2019.

               (8)In 2020, Ireland should achieve its medium-term budgetary objective. Based on the Commission 2019 spring forecast, this is consistent with a maximum nominal growth rate of net primary government expenditure of 3.7%
                  9
               , corresponding to an annual structural adjustment of 0.7% of GDP. Ireland is forecast to reach the medium-term budgetary objective. General government debt is forecast to remain on a firm downward path beyond the requirements of the debt rule. Overall, the Council is of the opinion that Ireland is projected to comply with the provisions of the Stability and Growth Pact in 2019 and 2020. In view of the difference between measurements of GDP and domestic output in Ireland and the associated impact on the debt-to-GDP ratio, Ireland's current cyclical conditions and the heightened external risks, the use of any windfall gains to further reduce the general government debt ratio would be important.

               (9)Public finances have further improved on the back of robust output growth, but the risks of revenue volatility remain, and there is scope for making revenue more resilient to economic fluctuations and adverse shocks. Limiting the scope and number of tax expenditures and broadening the tax base would improve revenue stability in the face of economic volatility. While Ireland has increased the lower value added tax rate on tourism activities, some recent tax measures have focused on cuts and reliefs. Moreover, Ireland has further potential to improve the way its tax system can support environmental objectives. Such efforts could include reducing fossil fuel subsidies and providing a stronger price signal to investors by committing to a schedule of increases in the carbon tax over the next decade.

               (10)The fight against aggressive tax planning is essential to make tax systems more efficient and fair as acknowledged in the 2019 euro area recommendation. Spillover effects of taxpayers' aggressive tax planning strategies between Member States call for a coordinated action of national policies to complement EU legislation. Ireland has taken measures against aggressive tax planning, but the high level of royalty and dividend payments as a percentage of GDP suggests that Ireland’s tax rules are used by companies that engage in aggressive tax planning. Limited application of withholding taxes on outbound (i.e. from EU residents to third country residents) royalty and dividend payments made by companies based in Ireland may lead to those payments escaping tax altogether, if they are also not subject to tax in the recipient jurisdiction.

               (11)Long-term fiscal sustainability risks related to the cost of ageing remain. Spending on healthcare is projected to rise from 4.1% of GDP in 2016 to 5.1% in 2070, with a peak of 5.2% in 2063. Though there are aspects of the healthcare system in Ireland that work well or have improved, the system is inefficient, struggles to meet demand and does not deliver coordinated, integrated care. In order to mitigate against the escalating pressures of demand, the Irish government approved the Sláintecare Implementation Strategy and set up the Sláintecare Programme Implementation Office to comprehensively reform and modernise Ireland's health and social care services over the next 10 years. The planned reform represents a credible vision for making the health system universally accessible and sustainable, meeting the demands of an ageing population and shifting care into the community, with a stronger focus on prevention. This is likely to have a positive impact in reducing the reliance on acute care, thereby making healthcare more cost-effective. However, implementation is endangered by the health system’s difficulties in addressing the duplicate health insurance market and effectively managing its own budget, performance and workforce in the short term. Short-term costs will also need to be contained to fulfil the Sláintecare vision in the long run.

               (12)Despite past government efforts to contain spending on public pensions, the overall deficit of the pension system is expected to grow significantly in the long term as a result of pension expenditure rising from 5% of GDP in 2016 to 6.6% in 2070, with a peak of 7.5% in 2053. A full and timely implementation of the presented roadmap for pension reform is key to making the Irish pension system more fiscally sustainable.

               (13)Increased investment in skills, education and training as well as in social inclusion are essential for improving Ireland’s productivity and long-term inclusive growth. The tightening labour market and the emerging skills shortages and mismatches in certain sectors call for efforts to reach out to inactive groups of potential workers and to invest in under-tapped human capital. There is scope for promoting upskilling and better aligning education curricula and vocational training to labour market needs. The low percentage of the workforce with basic digital skills calls for further investment in workplace based training and upskilling of the adult workforce. Investing in access to quality and affordable childcare and rolling out the National Childcare Scheme will help increase women's rather low employment rate. The participation rate of people with disabilities in the labour market is among the lowest in Europe. The number of people living in households with low work intensity remains one of the highest in the EU, highlighting the scope for more integrated and targeted activation strategies to support this particular group.

               (14)Years of low investment after the economic bust are taking their toll on the availability of affordable and social housing and of appropriate infrastructure in the areas of clean transport and energy, water and ultrafast broadband, which in turn pose barriers to business investment. Moreover, greenhouse gas emissions from road transport have increased strongly in the last 5 years. Improved infrastructure, combined with spatial planning, could be a critical enabler for improving the housing supply, increasing private investment, boosting productivity growth, and ensuring balanced regional economic development. Future-proof connectivity and sufficient digital skills remain crucial for domestic companies to effectively utilise digital technology and for a thriving domestic information and communications technology sector. Significant challenges remain in relation to access to ultrafast broadband, in particular in rural areas. More infrastructure investment in clean energy, clean and public transport and water services as well as intensified efforts in the field of decarbonisation, energy efficiency, renewable energy and the circular economy would help Ireland in its transition towards a low-carbon and environmentally resilient economy.

               (15)While the launch of the National Development Plan could eventually lead to the provision of additional basic infrastructure, the weak capacity of the construction sector could become an obstacle to its timely delivery. Furthermore, diversifying maritime transport and energy connections with continental Europe could increase the resilience of the economy to external shocks. Ireland has so far failed to decouple its economic growth from the emissions of greenhouse gases and air pollutants. Greenhouse gas emissions have steadily risen, in particular in transport, agriculture, energy and the built environment. Lack of progress in this area will make it more difficult for Ireland to meet its EU obligations, while also increasing the cost of future action.

               (16)Persistent supply shortages, coupled with increasing demand, continue to fuel rises in property prices. Although prices did not seem overvalued in 2017, affordability is becoming a concern. Housing supply shortages are also affecting social housing due to insufficient investment and builds over the last decade. While annual demand is estimated at about 72 000 units, just 10 000 are planned for delivery in 2019. A further 17 000 persons are to be assisted through Ireland's Housing Assistance Payment or Rental Accommodation Scheme, but this risks exacerbating rent increases in the private rental market where supply is already constrained. A large number of social homes are under-occupied, notably in the Dublin area, in part due to outdated succession practices. The inadequate mix in the types of social houses provided together with the very limited amount of affordable and cost-rental accommodation are factors further aggravating the situation. This has resulted in a steady rise in the number of people and families living in emergency accommodation with homelessness figures reaching new highs in February 2019.

               (17)Fostering the innovation-driven productivity of domestic firms is crucial to support more robust and resilient productivity growth in the country. Business research and development expenditure continues to increase but it remains below the EU average and highly concentrated in the foreign-owned firms. There is scope to gear innovation policies to better support Irish small and medium enterprises. Indirect support (i.e. tax credits) remains the main instrument of public support for research and development in Ireland (accounting for 80% of total public support). Stronger linkages between multinationals and domestic firms could help to improve the diffusion of innovation throughout the economy. In addition, closer cooperation between firms and public research centres would also increase the innovation potential.

               (18)Although the low levels of public research and development continue to cause concern (1.05% of GDP compared to an EU average of 2%), the recently adopted Future Jobs Ireland 2019 programme provides a promising framework to stimulate innovation and technological change and improve the productivity of small and medium enterprises. However, its full implementation will depend on a significant increase in public expenditure on research and innovation and the translation of the recently adopted programme into concrete policy measures. As it stands, this ambitious list of measures still lacks important details and precise implementation dates. For instance, for actions to be taken in 2019, no measures have been identified to increase the availability of long-term equity investment to support indigenous companies in scaling their business; the policy mix to incentivise small and medium enterprises to invest in new technologies combines tax credit and non-tax incentives to encourage small and medium enterprises to invest in innovation, but the relative magnitude of these measures remains unknown. While the strategy recognises the importance of broadband infrastructure for productivity, no specific actions and deliverables are planned to address the gap between Ireland and other EU countries when it comes to rolling out future-proof broadband networks in line with EU 2025 Gigabit Society targets.

               (19)Regional disparities in Ireland are significant and have been increasing over the last decade. Ireland has rather high regional economic disparities compared to other EU countries in terms of GDP per capita. Between 2000 and 2016, GDP per capita in the Southern and Eastern region increased by 74%, 63 percentage points more than in the Border, Midland and Western region and the increase accelerated after 2012. By 2016, GDP per capita in the Southern and Eastern region was 2.6 times higher than in the Border, Midland and Western region. The Dublin area, with 40% of Ireland’s population, contributed by 62 percentage points to GDP growth between 2000-2016.

               (20)Regulatory barriers to entrepreneurship (in particular certain regulations related to commercial property and legal services) negatively affect firm entry and exit and thereby the productivity of indigenous Irish firms. Barriers to entry into retail markets represent a challenge. Ireland scores among the top five countries with the greatest number of procedural requirements as regards the establishment of retail outlets. Retailers face procedural obstacles which delay and increase the costs of opening new shops and may have a negative impact on market structure and dynamics.

               (21)The new Legal Services Regulation Act remains to be implemented, as the introduction of regulations continues to experience significant delays, even if preparatory consultations are ongoing. Allowing for direct professional access to barristers on contentious matters as well as for legal persons to become partners in all types of legal practices remain uncertain possibilities. Overly complex operation and management rules for multidisciplinary practices are, on the other hand, to be avoided. An ambitious implementation of open-ended reforms is a matter of top priority. ‘Ambition 2.3’ in the Future Jobs Ireland 2019 programme is supposed to tackle problems with the cost of legal services, but the only deliverable in 2019 is tentative and the timing is ambiguous. Delays in implementing this reform contributes to the high cost of legal services in Ireland, to the detriment of business, small and medium enterprises in particular, and individuals. Since legal services are an important input for other business services, restrictions in that sector contributes to the high cost of other services (e.g. insurance).

               (22)Non-performing loan ratios have continued to fall and were down by 3.4 percentage points to 7.8% in the year up to the third quarter of 2018. Banks are well on track to meet their reduction targets, supported by portfolio sales, restructuring efforts and rising property prices. Long-term mortgage arrears (over 2 years past due) remain relatively high, helping to keep the non-performing loan ratio above the euro area average. A number of initiatives and draft bills, such as the ‘no consent, no sale’ bill have been proposed to address the social and economic impact of non-performing loan resolution, including for vulnerable households. The credit register became fully functional for consumer loans in 2018 and will be crucial for assessing whether borrowers are capable of servicing their debts. Insolvency procedures and the use of in- and out-of-court options for arrears resolution remain limited. Further reducing long-term mortgage arrears while building on initiatives for vulnerable households without creating undue obstacles for non-performing loans resolution remains a challenge and requires continued monitoring.

               (23)The programming of EU funds for the period 2021-2027 could help address some of the gaps identified in the recommendations, in particular in the areas covered by Annex D to the country report
                  10
               . This would allow Ireland to make the best use of those funds in respect of the identified sectors, taking into account regional disparities.

               (24)In the context of the 2019 European Semester, the Commission has carried out a comprehensive analysis of Ireland’s economic policy and published it in the 2019 country report. It has also assessed the 2019 Stability Programme and the 2019 National Reform Programme and the follow-up given to the recommendations addressed to Ireland in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Ireland, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

               (25)In the light of this assessment, the Council has examined the 2019 Stability Programme and is of the opinion that Ireland is expected to comply with the Stability and Growth Pact.

               (26)In the light of the Commission’s in-depth review and this assessment, the Council has examined the 2019 National Reform Programme and the 2019 Stability Programme. Its recommendations under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendations (1) to (3) below.

               HEREBY RECOMMENDS that Ireland take action in 2019 and 2020 to:

               1.Achieve the medium-term budgetary objective in 2020. Use windfall gains to accelerate the reduction of the general government debt ratio. Limit the scope and number of tax expenditures, and broaden the tax base. Continue to address features of the tax system that may facilitate aggressive tax planning, and focus in particular on outbound payments. Address the expected increase in age-related expenditure by making the healthcare system more cost-effective and by fully implementing pension reform plans.

               2.Provide personalised active integration support and facilitate upskilling, in particular for vulnerable groups and people living in households with low work intensity. Increase access to affordable and quality childcare.

               3.Focus investment-related economic policy on low carbon and energy transition, the reduction of greenhouse gas emissions, sustainable transport, water, digital infrastructure and affordable and social housing, taking into account regional disparities. Implement measures, including those in the Future Jobs strategy, to diversify the economy and improve the productivity of Irish firms – small and medium enterprises in particular - by using more direct funding instruments to stimulate research and innovation and by reducing regulatory barriers to entrepreneurship.

               Done at Brussels,

                     For the Council

                     The President

                     (1)

                        OJ L 209, 2.8.1997, p. 1.

                     (2)

                        OJ L 306, 23.11.2011, p. 25.

                     (3)

                        SWD(2019) 1006 final.

                     (4)

                        COM(2019) 150 final.

                     (5)

                        Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

                     (6)

                        COM(2014) 494 final.

                     (7)

                        Cyclically-adjusted balance net of one-off and temporary measures, recalculated by the Commission using the commonly agreed methodology.

                     (8)

                        Net primary government expenditure comprises total government expenditure excluding interest expenditure, expenditure on Union programmes fully matched by Union funds revenue and non-discretionary changes in unemployment benefit expenditure. Nationally financed gross fixed capital formation is smoothed over a 4-year period. Discretionary revenue measures or revenue increases mandated by law are factored in. One-off measures on both the revenue and expenditure sides are netted out. The expenditure benchmark for Ireland reflects an adjustment to correct for a distortion to the 10 year reference rate of potential growth caused by the exceptionally high surge in real GDP growth in 2015. Following the approach taken by the Irish authorities in their Budget 2017 calculations, the Commission has taken the average of potential growth rates in 2014 and 2016.

                     (9)

                        As in 2019, the expenditure benchmark reflects an adjustment to correct for a distortion to the 10year reference rate of potential growth caused by the exceptionally high surge in real GDP growth in 2015.

                     (10)

                        SWD(2019) 1006 final.


               EUROPEAN COMMISSION
            Brussels, 5.6.2019
            COM(2019) 506 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2019 National Reform Programme of Estonia and delivering a Council opinion on the 2019 Stability Programme of Estonia

               Recommendation for a

               COUNCIL RECOMMENDATION

               on the 2019 National Reform Programme of Estonia and delivering a Council opinion on the 2019 Stability Programme of Estonia

               THE COUNCIL OF THE EUROPEAN UNION,

               Having regard to the Treaty on the Functioning of the European Union, and in particular Articles 121(2) and 148(4) thereof,

               Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies
                  1
               , and in particular Article 5(2) thereof,

               Having regard to the recommendation of the European Commission,

               Having regard to the resolutions of the European Parliament,

               Having regard to the conclusions of the European Council,

               Having regard to the opinion of the Employment Committee,

               Having regard to the opinion of the Economic and Financial Committee,

               Having regard to the opinion of the Social Protection Committee,

               Having regard to the opinion of the Economic Policy Committee,

               Whereas:

               (1)On 21 November 2018, the Commission adopted the Annual Growth Survey, marking the start of the 2019 European Semester for economic policy coordination. It took due account of the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. The priorities of the Annual Growth Survey were endorsed by the European Council on 21 March 2019. On 21 November 2018, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it did not identify Estonia as one of the Member States for which an in-depth review would be carried out. On the same date, the Commission also adopted a recommendation for a Council recommendation on the economic policy of the euro area, which was endorsed by the European Council on 21 March 2019. On 9 April 2019, the Council adopted the recommendation on the economic policy of the euro area (‘Recommendation for the euro area’).

               (2)As a Member State whose currency is the euro and in view of the close interlinkages between the economies in the economic and monetary union, Estonia should ensure the full and timely implementation of the Recommendation for the euro area, as reflected in recommendation (3) below. In particular, measures focusing economic policy related to investment in the specified areas will help address the second euro area recommendation as regards supporting investment.

               (3)The 2019 country report for Estonia
                  2
                was published on 27 February 2019. It assessed Estonia’s progress in addressing the country-specific recommendations adopted by the Council on 13 July 2018, the follow-up given to the recommendations adopted in previous years and Estonia's progress towards its national Europe 2020 targets.

               (4)On 30 May 2019, Estonia submitted its 2019 National Reform Programme and, on 30 April 2019, its 2019 Stability Programme.

               (5)Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds ('ESI Funds') for the 2014-2020 period. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council
                  3
               , where it is necessary to support the implementation of relevant Council recommendations, the Commission may request a Member State to review and propose amendments to its Partnership Agreement and relevant programmes. The Commission has provided further details on how it would make use of that provision in guidelines on the application of the measures linking the effectiveness of the ESI Funds to sound economic governance
                  4
               .

               (6)Estonia is currently in the preventive arm of the Stability and Growth Pact. The 2019 Stability Programme was submitted on a no-policy-change basis. The government plans to move from a general government deficit of 0.6% of GDP in 2018 to a deficit of 0.2% of GDP in 2019, 0.3% of GDP in 2020 and register a deficit of 0.7% of GDP by 2022. Based on the recalculated structural balance
                  5
               , the medium-term budgetary objective, set at a deficit of 0.5% of GDP in structural terms, is not planned to be achieved over the period covered by the 2019 Stability Programme. The general government debt-to-GDP ratio is projected to decline to 5.3% of GDP by 2022. The macroeconomic scenario underpinning those budgetary projections is favourable. The measures needed to support the planned deficit targets have not been specified posing a risk to the revenue yield assumptions.

               (7)On 13 July 2018, the Council recommended Estonia to ensure that the nominal growth rate of net primary government expenditure
                  6
                does not exceed 4.1% in 2019, corresponding to an annual structural adjustment of 0.6% of GDP. In view of the Commission autumn 2018 forecast, which projected a closer position to the medium term budgetary objective in 2019, and consistent with the rules for unfreezing the required adjustment, the nominal growth rate of net primary government expenditure should not exceed 4.9%, corresponding to an annual structural adjustment of 0.3% in 2019. Based on the Commission 2019 spring forecast, there is a risk of significant deviation from that requirement in 2019.

               (8)In 2020, in view of Estonia's projected output gap of 2.7% of GDP and with projected GDP growth below to the estimated potential growth rate, the nominal growth rate of net primary government expenditure should not exceed 4.1%, in line with the structural adjustment of 0.6% of GDP stemming from the commonly agreed adjustment matrix of requirements under the Stability and Growth Pact. Based on the Commission 2019 spring forecast under unchanged policies, there is a risk of significant deviation from that requirement in 2020. Overall, the Council is of the opinion that the necessary measures should be taken as of 2019 to comply with the provisions of the Stability and Growth Pact.

               (9)Preventing money laundering has become a priority for Estonia against the background of large money-laundering scandals. Estonia has strengthened its anti-money laundering framework and the proportion of non-resident deposits in the Estonian banking sector has significantly decreased. However, challenges remain. While the Estonian government introduced additional measures and guidelines on how to further strengthen the prevention in this area, a legislative initiative aiming at increasing the capacities of the anti-money laundering supervision has not yet been adopted by the Estonian Parliament. Attention should be paid to the effective implementation of these measures, once adopted.

               (10)Skills shortages and mismatches are among the main obstacles to business investment and limit greater productivity gains. In recent years, Estonia has implemented comprehensive reforms but labour market trends and the decrease in the working-age population present long-term challenges to the education and training system. These challenges include a still high rate of early school leaving, incomplete reorganisation of the school network; the insufficient labour market relevance of higher education and vocational education and training; and the challenges linked to the ageing of teachers and the low attractiveness of the profession. Although participation in adult learning is improving, the upskilling and reskilling of the workforce is not occurring fast enough to keep up with labour market trends. The insufficient capacity to innovate is at the centre of the identified skills needs. In spite of the high percentage of information and communication technology specialists, there is limited digital skills training provided by enterprises. Improving the labour market relevance of the education and training system, including by investing in career guidance, tackling early school leaving and better anticipating skills needs, would help ensure that people are equipped with the rights skills. In addition, enhancing the working conditions of teachers, the quality of teaching and the education policies in response to demographic and economic trends would strengthen the capacity of the education and training system.

               (11)Despite improvements, poverty, social exclusion and income inequality remain high, particularly among older people. Around 42% of those aged 65 and above were at risk of poverty and social exclusion in 2017 compared to the European Union average of 15%. Social benefits are still not effective in reducing poverty and the social safety net is weak. The provision of good quality and affordable social services is hampered by the weak coordination between the health and social care services and by the wide variation in municipalities' ability to identify the needs for social services and deliver them. Individuals also have to cover a large part of the costs of the services provided by the authorities. Estonia’s public spending on long-term care was less than half of the EU average (0.6% of GDP compared with 1.6% of GDP in 2016). There are no preventive measures or a support system to alleviate the burden on informal carers. The proportion of people with unmet medical needs remains one of the highest in the EU (11.7%) indicating problems with the accessibility and effectiveness of the health care system. These challenges point to the need to deliver affordable and good quality social and health care services in an integrated way and to develop a comprehensive long-term care framework. Investments supporting social inclusion, including in social infrastructure, would foster inclusive growth.

               (12)The gender pay gap at 25.6% in 2017 remains among the highest in the Union and is slightly wider than the previous year. Moreover, the impact of parenthood on women’s employment is well above the Union average (25.2 and 9.0% respectively). Long parental leaves often lead to slower career progression for women. Women tend to work in lower-paid economic sectors and occupations even though their education level is higher than men's. Recent measures added flexibility to the parental leave and benefit system with a view to facilitating parents’ return to the labour market. The use of childcare has been improving. However, factors such as economic activity, occupation, age, job experience or working time explain only part of the gender pay gap, leaving an unexplained gap of 20% against the EU average of 11.5%. Pay transparency could help to better understand the reasons behind this high gender wage gap. Continued investment in childcare and active labour market measures would help women’s employment. Furthermore, engaging with the social partners and strengthening their capacity remain important in a broader context.

               (13)As a peripheral country with a low population density, a well-functioning and interconnected transport system is key for Estonia’s economic activities and exports. Estonia’s transport infrastructure faces some shortcomings in terms of connectivity and sustainability. Rail and intermodal transport remain underdeveloped. Moreover, greenhouse gas emissions from road transport have increased the last 5 years. Further innovative and sustainable solutions could help address congestion and public transport-related problems. Synchronising Estonia’s electricity system with the continental European network is key to ensuring security of electricity supply in the entire Baltic region. Investment in infrastructure would help improve the competitiveness of the Estonian companies.

               (14)With low levels of investment in research and development, especially from the private sector, Estonia’s productivity has been lagging behind. While in 2017 public expenditure on research and development was slightly below the EU average, business investment was only 0.61% of GDP — about half the EU average. There is a low proportion of companies, in particular among small and medium-sized enterprises, reporting research and innovation activities. Non-research and development innovation expenditure is declining and the collaboration between science and businesses is weak. Some of these factors are dragging down the country's innovation performance and productivity. More targeted investment in research, development and innovation, including in the digitalisation and automation of firms would increase Estonia’s productivity and competitiveness. Better prioritisation of research topics in areas of relevance for the economy would do likewise. The Estonian authorities have designed and implemented several measures to address the shortcomings in the research and innovation system but their impact remains limited to date.

               (15)Challenges in the areas of resource and energy efficiency remain. Estonia’s eco-innovation performance does not fully reflect the country’s potential, and its composite eco-innovation score of 60 is 40% below the EU average. Despite some improvements in recent years, Estonia performs about three times below the EU average in terms of resource productivity and the gap with the rest of the EU is widening. Only a small proportion of Estonian small and medium-sized enterprises are taking actions to improve their resource efficiency and become greener. Furthermore, the economy is highly energy intensive, with energy consumption levels well above the EU average. All Estonian regions are lagging behind in improving resource and energy efficiency. At 0.4%, Estonia is well below its national targets of 10% share of renewable energy in transport. Fostering resource and energy efficiency, in particular in the buildings sector, and supporting the circular economy, including by increasing investment, would further contribute to a more competitive and sustainable economy.

               (16)Insolvency procedures in Estonia take around three years and the recovery rate is slightly above 40%. This traps labour and financial resources in less productive firms. It undermines incentives to invest and provide financing to firms. Reforming the insolvency framework would be important with a view to shorten the duration of insolvency proceedings and increase the recovery rate for creditors. In particular, this could include encouraging the use of pre- and post- insolvency restructuring proceedings and preventing piece-meal liquidation of companies.

               (17)The programming of EU funds for the period 2021-2027 could help address some of the gaps identified in the recommendations, in particular in the areas covered by Annex D to the country report
                  7
               . This would allow Estonia to make the best use of those funds in respect of the identified sectors, taking into account regional disparities.

               (18)In the context of the 2019 European Semester, the Commission has carried out a comprehensive analysis of Estonia’s economic policy and published it in the 2019 country report. It has also assessed the 2019 Stability Programme and the 2019 National Reform Programme and the follow-up given to the recommendations addressed to Estonia in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Estonia, but also their compliance with Union rules and guidance, given the need to strengthen the Union’s overall economic governance by providing Union-level input into future national decisions.

               (19)In the light of this assessment, the Council has examined the 2019 Stability Programme and its opinion
                  8
                is reflected in particular in recommendation (1) below.

               HEREBY RECOMMENDS that Estonia take action in 2019 and 2020 to:

               1.Ensure that the nominal growth rate of net primary government expenditure does not exceed 4.1% in 2020, corresponding to an annual structural adjustment of 0.6% of GDP. Ensure effective supervision and the enforcement of the anti-money laundering framework.

               2.Address skills shortages and foster innovation by improving the capacity and labour market relevance of the education and training system. Improve the adequacy of the social safety net and access to affordable and integrated social services. Take measures to reduce the gender pay gap, including by improving wage transparency.

               3.Focus investment-related economic policy on sustainable transport and energy infrastructure, including interconnections, on fostering research and innovation, and on resource and energy efficiency, taking into account regional disparities.

               Done at Brussels,

                     For the Council

                     The President

                     (1)

                        OJ L 209, 2.8.1997, p. 1.

                     (2)

                        SWD(2019) 1005 final.

                     (3)

                        Regulation (EU) No 1303/2013 of the European Parliament and of the Council of 17 December 2013 laying down common provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and the European Maritime and Fisheries Fund and laying down general provisions on the European Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime and Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320).

                     (4)

                        COM(2014) 494 final.

                     (5)

                        Cyclically-adjusted balance net of one-off and temporary measures, recalculated by the Commission using the commonly agreed methodology.

                     (6)

                        Net primary government expenditure comprises total government expenditure excluding interest expenditure, expenditure on Union programmes fully matched by Union funds revenue and non-discretionary changes in unemployment benefit expenditure. Nationally financed gross fixed capital formation is smoothed over a 4-year period. Discretionary revenue measures or revenue increases mandated by law are factored in. One-off measures on both the revenue and expenditure sides are netted out.

                     (7)

                        SWD(2019) 1005 final.

                     (8)

                        Under Article 5(2) of Council Regulation (EC) No 1466/97.