               EUROPEAN COMMISSION
            Brussels, 23.5.2018
            COM(2018) 401 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2018 National Reform Programme of Belgiumand delivering a Council opinion on the 2018 Stability Programme of Belgium

               Recommendation for a

               COUNCIL RECOMMENDATION

               on the 2018 National Reform Programme of Belgium

                  and delivering a Council opinion on the 2018 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
                  2
               ,

               Having regard to the resolutions of the European Parliament
                  3
               ,

               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 22 November 2017, the Commission adopted the Annual Growth Survey, marking the start of the 2018 European Semester of 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 22 March 2018. On 22 November 2017, 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 day, 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 22 March 2018. On 14 May 2018, 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 on the economic policy for the euro area, as reflected in recommendations (1) to (3) below.

               (3)The 2018 country report for Belgium
                  4
                was published on 7 March 2018. It assessed Belgium’s progress in addressing the country-specific recommendations adopted by the Council on 11 July 2017, the follow-up given to the recommendations adopted in previous years and Belgium's progress towards its national Europe 2020 targets.

               (4)On 27 April 2018, Belgium submitted its 2018 National Reform Programme and its 2018 Stability Programme. 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 for the 2014-2020 period. As foreseen 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 European Structural and Investment Funds to sound economic governance
                  6
               .

               (6)Belgium is currently in the preventive arm of the Stability and Growth Pact and subject to the debt rule. In its 2018 Stability Programme, the government plans a gradual improvement of the headline balance from a deficit of 1.0 % of GDP in 2017 to a surplus of 0.1 % of GDP in 2021. The medium-term budgetary objective, set at a balanced budgetary position in structural terms, is planned to be reached by 2020. However, the recalculated structural balance
                  7
                still points to a deficit of 0.2 % in 2020. After having peaked at almost 107 % of GDP in 2014 and decreasing to around 103 % of GDP in 2017, the general government debt-to-GDP ratio is expected to decline to 94.6 % by 2021 according to the 2018 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 2019 onwards have not been specified, which contributes to the projected deterioration of the structural balance in 2019 under unchanged policies according to the Commission 2018 spring forecast.

               (7)On 23 May 2018, the Commission issued a report under Article 126(3) of the TFEU, as Belgium did not make sufficient progress towards compliance with the debt reduction benchmark in 2017. Following an assessment of all the relevant factors, as there is currently not sufficiently robust evidence to conclude on the existence of a significant deviation in Belgium in 2017 and over 2016 and 2017 together, the report could not fully conclude as to whether the debt criterion as defined in the Treaty and in Regulation (EC) No 1467/1997 is or is not complied with. The Commission will reassess compliance on the basis of the ex-post data for 2018 to be notified in Spring 2019.

               (8)The 2018 Stability Programme indicates that the budgetary impact of the security-related measures in 2017 is significant, and provides adequate evidence of the scope and nature of these additional budgetary costs. According to the Commission, the eligible additional expenditure in 2017 amounted to 0.04 % of GDP for security-related measures. The provisions set out in Articles 5(1) and 6(3) of Regulation (EC) No 1466/97 cater for this additional expenditure, in that the severity of the terrorist threat are unusual events, their impact on Belgium's public finances is significant and sustainability would not be compromised by allowing for a temporary deviation from the adjustment path towards the medium-term budgetary objective. Therefore, the required adjustment towards the medium-term budgetary objective for 2017 has been reduced to take into account these additional costs.

               (9)On 11 July 2017, the Council recommended Belgium to ensure that the nominal growth rate of net primary government expenditure
                  8
                does not exceed 1.6 % in 2018, corresponding to an annual structural adjustment of 0.6 % of GDP. At the same time, it was stated that the assessment of the 2018 Draft Budgetary Plan and subsequent assessment of 2018 budget outcomes will need to take due account of the goal of achieving a fiscal stance that contributes to both strengthening the ongoing recovery and ensuring the sustainability of public finances. Following the Commission's assessment of the strength of the recovery in Belgium while giving due consideration to its sustainability challenges, carried out in the context of its opinion on Belgium's Draft Budgetary Plan, no additional elements in that regard need to be taken into account. Based on the Commission 2018 spring forecast, there is a risk of a significant deviation from the recommended adjustment path towards the medium-term budgetary objective in 2018 and over 2017 and 2018 taken together.

               (10)In 2019, in view of Belgium's general government debt ratio above 60 % of GDP and projected output gap of 0.4 %, the nominal growth rate of net primary government expenditure should not exceed 1.8 %, in line with the structural adjustment of 0.6 % of GDP stemming from the matrix of requirements under the Stability and Growth Pact. Under unchanged policies, there is a risk of a significant deviation from that requirement in 2019 and over 2018 and 2019 taken together. Belgium is prima facie not forecast to comply with the debt rule in 2018 and 2019. Overall, the Council is of the opinion that the necessary measures should be taken as of 2018 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 prudent.

               (11)Sustainability of public finances remains a challenge. The pension reforms enacted in 2015 were a significant step to address risks related to the long-term of ageing, yet the 2018 Ageing Report points to larger than previously expected increase in age-related long-term expenditure for both pensions and long-term care. Pension expenditure is projected to increase by 2.9 pps of GDP in 2070, compared with an increase of 1.3 pps in the previous update and a decrease of 0.1 ppt of GDP on average for the euro area. In this respect the full implementation of the government's reform roadmap could contribute to address those risks. In addition, expenditure on long-term care is projected to increase, going from an already above EU average level of 2.3 % of GDP to 4.0 % of GDP by 2070.  Reducing the fragmentation in the organisational landscape of long-term care, due to the distribution of competences across different administrative levels, has the potential to increase the efficiency of spending in this area.

               (12)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. To improve internal coordination and to transpose the fiscal component of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union (the ‘Fiscal Compact’), the federal government and the regional and community governments concluded a cooperation agreement in 2013, with the aim to define overall and individual multiannual fiscal paths, to be monitored by the High Council of Finance. An agreement on individual fiscal targets to be achieved by 2020 has been reached, which is a positive step. However, a formal agreement on annual fiscal targets at all levels of government is still missing. Progress has been made in relation to establishing sufficient safeguards regarding the independence of the High Council of Finance.

               (13)There is scope to give spending restraint a larger role in fiscal consolidation. Total public expenditure as a percentage of GDP is above the euro area average. Despite its potential to stimulate growth in the long run, public investment is low by European standards, particularly in relation to total public spending. Not only is the public capital stock low, the quality of public infrastructure has also been eroded. Spending reviews can contribute to a smarter allocation of expenditure and support growth-friendly consolidation. At regional level, only Flanders is planning to introduce a spending review approach in its budgetary process. In addition, no level of government in Belgium is currently bound by domestic expenditure rules, with the exception of a ceiling for healthcare spending. This contrast with the increasing adoption of such rules across the EU and prevents spending-based fiscal consolidation. Furthermore, contributions to the Belgian Deposit Guarantee Scheme are not invested in a separate portfolio of low-risk assets.

               (14)The distribution of debt and assets across Belgian households reveals some pockets of vulnerability, despite their overall favourable wealth position. A prolonged period of house prices increasing faster than households' disposable income has made the financial situation of households more fragile through an almost mechanical increase in their debt. Although measures have been adopted to address an increase in macroprudential risk, the complex national macro-prudential decision-making process may leave financial stability risks unaddressed. House prices appear currently to be slightly overvalued.

               (15)As indicated in the 2018 euro area recommendation, the fight against aggressive tax planning is essential to impede distortions of competition between firms, provide fair treatment of taxpayers and safeguard public finances. Spill-over effects of taxpayers' aggressive tax planning strategies between Member States call for a coordinated action of national policies to complement EU legislation. The former Notional Interest Deduction system that was based on the stock of equity has been replaced by an incremental system. The new system, which shares an incremental baseline with the Allowance for Growth and Investment proposed in the common corporate tax base, will be limited to incremental equity capital calculated on the basis of a 5-year average. This change is meant to contribute to the budget-neutrality of the corporate tax reform while addressing the potential use of the system in aggressive tax planning and still alleviating the debt/equity bias issue. While the absence of some specific anti-abuse rules was a cause of concern, a reform of the anti-abuse framework is now being prepared. This is a positive step. It will be closely monitored to ensure that the new rules address all relevant forms of abuse. Based on recent exchanges, the Commission will continue its constructive dialogue to fight against taxpayers aggressive planning strategies.

               (16)Recent economic growth has been job-rich. Employment growth was robust in 2017 and the unemployment rate is now close to pre-crisis level.  Nevertheless, with regards to the employment rate of the population aged 20 to 64 (68.1 % in 2017) Belgium is not on track to achieving its Europe 2020 target of 73.2 %. Limited progress has been made on the participation in the labour market of disadvantaged groups, as inactivity and unemployment are largely concentrated among the low-skilled, people with a migrant background and older workers, suggesting that both structural and group-specific factors hinder integration in the labour market. In particular, people with a migrant background, which are a large share in the working-age population, continue to face unfavourable labour market outcomes and thus represent a significant untapped labour market potential. In 2016, the employment rate of non-EU born was 49.1 %, which is more than 20 percentage points lower than for native born (the gap was even more pronounced for women) There is some evidence that activation measures are not equally effective for all population groups. While some measures have been taken to help newly arrivals integrate and to tackle discrimination, there is still a lack of coordination across policy domains and political levels to address the challenge of integrating people with a migrant background in the labour market. Strong regional disparities in labour market performance persist.

               (17)In spite of efforts to reduce the tax wedge on labour, disincentives to work remain high for some groups, such as single households earning the average wage and second earners. Despite previous measures the tax wedge for a single household earning the average wage remained among the EU's highest in 2016. The unemployment trap for low wage earners (67 % of the average wage for a single household) is also one the EU's highest. High tax disincentives for second earners – mainly women – remain.

               (18)The vacancy rate is among the highest in the EU indicating major skills mismatches related to, among other factors, low mobility and inadequate language skills in the Brussels region. Participation in life-long learning is low. More commitments by individuals and employers to continuous life-long learning is important to enable people to handle employment transitions.

               (19)Some progress has been made as regards equal opportunities to participate in quality education and vocational training as communities are phasing in school reforms. However, despite good average performance in international comparison, long-standing high educational inequalities remain.  Educational outcomes of 15 year-old pupils show significant variation linked to the socio-economic background and migrant status. The performance differences between communities as well as the underrepresentation of disadvantaged groups among top achievers in science, reading and mathematics are raising concerns. Wide performance gaps between schools go hand-in–hand with unequal educational opportunities. Although the proportion of tertiary education graduates is high, inequalities in access to quality education, skills shortages and regional disparities are seen.  The proportion of graduates in science, technology and mathematics is one of the lowest in the EU and shortages in these fields could become a major barrier to growth and innovation. Teachers’ shortages are raising concerns, yet teachers' reforms progress slowly. There is a need to adapt teachers' continuous professional development.  Both the Flemish and the French-speaking Communities have embarked on major reforms of their education systems. Their implementation is planned over the next decade and beyond. However, at the end of 2017, the decision was taken to postpone the entry into force of key measures. The impact of the reforms and measures will very much depend on their effective implementation and monitoring.

               (20)Only limited reforms have been undertaken to address the restrictive regulatory framework in services. Flanders abolished the establishment act for a selected number of craft professions. Nevertheless, regulation remains high in some professional services. As a result, competition is subdued in these sectors with low entry rates of new companies coming into the market. In the construction sector, horizontal authorisation schemes for access to the construction market are imposed and building permits remain complex despite measures adopted in recent years. The churn rates in the Belgian construction sector are substantially below the EU average, which may indicate that the sector suffers from insufficient competition. This also impacts the delivery of important infrastructure projects. There are also important restrictions in the area of rail and road transport services. The low productivity growth of the Belgian economy is largely driven by low productivity growth in the services sector. Regulatory restrictions also have adverse spill-over effects on users of these services, notably the manufacturing sector. More in-depth structural reforms of key services sectors would help boost productivity growth, essential to ensure future growth as well as the sustainability of public finances.

               (21)Limited progress has also been made in improving the functioning of the retail sector. Despite recent reforms, regulatory restrictions still weigh on the sector's performance and deter investment. Prices for many product categories continue to be higher than in the neighbouring countries. More effort is needed to render the business environment competition and investment-friendly to allow consumers enjoy a greater choice of products and lower prices. In April the Commission has proposed best practices to guide Member States' reforms of the retail sector
                  9
               .

               (22)Entrepreneurship performance in Belgium remains low, despite some reforms in the recent years and recent measures whose impact has yet to be assessed. Business dynamism is low, as the business creation rate remains among the lowest in Europe, far lower than the EU average, accompanied by a low destruction rate. Moreover the administrative burden for firms remains heavy, characterized by complex procedures and low level of regulatory certainty.

               (23)Belgium is an average performer in digital public services. In contrast to its good overall position on development of its digital economy, it ranks only average in digital public services. Belgium’s federal structure poses specific challenges in establishing coherent and nationwide e-government services. Diverse systems that are not necessarily interoperable systems create friction losses. Serious concerns remain about the justice system notably as regards delayed actions, digitalisation, and the reliability, comparability and uniformity of court data. The roll-out of initiatives to digitalise certain court services to all courts such as e-box or e-deposit are behind schedule. However, as long as this uniform coding system is not applied across all courts, data on efficiency of court proceedings will remain of limited reliability and comparability.

               (24)In spite of recent reforms, the Belgian tax system remains complex. The reform of the corporate income tax will lower statutory rates and contribute simplify the system. Nevertheless, many exemptions and distortionary incentives remain, as the rising trend in the total amount of tax breaks shows. The opportunity to shift taxes to more growth-friendly bases could be further used. Revenues from environment related taxes are still among the lowest in the EU. Indeed, there is considerable potential for a genuine 'green' tax shift dealing inter alia with the favourable treatment of company cars, which contribute to air pollution, congestion and greenhouse gas emissions.

               (25)There has been limited progress in dealing with traffic congestion. Mobility suffers from insufficient public investment in infrastructure, distortive tax incentives and lack of competition in transport services, causing major congestion and hindering productivity growth. Road traffic congestion is worsening year by year deterring foreign investment and incurring high social, economic and environmental costs. The most urgent challenges are to complete and upgrade rail and road transport infrastructure especially around and inside Antwerp and Brussels. There are also substantial restrictions in the area of rail and road transport services. The authorities can encourage a more efficient use of existing infrastructure and modal shift away from individual transport use towards more collective and low emitting alternatives.

               (26)In the context of the 2018 European Semester, the Commission has carried out a comprehensive analysis of Belgium’s economic policy and published it in the 2018 country report. It has also assessed the 2018 Stability Programme and the 2018 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.

               (27)In the light of this assessment, the Council has examined the 2018 Stability Programme and its opinion
                  10
                is reflected in particular in recommendation 1 below.

               HEREBY RECOMMENDS that Belgium takes action in 2018 and 2019 to:

               1.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. Use windfall gains to accelerate the reduction of the general government debt ratio. Pursue the envisaged pension reforms and contain the projected increase in long-term care expenditure. Pursue the full implementation of the 2013 Cooperation Agreement to coordinate fiscal policies of all government levels. Improve the efficiency and composition of public spending at all levels of government to create room for public investment, notably by carrying out spending reviews.

               2.Remove disincentives to work and strengthen the effectiveness of active labour market policies, notably for the low-skilled, people with a migrant background and older workers. Pursue the education and training reforms, including by fostering equity and increasing the proportion of graduates in science, technology, engineering and mathematics.

               3.Reduce the regulatory and administrative burden to incentivise entrepreneurship and increase competition in services, particularly retail, construction and professional services. Tackle the growing mobility challenges, in particular through investment in new or existing transport infrastructure and reinforcing incentives to use collective and low emission transport.

               Done at Brussels,

                     For the Council

                     The President

                     (1)

                        OJ L 209, 2.8.1997, p. 1.

                     (2)

                        COM(2018) 401 final.

                     (3)

                        P8_TA(2018)0077 and P8_TA(2018)0078.

                     (4)

                        SWD(2018) 200 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.

                     (9)

                        COM(2018) 219 final.

                     (10)

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


               EUROPEAN COMMISSION
            Brussels, 23.5.2018
            COM(2018) 402 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2018 National Reform Programme of Bulgaria and delivering a Council opinion on the 2018 Convergence Programme of Bulgaria

               Recommendation for a

               COUNCIL RECOMMENDATION

               on the 2018 National Reform Programme of Bulgaria

                  and delivering a Council opinion on the 2018 Convergence Programme of Bulgaria

               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 9(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
                  3
               ,

               Having regard to the resolutions of the European Parliament
                  4
               ,

               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 22 November 2017, the Commission adopted the Annual Growth Survey, marking the start of the 2018 European Semester of 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 22 March 2018. On 22 November 2017, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it identified Bulgaria as one of the Member States for which an in-depth review would be carried out.

               (2)The 2018 country report for Bulgaria
                  5
                was published on 7 March 2018. It assessed Bulgaria’s progress in addressing the country-specific recommendations adopted by the Council on 11 July 2017, the follow-up given to the recommendations adopted in previous years and Bulgaria'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 7 March 2018
                  6
               . The Commission’s analysis leads it to conclude that Bulgaria is experiencing macroeconomic imbalances. Vulnerabilities in the financial sector are coupled with high indebtedness and non-performing loans in the corporate sector, in a context of incomplete labour market adjustment.

               (3)On 19 April 2018, Bulgaria submitted its 2018 National Reform Programme and its 2018 Convergence Programme. To take account of their interlinkages, the two programmes have been assessed at the same time. Bulgaria’s National Reform Programme includes commitments both for the short and medium term and covers the challenges identified in the 2018 country report. In particular, it announces measures to strengthen banking and non-banking supervision, to improve the insolvency framework and to reduce remaining weaknesses identified in the 2016 stress tests exercises. There are also measures to reinforce tax collection and tackle the shadow economy, to improve the targeting of active labour market policies, to increase social protection and to address various challenges in the healthcare and education sectors. Overall, the effective implementation of the National Reform Programme would underpin the correction of imbalances.

               (4)Relevant country-specific recommendations have been addressed in the programming of the European Structural and Investment Funds for the 2014-2020 period. As foreseen in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council
                  7
               , 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 European Structural and Investment Funds to sound economic governance
                  8
               .

               (5)Bulgaria is currently in the preventive arm of the Stability and Growth Pact. In its 2018 Convergence Programme, the government, starting from a headline surplus of 0.9 % of GDP in 2017, aims at a balanced budget in 2018 and a surplus of 0.3 % of GDP in 2019, 0.5 % in 2020 and 0.2 % in 2021. The medium-term budgetary objective — a structural deficit of 1 % of GDP — is planned to continue to be met with a margin throughout the programme period. According to the 2018 Convergence Programme, the general government debt-to-GDP ratio is expected to decline gradually from 25.4 % of GDP in 2017 to 19.4 % in 2021. The macroeconomic scenario underpinning those budgetary projections is plausible. Based on the Commission 2018 spring forecast, the structural balance is forecast to remain in surplus but to decrease from 0.9 % of GDP in 2017 to 0.6 % of GDP in 2018 and remain at the same level in 2019. The structural balance is thus forecast to remain above the medium-term budgetary objective in both years. Overall, the Council is of the opinion that Bulgaria is projected to comply with the provisions of the Stability and Growth Pact in 2018 and 2019.

               (6)Increasing the efficiency of fiscal policy is of utmost importance. Tax revenues and tax compliance are improving but more as a result of a better economic outlook than of improved tax administration and collection. Efficiency of public spending in Bulgaria is very low. Reforms in the field of public finances management are important in this regard and the current economic and fiscal conditions are particularly favourable for such reforms. The economic performance of state owned enterprises is weak compared with other countries in the region and with the private sector and it is also a source of uncertainty and risk for public finances as the arrears of such companies represent contingent liabilities. Overall, corporate governance of state owned enterprises remains a challenge and does not fulfil international standards. Additionally, reforms in this area are very important for the business environment.

               (7)The soundness of the financial sector continued to improve despite remaining vulnerabilities. Corporate non-performing loans are still high, although they have been reduced. Capital buffers are comfortable on average, thus providing space for a balance-sheet clean-up. There has been notable progress in improving financial sector supervision, but some important measures are still to be fully implemented. Mitigating remaining risks associated with related-party exposures and improving asset valuation are key to further strengthening balance sheets and boosting the resilience of banks and insurance companies.

               (8)The ineffectiveness of the insolvency framework is slowing the reduction in private sector indebtedness and the work-out of non performing loans. Procedures are lengthy and the recovery rate is low. Some elements of a functioning framework are still lacking, in particular rules for debt discharge and for granting a second chance to entrepreneurs within a reasonable timeframe following bankruptcy. The lack of data gathering and adequate monitoring tools prevents an assessment of the effectiveness of either older or new procedures, including for business restructuring.

               (9)Levels of undeclared work remain high, which has considerable implications for fiscal revenue, labour conditions and the adequacy of income after retirement. Bulgaria has taken a number of recent measures seek to improve the situation These include one-day contracts in agriculture, improved cooperation between fiscal and labour authorities and increased efforts to raise awareness about the negative consequences for employees. Their efficiency will depend on effective implementation. Accelerating the transition to the formal economy is essential for achieving inclusive growth and ensuring fair working conditions for all.

               (10)The labour market has improved but challenges persist. Employment reached pre-crisis levels and unemployment is below the EU average. However, the positive labour market developments are not equally benefiting the whole working-age population. The long-term unemployed, inactive young people, Roma and people living in poorer regions and rural areas continue to face significant difficulties in entering or re-entering employment The ageing and shrinking population, combined with an activity rate below the EU average, leads to labour and skills shortages, thus weakening long-term prospects of the economy. A reinforced focus on upskilling and training would therefore be warranted. Labour market participation and employability could be fostered through a mix of effective outreach measures, active labour market policies and social services.

               (11)Inequality of income and access to services (education, healthcare and housing), as well as the risk of poverty or social exclusion remain among the highest in the EU. In 2016, two-fifths of the population was at risk of poverty or social exclusion while the income of the richest 20 % of households was almost eight times that of the poorest 20 %. Spending on social protection is low, including on the general minimum income scheme, whose coverage and adequacy are limited, as well as its impact on reducing poverty and inequality. An objective mechanism to revise the level of benefits is lacking. In spite of recent improvements in the adequacy of social assistance benefits and minimum pensions, the social protection system does not provide sufficient levels of support to the most vulnerable or disadvantaged groups, such as Roma, children, the elderly, persons with disabilities and people living in rural areas. The provision of social services remains weak and their integration with labour market and other services is incomplete.

               (12)The minimum wage is set without a clear and transparent mechanism and the percentage of workers at the minimum wage has increased more than two fold over the last six years. The lack of such a mechanism may put at risk the achievement of a proper balance between the objectives of supporting employment and competitiveness, while safeguarding labour income. In addition, it creates uncertainty that can adversely impact the predictability of business conditions. The government has tabled proposals for a minimum wage setting mechanism addressing this shortcoming. However, there is no agreement between the social partners on this issue. Also, in its budget forecast, the government included increases of minimum wage until 2020. In 2018, Bulgaria ratified the International Labour Organisation's Minimum Wage Fixing Convention. This could be a good basis for setting an objective mechanism.

               (13)Limited access to healthcare caused by low public spending, uneven distribution of limited resources and low health insurance coverage remains a significant challenge. The low level of public expenditure needs to be compensated by high private spending, mainly in the form of out-of-pocket payments. The proportion of Bulgarians without health insurance is high in relation to the majority of EU Member States. District-level differences in the distribution of doctors and the low number of nurses remain problematic. On a positive note, the number of doctors leaving Bulgaria has recently dropped. Measures like the National Health Strategy should be used to tackle these weaknesses.

               (14)Despite recent measures to modernise the education system, educational outcomes are low and strongly influenced by socio-economic status. Children from disadvantaged families, particularly Roma, do not enjoy equal opportunities. High levels of early school leaving have negative consequences for future employability and labour market performance. Providing ethnically mixed kindergartens, schools and classes remains a challenge for the provision of quality inclusive mainstream education. Curricular reform seeks to improve educational outcomes and digital skills. However, the level of digital skills is still among the lowest in the EU and varies between different socioeconomic groups. Despite recent measures, the labour market relevance of vocational education and training remains insufficient. Higher education reform is underway, but addressing skills shortages is a challenge given the unbalanced profiles of graduates by sectors. Participation in adult learning is very low in spite of the need for upskilling. In a context of pronounced ageing among teachers, measures to address future shortages have started. Notwithstanding recent improvements, teacher education programmes require further strengthening.

               (15)Many of the measures included in the National Public Procurement Strategy have been put in place. However, the national authorities should put more efforts to ensure their effective implementation. According to business and non-governmental organisations, the overall public procurement landscape has already begun to improve. However, transparency and corruption are still a matter of concern. The increased use of direct awards and the high number of single bids could significantly hamper the system's transparency and effectiveness. The first independent evaluation of the new control functions of the Public Procurement Agency is ongoing.  Regular updates would be necessary to ensure further optimisation of the Agency's control functions. The remaining problems with the administrative capacity, including at the municipal level, call for further efforts on professionalization, standardisation and serious consideration of the possibilities offered by central purchasing bodies.  Aggregation of demand could also improve effectiveness and economy in the health procurement system. Finding a solution for the prevention of delays related to important public projects still necessitates further reflection.

               (16)Structural shortcomings and high fragmentation in the research, development and innovation system limit its contribution to productivity and growth. Lower technology segments still dominate manufacturing and innovation is very low. The level of public as well as business spending on Research & Development is particularly low. The sluggish reforms hinder the move towards an innovation-oriented system. While there are many universities and research institutes, only a few of them are producing high-quality scientific output. Commercialization of research remains a major weakness. The research funding system lacks competitive calls, international evaluation, and performance-based funding of research institutions. Public-private cooperation in research and development is weak. The flagship ‘Sofia Tech Park’ still faces a number of challenges, including: inefficient governance, unstable management, underutilised scientific infrastructure and a lack of long-term financial commitment from the government. Structural transformation, combined with effective governance and a stable level of public research and innovation resources can maximise the impact on productivity and growth and support the transition of the economy to higher value added activities in line with the smart specialisation strategy.

               (17)The business environment needs further improvement. While a number of reforms have been adopted, their practical implementation is lagging behind. Businesses are still concerned about corruption, institutional shortcomings and insufficient labour supply. Progress in public administration reform and e-government is slow. Governance in the public sector could benefit from more transparency, clearer rules and a long-term perspective. In addition, the role of social dialogue can further evolve, facilitated, when necessary, by public authorities Shortcomings in infrastructure are reflected in the low effectiveness and performance of the transport sector. The rail passenger market has been suffering from a lack of effective competition. Well-targeted and effective measures to reduce air pollution have not been put in place.

               (18)In 2017, Bulgaria continued its efforts to reform its judiciary and address shortcomings in the fight against corruption and organised crime. New elections to the Supreme Judicial Council confirmed the positive impact of constitutional and legislative reforms carried out in 2015 and 2016. Reforms of the criminal code have been adopted to improve the system of prosecution in high-level corruption cases and further reforms are under consideration. A law was adopted in early 2018 establishing a new unified anti-corruption authority to strengthen prevention and deterrence of high-level corruption. Under the Cooperation and Verification Mechanism, the Commission continues to monitor the judicial reform and the fight against corruption and organised crime in Bulgaria. These areas are therefore not covered in the country-specific recommendations for Bulgaria, but are relevant for the development of a positive business environment in Bulgaria.

               (19)In the context of the 2018 European Semester, the Commission has carried out a comprehensive analysis of Bulgaria's economic policy and published it in the 2018 country report. It has also assessed the 2018 Convergence Programme and the 2018 National Reform Programme and the follow-up given to the recommendations addressed to Bulgaria in previous years. It has taken into account not only their relevance for sustainable fiscal and socioeconomic policy in Bulgaria 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.

               (20)In the light of this assessment, the Council has examined the 2018 Convergence Programme and is of the opinion that Bulgaria is expected to comply with the Stability and Growth Pact.

               (21)In the light of the Commission’s in-depth review and this assessment, the Council has examined the National Reform Programme and the Convergence Programme. Its recommendations under Article 6 of Regulation (EU) No 1176/2011 are reflected in recommendations 2 and 3 below.

               HEREBY RECOMMENDS that Bulgaria take action in 2018 and 2019 to:

               1.Improve tax collection and the efficiency of public spending, including by stepping up enforcement of measures to reduce the extent of the informal economy. Upgrade the State owned enterprise corporate governance framework in line with international good practices.

               2.Take follow-up measures resulting from the financial sector reviews and implement the supervisory action plans in order to strengthen the oversight and stability of the sector. Ensure adequate valuation of assets, including bank collateral, by enhancing the appraisal and audit processes. Complete the reform of the insolvency framework and promote a functioning secondary market for non-performing loans.

               3.Increase the employability of disadvantaged groups by upskilling and strengthening activation measures. Improve the provision of quality inclusive mainstream education, particularly for Roma and other disadvantaged groups. In line with the National Health Strategy and its action plan, improve access to health services, including by reducing out-of-pocket payments and addressing shortages of health professionals. Introduce a regular and transparent revision scheme for the minimum income and improve its coverage and adequacy.

               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)

                        COM(2018) 402 final.

                     (4)

                        P8_TA(2018)0077 and P8_TA(2018)0078.

                     (5)

                        SWD(2018) 201 final.

                     (6)

                        COM(2018) 120 final.

                     (7)

                        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).

                     (8)

                        COM(2014) 494 final.


               EUROPEAN COMMISSION
            Brussels, 23.5.2018
            COM(2018) 407 final
            Recommendation for a
            COUNCIL RECOMMENDATION
            on the 2018 National Reform Programme of Irelandand delivering a Council opinion on the 2018 Stability Programme of Ireland

               Recommendation for a

               COUNCIL RECOMMENDATION

               on the 2018 National Reform Programme of Ireland

                  and delivering a Council opinion on the 2018 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
                  3
               ,

               Having regard to the resolutions of the European Parliament
                  4
               ,

               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 22 November 2017, the Commission adopted the Annual Growth Survey, marking the start of the 2018 European Semester of 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 22 March 2018. On 22 November 2017, 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 day, 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 22 March 2018. On 14 May 2018, 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 on the economic policy for the euro area, as reflected in the recommendations below, in particular (1) and (2).

               (3)The 2018 country report for Ireland
                  5
                was published on 7 March 2018. It assessed Ireland’s progress in addressing the country-specific recommendations adopted by the Council on 11 July 2017, 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 7 March 2018
                  6
               . The Commission’s analysis leads it to conclude that Ireland is experiencing macroeconomic imbalances. In particular, large stocks of private and public debt and net external liabilities constitute vulnerabilities. However, the improvements have been substantial. Strong productivity growth in past years led to improved competitiveness and to a positive current account balance entailing a rapid reduction in the high stock of net foreign liabilities. Strong economic growth continues to support private deleveraging. However, the stock of private debt remains high, although the strong influence of the activities of multinational companies needs to be taken into account when evaluating corporate debt, while household debt appears broadly in line with fundamentals. Government debt is projected to remain on a downward trajectory, and the deficit is moving closer to balance. House prices are growing at a rapid pace, albeit from likely undervalued levels, which is also strengthening households’ balance sheets. Banks are well recapitalised and their profitability is improving gradually. The stock of non-performing loans, although remaining high, continues to decrease. Policy action addressing these vulnerabilities has been taken, but some measures will take time to generate the expected effects.

               (4)On 18 April 2018, Ireland submitted its 2018 National Reform Programme and on 30 April its 2018 Stability Programme. 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 for the 2014-2020 period. As foreseen in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament and of the Council
                  7
               , 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 European Structural and Investment Funds to sound economic governance
                  8
               .

               (6)Ireland is currently in the preventive arm of the Stability and Growth Pact and subject to the transitional debt rule. In its 2018 Stability Programme, the government expects the headline deficit to decline slightly to 0.2 % of GDP in 2018 and to continue to gradually improve thereafter, turning into a surplus of 0.4 % of GDP in 2021. The medium- term budgetary objective — a structural deficit of 0.5 % of GDP — is expected to be met from 2019 onwards. According to the Stability Programme, the general government debt-to-GDP ratio is expected to fall to 66 % in 2018 and to continue declining to 58.7 % in 2021. The macroeconomic scenario underpinning those budgetary projections is plausible. At the same time, the measures needed to support the planned deficit targets from 2019 onwards have not been sufficiently specified.

               (7)On 11 July 2017, the Council recommended Ireland to ensure that the nominal growth rate of net primary government expenditure does not exceed 2.4 % in 2018, corresponding to an annual structural adjustment of 0.6 % of GDP. At the same time, the Council stated that consideration should be given to achieving a fiscal stance that contributes to both strengthening the ongoing recovery and ensuring the sustainability of Ireland's public finances. Based on the Commission 2018 spring forecast, there is a risk of some deviation from the recommended fiscal adjustment in 2018 and over 2017 and 2018 taken together.

               (8)In 2019, Ireland should achieve its medium-term budgetary objective. This is consistent with a nominal growth rate of net primary government expenditure
                  9
                which does not exceed 5.3 %
                  10
               , corresponding to an annual structural adjustment of 0.1 % of GDP. Based on the Commission 2018 spring forecast, the structural balance is forecast to reach a deficit of 0.4 % of GDP in 2019, above the medium-term budgetary objective. Ireland is forecast to comply with the transitional debt rule in 2018 and the debt rule in 2019. Overall, the Council is of the opinion that Ireland needs to stand ready to take further measures to ensure compliance in 2018 and is projected to comply with the provisions of the Stability and Growth Pact in 2019. 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 prudent.

               (9)Public finances have further improved on the back of robust output growth, yet risks of revenue volatility remain, and there is scope for making revenue more resilient to economic fluctuations and adverse shocks. Limiting the scope and the number of tax expenditures, and broadening the tax base would improve revenue stability in the face of economic volatility. However, some recent tax measures have focused on cuts and reliefs, and seem to have further increased reliance on highly pro-cyclical sources of revenue. Moreover, Ireland has further potential to improve the way its tax system can support environmental objectives.

               (10)As indicated in the 2018 euro area recommendation, the fight against taxpayer's aggressive planning strategies is essential to impede distortions of competition between firms, provide fair treatment of taxpayers and safeguard public finances. Spill-over effects of taxpayers' aggressive planning strategies between Member States call for a coordinated action of national policies to complement EU legislation. 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. Furthermore, companies may use certain provisions in bilateral tax treaties between Ireland and some other countries to overrule the new tax residence rule put in place in Ireland in 2015. The outcome of the consultation undertaken by Ireland following the Independent Review of the Corporation Tax Code will be relevant for the design of the announced tax reforms. The Commission takes note of recent positive steps announced or adopted (i.e. steps taken to tackle aggressive tax planning domestically; possible defensive measures against listed non cooperative jurisdictions). Based on recent exchanges, the Commission will continue its constructive dialogue to fight against taxpayers aggressive planning strategies.

               (11)Long-term fiscal sustainability risks related to the cost of ageing remain. Ireland has introduced some significant efficiency measures such as a cost-saving agreement with the pharmaceutical industry, a financial management system and activity-based funding. Some measures have also been taken to improve the availability of primary health care. However, the Irish healthcare system is costly and faces many challenges, which are compounded by a rapidly ageing population. Moreover, primary and community care services are not yet capable of alleviating the mounting pressure on capacity and costs within hospital care. The planned move towards universal health care needs to be supported by multi-year budgeting and better expenditure control. In addition, it has to be informed by the findings from a comprehensive spending review of the effectiveness and efficiency of the health sector. In addition, strengthening the gatekeeper role of primary care for Ireland’s overburdened hospitals should be considered. Despite a wide range of reforms to contain public pension expenditure, the overall pension system deficit is expected to grow significantly in the long term. A timely implementation of the presented roadmap for pension reform is key to strengthening the fiscal sustainability of the Irish pension system.

               (12)Years of low investment following the economic bust are taking their toll on the availability of appropriate infrastructure in the areas of transport, clean energy, water services, housing and telecommunications. Persistent supply shortages, coupled with increasing demand, continue to fuel property price increases.  Although prices did not seem overvalued in 2016, affordability is a concern. If not addressed, constraints limiting the supply of housing could contribute to imbalances building up. Combined with spatial planning, improved infrastructure is a critical enabler for an appropriate housing supply response, the enhancement of private investment, productivity growth and a balanced regional economic development. Moreover, infrastructure investment in clean energy, clean and public transport and water as well as intensified efforts in the field of renewable energy and the circular economy will be essential for Ireland to succeed in its transition towards a low-carbon and environmentally resilient economy. The National Development Plan 2018-2027 and the National Planning Framework, which are part of the ‘Ireland 2040 Strategy’, will be strong steps in the right direction once acted upon and implemented in close coordination with stakeholders.

               (13)Existing climate change mitigation efforts will not enable Ireland to achieve its Europe 2020 climate goals domestically. Only limited progress has been achieved in decarbonising key parts of the economy, mainly in agriculture, road transport and the residential sector. This will make it necessary for Ireland to use available flexibilities to comply with the Effort Sharing Decision, such as buying allocations from other Member States.  National projections highlight the scale of additional efforts needed: emissions under the Effort Sharing Decision (setting binding annual greenhouse gas emission targets for Member States for 2013-2020) are expected to increase up to 2025, before stabilising at a level slightly below 2005 emissions, on the basis of existing policies. Ireland recently adopted a National Mitigation Plan laying out a roadmap towards a low-carbon economy and a coherent framework to tackle persisting challenges in the energy sector. As it stands, however, the plan offers few specific new mitigation measures. The National Planning Framework also has a climate component, in recognition of the fact that adequate spatial planning will be a critical enabler of climate change mitigation given that the population is so widely dispersed and Ireland only has a small number of large urban areas, all of which face serious congestion and public transport issues. Finally, the National Development Plan 2018-2027 and its effective implementation will play a crucial role in decarbonising the economy. The plan will in fact determine the extent to which additional means are mobilised for the decarbonisation of the power sector, the deployment of renewable energy sources and the improvement of public transport and energy efficiency.

               (14)Ensuring inclusive growth remains a challenge in Ireland. Unemployment fell to 6.7 % in 2017 but certain groups are still largely detached from the labour market and socially excluded. The social protection and taxation systems are very effective in curtailing poverty and inequality, and Ireland has taken measures to incentivise employment by tapering the withdrawal of benefits and supplementary payments. Ireland’s persistent high at-risk-of-poverty-or-social-exclusion rate is linked to the high proportion of people living in households with low work intensity (almost twice the EU average and highest in the EU — 18.2 % v 10.5 % in 2016). This is particularly prevalent for single-parent households. Almost three quarters of people not working in Ireland are inactive. Both the overall and child at-risk-of-poverty-or-social-exclusion rates fell slightly in 2016 but remain higher than the EU average. As a result, Ireland needs to complete the implementation of its Action Plan for Jobless Households, including by improving the integrated support to people furthest from the labour market. The supply of social housing requires continued attention to meet ambitious targets and high demand.

               (15)Access to affordable, full-time and quality childcare remains a challenge. According to the Organisation for Economic Co-operation and Development, childcare costs in Ireland — relative to wages — were in 2015 the highest in the EU for lone parents and the second highest in the EU for couples. The high costs of childcare can act as a barrier to accessing paid employment, particularly in low-income households, including single parents. This has a negative effect on women's employment rate, which stood in 2016 at 65.4 % close to the EU average. A law on the Single Affordable Childcare Scheme is currently being discussed in Parliament. Implementation is expected in 2018 but delays are already becoming apparent. The quality of childcare provision has also been promoted in particular through initiatives to ensure robust staff qualifications.

               (16)The differences between the employment rates of low, medium and highly skilled workers were among the highest in the EU in 2016 and the employment rate of low-skilled labour is 10 pps lower than before the economic crisis. As a consequence and linked to the change in economic activity, skills mismatches and skills shortages are becoming more evident in several areas. This accentuates the need to accelerate upskilling and reskilling policies and measures. Ireland has in particular a low level of participation in life-long learning among low-skilled people in employment, which makes them vulnerable to changes in labour demand. Ireland has overall one of the lowest levels of digital skills in the EU, which is in stark contrast to the high proportion of science, technology, engineering and mathematics graduates leaving the Irish higher education system. Ireland also has one of the lowest employment rates of people with disabilities in the EU.

               (17)Productivity growth in Ireland is mainly driven by multinational companies. The productivity performance gap between these firms and Irish indigenous firms —mostly small and medium-sized enterprises — is increasing. The high international mobility of some of the multinationals and current uncertainties may put the sustainability and resilience of the Irish economy at risk in the longer term. Recent research has revealed that Irish-owned firms draw limited spill-overs and benefits in terms of productivity growth, innovation and export performance from the activities of multinationals in Ireland. However, Irish firms that carry out research and development efforts do benefit from spill-overs from multinationals. Public-sector incentives to carry out research and development and increasing the availability of skilled workers to Irish small and medium-sized enterprises would foster the diffusion of new technologies in those firms. In addition and as repeatedly indicated by the Irish National Competitiveness Council, ensuring the competitiveness of Irish firms requires limiting the growth of certain inputs and of legal costs in particular. Barriers in the market for legal services continue to represent a challenge, hampering competition and raising costs for service recipients. These affect mostly small businesses as they increase litigation costs. No implementing regulations are as yet in place for the new Legal Services Regulation Act. Public consultations, which are a pre-requisite to implementing legislation, are experiencing significant delays.

               (18)Even if Ireland’s financial sector is on the way to a sustained recovery, legacy issues still create constraints. Although Ireland continued to make progress in reducing non-performing loans, their ratio to total gross loans (11.2 % in September 2017) remains among the highest in the EU. Debt overhang, market concentration and heightened uncertainty in some exporting sectors weigh on the demand for credit by small and medium-sized enterprises which remains subdued.  It is crucial to reduce the long-term arrears, of which those overdue for more than 2 years account for around 60 % of total mortgages in arrears in 2017.  Reducing long-term arrears could also help address the problem of debt overhang, which reduces the incentives for corporations, and small and medium-sized enterprises in particular, to put credit into more productive uses. Recent research from the Central Bank of Ireland shows that restructuring solutions involving a temporary payment reduction are particularly prone to re-defaults. The viability of repossessions and write-offs could be improved and complemented by a stronger consumer protection framework for secondary market loan sales, while safeguarding the durability of loan restructuring solutions.

               (19)In the context of the 2018 European Semester, the Commission has carried out a comprehensive analysis of Ireland’s economic policy and published it in the 2018 country report. It has also assessed the 2018 Stability Programme and the 2018 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.

               (20)In the light of this assessment, the Council has examined the 2018 Stability Programme and its opinion
                  11
                is reflected in particular in recommendation 1 below.

               (21)In the light of the Commission’s in-depth review and this assessment, the Council has examined the National Reform Programme and the 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 2018 and 2019 to:

               1.Achieve the medium-term budgetary objective in 2019. Use windfall gains to accelerate the reduction of the general government debt ratio. Limit the scope and the number of tax expenditures, and broaden the tax base. Address the expected increase in age-related expenditure by increasing the cost-effectiveness of the healthcare system and by pursuing the envisaged pension reforms.

               2.Ensure the timely and effective implementation of the National Development Plan, including in terms of clean energy, transport, housing, water services and affordable quality childcare. Prioritise the upskilling of the adult working-age population, with a focus on digital skills.

               3.Foster the productivity growth of Irish firms, and of small and medium enterprises in particular, by stimulating research and innovation with targeted policies, more direct forms of funding and more strategic cooperation with foreign multinationals, public research centres and universities. Promote faster and durable reductions in long-term arrears, building on initiatives for vulnerable households and encouraging write-offs of non-recoverable exposures.

               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)

                        COM(2018) 407 final.

                     (4)

                        P8_TA(2018)0077 and P8_TA(2018)0078.

                     (5)

                        SWD(2018) 206 final.

                     (6)

                        COM(2018) 120 final.

                     (7)

                        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).

                     (8)

                        COM(2014) 494 final.

                     (9)

                        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.

                     (10)

                        As in 2018, the expenditure benchmark 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.

                     (11)

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