In this blog, NERI Co-director Dr. Tom McDonnell discusses NERI's views regarding the issues to be considered in Ireland's National Reform Programme 2024.
Good policy matters. Ireland along with each of the other European Union countries takes part in what is termed the European Semester. The European semester is part of the EU’s economic governance framework. It is an annual and year-long process and considers policies for economic growth, sound public finances, macroeconomic imbalances and a variety of other areas. The European Pillar of Social Rights and the UN Sustainable Development Goals also inform the policy development process within the European Semester bringing concerns of inequality, wages, climate and other social goals into the discussion.
Key milestones are the publication each year of the government’s National Reform Programme or NRP (circa April/May) and the European Commission’s response via its Country Specific Recommendations or CSRs (circa mid-Summer).
For example, in 2023 the CSRs were for Ireland to, amongst other things:
- Wind down the temporary energy support measures and ensure cost of living measures are targeted, maintain a sound fiscal position and preserve nationally financed public investment;
- Accelerate investments to speed up the circular economy and develop an efficient system for recyclable waste, accelerate investments in water and wastewater infrastructure;
- Reduce reliance on fossil fuels, develop green infrastructure, streamline the planning and permitting framework for renewables etc and step up efforts at skills acquisition for the green transition.
The clear theme is around infrastructure deficits in a swathe of areas and the need to accelerate the green transition.
The NERI’s submission to this year’s NRP advocated for a set of reforms focused on productivity, employment rates and quality of work (amongst other things). On productivity we noted that:
- Ireland’s underspends on education per pupil relative to high income EU peer countries;
- Ireland also underspends on public R&D per capita relative to these peer countries. These two underspends will weaken our potential innovative capacity over time and cause lower productivity growth than might otherwise be the case;
- Ireland has significant infrastructure deficits across a range of areas. Given that Ireland is starting with a weaker infrastructural base and has a faster-growing population, it has a commensurately greater need for investment than other Western European countries;
- Sustained productivity growth will in-part require a compositional shift away from low value added sectors such as accommodation and food services. One implication is that enterprise policy needs to be more selective in terms of the type of industries we wish to support. Policies like the preferential 9% VAT rate make little long-term economic sense;
- Finally, reforms to the social insurance system could foster a higher level of entrepreneurship and risk taking in the economy.
On employment we made the following points:
- Ireland’s employment rates are improving (especially for women) but we remain well below the best performing countries. There is therefore scope for policy to structurally increase employment;
- Reform should focus on barriers to employment. The obvious direction for reform is to continue to work to reduce Ireland’s very high cost of childcare (and other forms of care) relative to most other EU countries and also to work to expand availability of caring services in every region. This will mean creating career structures and conditions to incentivise people to move into and stay in the care sector. The cost and access issues are significant barriers to employment, especially for lone parents and second earners (mainly women);
- Ireland has particularly high employment gaps for certain cohorts including people with a disability. Much greater employer flexibility (both from private business and from the government as an employer) around working from home and around flexible or reduced working hours and days could help improve on the weak employment rates of cohorts with particular barriers to labour force participation;
- The tax and welfare system is riddled with cliff edges that create barriers to employment. Policymakers should act with alacrity to eliminate all cliff edges from the T & W system and move instead to a system of working age payments based solely on income with all benefits designed to taper gently along with income. Such a system would best reconcile adequacy and employment considerations;
- A further issue to consider when discussing barriers to employment relates to the ability to leave a job that is low value added or that is underutilising an individual’s human capital. Our view is that transitioning to a social insurance system based on income replacements would enable a more efficient use of the labour force’s human capital by reducing the imperative to take a job straight away and giving people the time to make a more considered and better match of skill-set and job function. This in turn should reduce the instance of skills mismatch and overqualification;
- Finally, the discussion around employment needs to move beyond aggregate measures of total employment and employment rates and to consider job quality or ‘good jobs’ as a policy goal. Job quality is central to positive well-being outcomes. In part, a shift away from bad jobs will necessarily entail a gradual economy-wide shift away from low value-added sectors and jobs to higher value-added sector jobs. Higher wage minima and greater collective bargaining would both help restructure the economy over time away from low value added activities.
Real wages declined in Ireland for the second consecutive year in 2023. This has exerted significant pressure on the living standards of low-income households and shows that effective social dialogue, collective bargaining and improved wage rates will be essential in the years to come to ensure ongoing improvements in living standards for workers.
So there is a lot to do in the policy space. Time to get started.