Surplus to Requirements

Roderick McAuliffe

26.05.2023

Surplus to Requirements

The positive economic rebound that Ireland has enjoyed since the re-opening of the economy post Covid-19 has resulted in robust public finances. However, both the banking and sovereign crises experienced in 2008 and 2012, respectively, remain fresh in the minds of policymakers. Determined to avoid the sins of the past, plans to create a long-term public sector savings vehicle were outlined earlier this month. Readers would be forgiven for only associating such funds with countries that enjoy excess revenues stemming from the production of oil and gas. In recent years however, Ireland has seen corporate tax receipts double and are forecast to grow to over €25bln per annum by 2026. Given the fact that much of this rise appears inexplicable to policymakers, the creation of the fund is to ultimately avoid building up permanent fiscal commitments on “transitory” tax revenue streams.

 

 

Currently, Ireland already has a “rainy-day fund” namely, The National Reserve Fund. Established in 2019, the fund has a ceiling of €8bln and having transferred €2bln in 2022 and a further €4bln earlier this year, the maximum level is fast approaching. The fund was initially established to remedy the occurrence of exceptional circumstances or support major structural reforms. However, several economic and advisory bodies have called for the ceiling to be removed and furthermore, to have the mandate of the fund changed to further support our new long-term goal of insuring against the cost of an ageing population. Costs associated with the provision of healthcare and pensions appear to be the state’s most readily quantifiable future costs. While paying down debt has been referenced, it appears most of the funds will be used to ensure there is sufficient funding in place to facilitate an ageing population.

 

 

The capitalisation of the fund has not been finalised yet but, in each scenario the state has outlined that transfers to the fund cease after 2030. The amounts transferred also vary in each scenario however, it is proposed that a minimum of €4bln is transferred annually while a maximum of €12bln transferred between 2024 to 2030 is forecast to be top end of the range. Of course, such pre-commitment to transfer funds until 2030 assumes that the state continues to enjoy budgetary surpluses throughout this period. It is important to note; in the early 2000’s the Irish Government continued to make transfers to the National Pension Reserve fund in the case of an Exchequer deficit. In effect, government borrowings supported transfers to the fund and in this case, it appears the Government would be willing to do similar.

 

 

The Irish Government clearly finds itself in an enviable position. Assuming forecasts are realised, the state is expected to enjoy budgetary surpluses of €10bln this year and €16bln next year. While the current government prides itself on maintaining fiscal prudence, with an election looming by spring 2025, the government may soon find itself spending such proceeds for electoral gain.