Minister for Finance to create new rainy day fund to absorb future shocks to the economy

Michael McGrath said the wealth fund will be capitalised by windfall taxes from multinationals and some fraction of any future budgetary surplus.

Minister for Finance Michael McGrath arriving at government buildings. Photo: Damien Storan.

Minister for Finance Michael McGrath has announced it will set up a sovereign wealth fund to house longer-term savings in an effort to shield the economy from “serious fiscal challenges on the horizon”.

Mr McGrath said the wealth fund will be capitalised by windfall taxes and some fraction of any future budgetary surplus.

“In headline terms, it is fair to say that our public finances are currently in a sweet-spot. A large budgetary surplus was recorded last year and, assuming no major shock to the economy, my Department is projecting an expansion of this surplus in the years ahead,” said Mr McGrath.

“Digging below the surface, however, it is clear that fiscal vulnerabilities are building up,” he continued.

Long-term funds have already been established in Ireland to help with future risks including the National Pensions Reserve Fund which was established in 2001 as a long-term savings vehicle to meet part of the cost of population ageing. This Fund was partially liquidated during the sovereign debt crisis of 2008, with the residual amount re-purposed as the Irish Strategic Investment Fund in 2014.

Mr McGrath said that the Government will give “consideration” to the Irish Strategic Investment Fund but that this new fund will have a “different mandate”.

“I think it is worth pointing out that the ISIF does have a different mandate. The investment is in areas such as housing and green transition and so on.

“The fund that we will be setting up over the months ahead will have to have quite a diversified portfolio. It certainly won't all be invested in Ireland, that wouldn't be prudent from a risk management point of view.

"While we will give consideration to any possible relationship between ISIF and the proposed new fund, it does have a different mandate,” he said.

The new savings vehicle, which was proposed in a paper by the Department of Finance titled Future-proofing the Public Finances, is expected to reduce impending budgetary costs and smooth the impact on the public finances, creating inter-generational equity.

“It is set to act as a form of rainy day fund that will provide a physical buffer to in the event of a significant economic slowdown. It would, therefore, boost the shock absorption capacity of the economy,” said the paper.

Ireland’s economy accrues significant costs associated with financing an ageing population including higher healthcare, pension, and long-term care spending, which have left the economy exposed.

Also, Irish corporation tax receipts are shown to be highly concentrated in a small number of firms and sectors. The top ten largest corporation tax payers account for around €1 in every €7 of all tax collected, leaving Ireland’s economy exposed if multinationals face a downturn.

The Department estimates that windfall corporation tax receipts will be in the region of €12 billion this year.