Seamus Coffey: 'We are living a way within our means'
Seamus Coffey: 'An advantage of a national reserve fund is that it provides funds that could be accessed if the country was to lose access to borrowing money on financial markets.'
As a country we find ourselves in an uncommon position: We are living a way within our means.
Recent figures from the Central Statistics Office show the net flow of income in and out of the country was positive to the tune of €20bn.
Ireland’s recent economic history is pock-marked with instances where the opposite was the case.
In both the late 1970s and the mid-2000s, there were significant deficits, with the country’s spending significantly exceeding the income it could generate.
The source of the imbalances differed, with government borrowing the problem in the 1970s while the private sector was the culprit in the 2000s.
However, the outcome was much the same as the period of excess was followed by retrenchment and recession. Thankfully, we are far removed from such problems now.
With a national surplus of €20bn, the constraints we face are not financial.
In the 1970s, we borrowed money to increase Government spending and in 2000s we borrowed money to build houses. We could use the surplus and try and do both of those.
However, we now face the constraint of the resource capacity of the economy to absorb any such additional spending.
We know there are areas where improvement is needed. Housing, health and transport infrastructure are obvious examples.
However, for all of these the additional capacity needs to be produced domestically. We cannot import ready-made houses, health services, or public transport infrastructure — we have to produce them ourselves.
The unemployment rate is at record lows.
The economy does not have surplus resources that can be directed to these areas.
If all we do is throw money at them the result will be domestic inflation. We would like to improve these areas but we need to make space in the economy to achieve it.
The public finances are not holding us back but if we use all the available financial resources we will fly too close to the sun.
It should also be recognised that much of these resources comes from the corporation tax paid by US multinationals.
It is great to be receiving this largesse, but as we cannot control it we should ensure that we do not rely on it.
After decades of concern about the national debt, the country has moved to discussing national savings.
Given the potentially temporary nature of the Government’s tax bonanza, this is appropriate. Norway has done this with its oil revenues.
The Government has announced plans for two national funds.
The first is a national reserve fund, the second is an infrastructure fund. But only one of these is a savings fund. An infrastructure fund is just another vehicle for spending.
We already have a capital spending envelope for the Government.
This probably should be increased but we don’t need a new mechanism for it.
There have already been calls for the resources from the new infrastructure fund to be directed to housing, transport, agriculture, and for supporting the climate transition. All of this is spending, and not saving.
The rules governing Norway’s €1 trillion sovereign wealth fund forbid any of the funds being used domestically.
This eliminates the impact of lobby groups looking for the funds to be directed towards their sector and the desire of politicians to engage in pork-barrel spending for their constituency.
Ireland’s proposed infrastructure fund is the opposite of this.
We do have the resources to establish a national reserve fund.
This should be actual savings and, in future, the income from such a fund can be used to help meet demographic costs such as rising healthcare and pension costs.
A similar outcome could also be achieved by reducing the national debt that was built up after the previous episodes of economic mismanagement.
This too would make additional resources available for other uses as lower debt results in lower interest costs.
An advantage of a national reserve fund is that it provides funds that could be accessed if the country was to lose access to borrowing money on financial markets.
This arises when interest rates rise to unsustainable levels.
In such circumstances, the resources in a national savings fund could be deployed until order is restored.
There is no doubting the problems the country faces but simply throwing money at them is not sufficient.
If we want to build more houses, provide more health services or improve public transport we need the resources to do so as well.
If we want these items to be our priority, it will require making space in the economy to undertake them.
- UCC economist Seamus Coffey is a former chair of the Irish Fiscal Advisory Council
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