Ireland plans to set up a sovereign wealth fund next year, modeled on successful initiatives in other countries, to channel its huge budget surpluses to address long-term cost pressures such as pensions and infrastructure spending.
Finance Minister Michael McGrath presented a “scoping paper” on a future fund at a cabinet meeting on Tuesday as the government’s finances are flooded with corporate tax revenues from US technology and pharmaceutical companies based in Ireland.
Dublin expects to run €65bn in budget surpluses by 2025 and is looking to future-proof its finances in case its corporate tax wealth runs dry just as it faces spiraling pension costs .
The paper had reviewed similar plans in Norway, Japan and Australia and set criteria for the fund, to be managed by the National Treasury Management Agency, the finance ministry said.
The fund is expected to be drawn over time as pressures related to age and other structural spending mount, officials said. It was not yet clear whether the NTMA would contract an asset management fund or exactly what assets the new sovereign wealth fund would invest in.
The government has long warned that it cannot be relied upon huge but volatile corporate tax revenues – more than half of which comes from just 10 US companies – for everyday groceries.
The Irish government expects a government surplus of €10 billion this year, rising to €16.2 billion next year, up from €8 billion in 2022. Corporate tax is expected to rise by 24, 3 billion euros this year, an increase of 7% compared to 2023.
But the government estimates that half of this year’s projected corporate tax revenue could be potential one-offs. By 2030, it expects to find between 7 and 8 billion euros more a year for pensions than at the beginning of the decade.
It has started saving some of its windfall tax profits for a rainy day and has €6 billion National Reserve Fund, invested in low-risk government bonds. Unlike that fund, the new vehicle will pursue a diversified investment strategy, the government said.
Ireland is torn between the government’s desire to manage what Dermot O’Leary, chief economist at stock broker Goodbody, calls an “embarrassment of riches” in a prudent way, and calls for the excess money to be used to address a chronic housing crisis which even the central bank has warned is a potential constraint on the economy.
Windfall receipts from tech titans like Google and Meta who have large European operations or headquarters in Ireland have skewed domestic economic data so much that the country uses a modified measure of economic output, dubbed GNI* to try to paint a more accurate picture.
Even so, the government expects a budget surplus of 3.4% of gross national income this year, rising to 5.4% next year. “These are the largest in the euro area. The government has important choices to make,” O’Leary said.
Given Ireland’s history of pro-cyclical spending over the last few decades, “it would be fair in an economy that’s at full capacity to put some of those funds aside,” he said.
However, Ireland faces a general election by early 2025 and the government “would find it difficult to resist the urge to use some of this surplus for electoral gains,” he added.
—————————————————-
Source link