The Government will put €2 billion into a rainy day fund this year and €4 billion next year to give itself sufficient elbow room to respond to future challenges, Minister for Finance Paschal Donohoe has announced as part of Budget 2023.
The two deposits, drawn from the State’s excess corporation tax receipts for 2022 and 2023, are well above the €500 million that the Government is obliged to pay under the legislation governing the fund, which was drawn down in full in 2020 to fund emergency Covid spending.
Mr Donohoe said the Irish economy was facing challenges “that we know are coming”, including the greying of Ireland’s population, the digital transition and the Government response to climate change.
Earlier in his budget speech he said that geopolitical and global economic challenges have become both “more frequent” and “more severe” in recent years, and that Ireland, as a small, open economy, was “one of the most exposed” to the challenges.
Mr Donohoe said that replenishing the national reserve fund would add “resilience” to the public finances, supplying the State “with additional fire power to respond to the challenges of the future”.
He confirmed that Ireland’s corporation tax take for 2022 is expected to be “in excess of €20 billion”, more than €5 billion in advance of 2021.
However, the Department of Finance has identified around €8 billion to €10 billion of the total as being vulnerable to shocks due to the concentration of these receipts, with more than half coming from just 10 large multinational corporations.
Mr Donohoe said the €2 billion and €4 billion contributions to the rainy day fund “mean we will have banked a large share” of these excess corporation tax receipts. “I will be introducing the necessary Dáil resolution later this evening in order to give effect to the transfers to the fund for this year and next,” he told the Dáil.
The setting aside of large sums, while keeping the budget in surplus, is seen as an important sign to the financial markets on which Ireland relies to raise new borrowings. The markets reacted poorly to massive borrowings being planned by the UK government to fund its mini-budget, announced last Friday. In contrast, Mr Donohoe announced a general government surplus of €1 billion this year, with current projections indicating a €6.2 billion surplus next year.
State borrowing rates have risen across Europe and the US in recent days due to fears that central banks will have to increase interest rates very rapidly to control inflation.
The large allocations to the rainy day fund provides some protection for the exchequer if there is a fall-off in corporation tax, where receipts in recent years have grown way in advance of projections. More than €21 billion is expected to be collected in corporation tax this year, and more than €22 billion next year.
Set up in 2019, the rainy day fund was allocated an initial €1.5 billion from the Ireland Strategic Investment Fund, but plans to add €500 million each year thereafter were quickly revised due to Brexit and the pandemic. The fund was then drawn down in full over the course of 2020 to offset the impact of a decline in tax receipts and an increase in emergency pandemic-related expenditure.