The Government plans to establish a new public investment fund, separate from the planned sovereign wealth fund, to ensure that capital spending on vital infrastructure is not cut in the event of an economic downturn, Minister for Finance Michael McGrath has said.
Mr McGrath has already signalled plans to put a significant portion of excess corporation tax receipts into a new sovereign wealth vehicle.
“In parallel, we are looking at a countercyclical public investment fund. The idea is to make sure that we invest through the cycle ... we don’t want a situation where the next time we hit an economic chop or downturn, the first victim is capital investment, which is what happened last time,” he told the Department of Finance’s annual policy conference, which this year had the theme of “Future-Proofing the Public Finances”.
Mr McGrath said he plans to introduce legislation establishing both funds later this year.
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“The question of how much we put into each fund, what the proportions will be, are still under consideration and I expect that it will be in the context of the budget that I will have an opportunity to lay out a plan for the management of the public finances for the next decade and beyond,” he said.
The Government is expected to generate a cumulative budgetary surplus of €65 billion over the next four years primarily as a result of record corporation tax receipts, which are expected to be in the region of €24-€26 billion this year alone.
Mr McGrath said the State had an opportunity “it could not afford to let slip” and that he, as Minister for Finance, was in a fortunate position of being able to make strategic decisions “that could set us up very well for the next couple of decades”.
Separately, he rejected criticism from the State’s own fiscal watchdog that his budgetary strategy lacked credibility, insisting that the Government had laid out its numbers “transparently” in the recent summer economic statement.
He also defended the decision to breach the 5 per cent spending rule again next year, saying it was justified because of the unprecedented level of inflation.
The Irish Fiscal Advisory Council last week claimed the Government’s planned €6.4 billion budgetary package and wider plan lacked credibility and deliberately blurred the line between core and noncore spending.
Mr McGrath said the council had an important voice and the Government listened carefully to its advice. “But ultimately the Government does have a wider mandate to deliver on societal objectives and we’ve always made the point that the spending rule was not rigid and did have to be adapted last year and we believe that an adjustment this year was warranted as well but we are moving back closer towards the 5 per cent,” he said.
Cost of ageing population
Earlier the conference heard that the State’s rapidly ageing population will cost the exchequer an additional €17 billion a year in “standstill costs” by 2050.
The Department of Finance’s chief economist John McCarthy said spending pressures related to demographics such as increased pension costs were set to balloon in the coming decades. When combined with the cost of the so-called green and digital transitions, this would add approximately €17 billion a year (in today’s money) in costs to the exchequer.
The window for dealing with these issues was “closing rapidly”, Mr McCarthy said. It was also the primary reason why budgetary policy now “must be calibrated to permanent rather than transitory” sources of revenue.
The Government has been repeatedly warned that using potentially temporary receipts from corporate tax could backfire up the line and risked repeating the mistakes of the 2000s when a cyclical upturn in property-related tax revenue was used to fund upticks in current spending.
Mr McCarthy said the department estimated that up to €12 billion of last year’s record €22 billion corporate tax haul was “windfall”, meaning it could not be relied on in the future.
He said the concentration risk posed by corporate tax was now very pronounced with €1 in €7 of total tax revenue coming from just 10 large multinational groups. Mr McCarthy also noted the concentration risk from multinationals also existed in income tax receipts where 80 per cent is coming from just 20 per cent of employees
