‘Moral hazard’ issues surround Brexit use of rainy day fund

Government may access contingency fund to back at-risk sectors in event of no-deal Brexit

Minister for Finance Paschal Donohoe told the Budgetary Oversight Committee the Bill governing  use of the contingency fund “would allow me to use that funding to deal with those [Brexit] consequences”.  Photograph: Gareth Chaney/Collins

Minister for Finance Paschal Donohoe told the Budgetary Oversight Committee the Bill governing use of the contingency fund “would allow me to use that funding to deal with those [Brexit] consequences”. Photograph: Gareth Chaney/Collins

 

Using the State’s “rainy day fund” for Brexit planning would “lead to moral hazard”, according to briefing notes prepared by officials in the Department of Finance earlier this year.

As reported on Tuesday by The Irish Times, the Government is now considering using the contingency fund to support at-risk sectors of the economy if a no-deal Brexit occurs this year.

However, in briefing notes prepared in advance of an OECD mission in May 2019, department officials wrote that “to set out from its inception that the rainy day fund would be available to meet Brexit challenges could lead to moral hazard problems”.

The rainy day fund was envisaged, according to another briefing not from April, to counter force majeure events such as “a natural disaster, public emergency or other unforeseen one-off occurrences”.

‘Exceptional contingency’

“Brexit is not in itself an exceptional contingency as it has been confirmed since 2016 and it has been at the core of policymaking during that time. There are obvious external risks for the Irish economy including Brexit, but these are known risks for which we are undertaking extensive preparedness planning,” the officials wrote in May of this year.

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In an email exchange from February of this year, a Department of Finance official wrote the “best way to mitigate for Brexit is prudent management of the economy – we have already taken steps such as stabilising both our banking system and our public finances and the proposal to establish the rainy day fund”.

“The rainy day fund is not proposed as a Brexit mitigant. It is a policy initiative that we would be pursuing regardless of Brexit which has been known about as a risk since the time of the referendum result.”

The documents were released to Sinn Féin’s finance spokesman, Pearse Doherty, after a Freedom of Information request.

“The legislation that underpins the Rainy Day fund is clear,” he said. “It can only be used in exceptional circumstances such as natural disasters, to implement major reforms or bail out the banks. In FOI documents over the past year we have learned that officials in the Department of Finance recognise that this fund cannot be readily used to deal with the fallout from Brexit.”

Likely outcome

Minister for Finance Paschal Donohoe last week told the Budgetary Oversight Committee that while this year’s deposit into the fund had not yet occurred, the Bill governing the use of the contingency fund “would allow me to use that funding to deal with those consequences”.

A spokesman for the Department of Finance said briefing notes were drafted while the Bill was going through the Oireachtas and reflected the fact that an agreed Brexit was adjudged to be the likely outcome of negotiations. “To be clear, department officials set out in meetings with the IMF and OECD (during this time) that if the impact of a no-deal Brexit were significant then the legislation provided for drawdowns from the rainy day fund.”

The spokesman pointed to section nine of the Act, which has been signed into law by the president, which allows the Minister to propose a resolution to the Dáil for a drawdown from the fund in the event of exceptional circumstances. These are defined as “a period during which an unusual event outside the control of the State has a major impact on the financial position of the general government or a period of severe economic downturn, within the meaning of the stability and growth pact”.

“Therefore, a no-deal Brexit that led to a significant fiscal impact and/or an economic downturn would likely allow for a drawdown from the rainy day fund.”