Major new investment funds to be announced in budget

Two new longer-term funds are to be announced as part of the budget by Minister for Finance Michael McGrath, including one to support future State investment and a second to be invested for the long term, with the State finances benefiting from the interest earned.

The two funds, which will be given legislative backing, will be one of the key issues covered in the budget. It will outline a permanent package of €6.4 billion in tax and spending changes. There will also be €2.3 billion to €2.4 billion in once-off cost-of-living supports for households.

Adding in an additional €250 million for capital spending, already announced, brings the total budget package to about €9 billion, compared to €11 billion last year.

To this, a further €4 billion will be added, mainly for housing Ukrainian refugees but with some cash also for ongoing Brexit adjustments and for the hangover from Covid spending in the health service. This brings the total amount of funds committed to about €13 billion.

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The establishment of the new funds will be a central point of Mr McGrath’s speech. The first – the Infrastructure, Climate and Nature Fund- will be capped at €14 billion.

About €2 billion will be paid in each year from the exchequer. It will be made available to support State investment in case the public finances are put under pressure from a slowing economy in the years to come.

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This is to avoid the State facing the same pressure as happened after the last financial crash, when investment spending was cut sharply.

Rules will be put in place in relation to drawing down the money. It is understood that a portion of the funds, about one-fifth, can be drawn down if needed to help meet climate targets.

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A second investment fund will be established with the intention to allow it to grow over time to a larger amount than the €14 billion cap on the first fund. The plan is that the interest from investments made by the fund will then help the State to meet additional costs in the years ahead in areas such as the ageing population and pensions.

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Again, rules will be put in place in relation to how the cash will be used. The Fiscal Advisory Council, the budget watchdog, has called for the establishment of this fund as part of longer-term planning for the public finances, noting that it could limit the necessary increases in PRSI and other taxes in the years ahead.

A key motivation for the establishment of the two funds is the unpredictability of corporate tax receipts in the years ahead. The pre-budget White Paper, published on Saturday, forecast a €750 million shortfall in these revenues this year, now expected to come in at €23.5 billion.

It did anticipate some growth again next year to €24.5 billion, but the 2023 figures will be the first shortfall in this revenue source for many years, after a period of extraordinary growth. Overall tax revenues are expected to fall short by some €500 million this year, with an outperformance by income tax making up some of the corporation tax shortfall.