Ireland laid out plans in Tuesday’s budget to turn some of the healthiest public finances in Europe into a 100 billion euro ($106 billion) sovereign wealth fund, while also announcing a raft of measures to ease current cost of living stresses.
Budget surpluses are a rarity in Europe following a jump in spending during COVID-19 but a surge in Irish corporate taxes paid by a small number of foreign firms snapped Dublin quickly back into a surplus of 2.9% of gross national income last year.
With the surplus forecast to remain high, Finance Minister Michael McGrath said he would introduce laws to mandate the government of the day to invest 0.8% of nominal GDP, equivalent to 4.3 billion euros, into the new fund from 2024 to 2035.
His department estimates that the Future Ireland Fund could grow to around 100 billion euros by 2035, assuming a rate of return of around 4%, and help cut future pension and climate costs when it can be accessed five years later.
“This is a realistic and achievable plan for Ireland and the window of opportunity will not remain open indefinitely. We must seize it now,” McGrath told parliament in his first budget speech as finance minister.
The government will also establish a second, smaller 14 billion euro infrastructure and climate fund, available to catch up on targets to cut greenhouse gas emissions and act as a buffer against capital spending cuts in any future downturn.
McGrath has said that two successive recent falls in monthly Irish corporate tax returns – the first substantial decline in the volatile category for years – emphasised the need to act now.
Despite some signs of a slowdown from the rapid economic growth of last year, the finance ministry kept its forecast for growth this year broadly unchanged at 2.2% while trimming its 2024 growth projection to 2.2% from 2.5% previously.
Ministers pressed ahead with plans to cut income tax and break their own budget rule for the second successive year by hiking recurring government spending by 6.1% in a 6.4 billion euro package of permanent measures.
This was topped up by a further 2.7 billion euros of one-off cost of living financial supports and another 4.75 billion euros the government says may not repeat fully into the future, such as the 2 billion euros set aside to assist Ukrainian refugees.
McGrath said a combination of tax cuts, welfare rate rises, help with energy bills and reductions in childcare, university and school costs would push incomes ahead of inflation that is forecast to fall more slowly than expected to 5.3% this year and 2.9% next year.
A similarly expansive budget a year ago that included even more generous one-off measures handed little political momentum to the three-party governing coalition. The left-wing opposition Sinn Fein remains well ahead in polls, with elections due by early 2025.
At the same time the country’s fiscal watchdog criticized the new package as being too generous, with estimates it will add 0.2% to inflation in 2024, 0.3% in 2025 and 0.4% in 2026. The central bank sounded a similar warning last month.
While it also welcomed the establishment of the sovereign wealth fund, the Irish Fiscal Advisory Council (IFAC) added that by its calculations, the government was set to break its own spending rule again every year out to 2026.
“This is a serious cause for concern. It repeats past mistakes of procyclical fiscal policy, undermines the spending rule and makes government plans less credible,” IFAC said.
($1 = 0.9478 euros)
Source : Reuters