The term ‘sovereign wealth fund’ has become a surprisingly household term in recent years. In particular, the sovereign wealth fund of Saudi Arabia, the Public Investment Fund (PIF), has been the subject of much discussion as of late. From the controversy over LIV Golf, the PIF-funded rival tour of the PGA, which caused a rather bitter rift within professional golfing circles, to the takeover of Newcastle United, it is fair to say that talk of sovereign wealth funds is no longer solely for Quinn students.
Perhaps one of the biggest announcements within Budget 2024, was the announcement of government plans to set up two long-term public investment funds. While it will take a number of years before any Irish sovereign wealth will be able to compete with long-established ones such as the PIF, the move is still a positive one when it comes to future-proofing Ireland’s finances.
The Saudi PIF, as with the majority of the Saudi Arabian government’s activities, is funded by profits from the country’s highly valuable natural commodity – oil. Unfortunately for Ireland, turf has never had the same appeal as the ‘black gold’ that the Saudi Arabian’s were blessed with.
As a result, a key source of the funds in Ireland’s new investment funds will be booming tax receipts and, in particular, corporation tax receipts. Corporation tax receipts have risen to record levels in recent years.
However, such receipts are highly concentrated in a small number of companies (just three companies accounted for a third of all corporation tax collected in Ireland between 2017 and 2021) and are thought to be vulnerable and unsustainable. For this reason, the government has established the two investment funds to put the positive economic position the country finds itself in currently to work for the future.
The Investment Funds
The larger of the two funds will be called The Future Ireland Fund. The purpose of this fund will be, according to Minister for Finance Michael McGrath, to “protect living standards and public services” in the future. It is hoped that the fund will support Government expenditure and help pay for things like healthcare, pensions for Ireland’s aging population, and to deal with other challenges, such as climate change, which may, or in some cases inevitably will, put a strain on the public finances.
There will be no limit to the potential size of the Future Ireland Fund and future governments will be compelled to put the equivalent of 0.8% of GDP every year, from next year until 2035, into the fund. Next year, that figure will be around €4.3 billion.
Just over €4 billion which had been invested in the National Reserve Fund, better known as the ‘Rainy day Fund’, will be put into the Future Ireland Fund to kickstart it.
The second fund, The Infrastructure, Climate and Nature Fund, is established to try and recession-proof government spending on capital or long-term projects. This fund will be capped at €14 billion and will, the government hopes, help prevent the occurrence of stop-start capital investment which this country has experienced in the past. Such stop-start capital investment is perhaps best illustrated by looking at the saga that is the Dublin Metro Project.
Plans for a Dublin Metro were first announced in 2000. The project was “guaranteed” to be finished by 2007 (spoiler, it was not). Planning permission to build the Dublin Metro finally came through in 2010. However, by that stage Ireland was in the depths of recession. Dublin Metro was shelved in 2011 and it was only last year that the project finally got back on track, with a new expected completion date of 2035.
The Infrastructure, Climate and Nature Fund aims to prevent this type of scenario reoccurring, by having €14 billion of a reserve fund to turn to in the event of an economic downturn. The €14 billion figure equates to the average annual amount of capital expenditure under the National Development Plan over 2023-2028.
The fund also hopes to ensure that the relevant expertise and capacity for capital projects within the construction sector are not lost during economic downturns, as was the case after the last recession. Up to 22.5% of the Infrastructure, Climate, and Nature Fund may also be used for climate and nature-related capital projects.
Overall, the reception of the establishment of the two long-term funds has been largely positive. The move is seen as the most significant and consequential measure announced on Budget Day.
The move to establish long-term investment funds has been received positively. Oisín Coghlan, chief executive of Friends of the Earth, commented that it was a “landmark development that can help underpin climate action and nature restoration for years to come” by ensuring that the governments of the future have the funds to deal with climate-related costs regardless of what happens to tax receipts.
Similarly, the establishment of the funds is seen as a positive development for young people in particular.
The Future Ireland Fund aims to help diffuse the oft-discussed ‘pension timebomb’ that is said to be looming in Ireland’s future, by using Ireland’s currently booming tax receipts to provide governments of future funds to navigate changing financial circumstances.
Such an issue is one that particularly affects young people who, without such measures, will likely be left to bear the heavy burden of paying for a growing retired population.
Mark O’Rourke – Features Editor