Fianna Fáil’s Michael McGrath lays out proposals for a new Ireland national wealth fund…

One of the big issues dogging countries across the western world is how to manage increasing fiscal pressures in a world that has suddenly become highly volatile and subject to multiple economic and socio political shocks.

The lunatic Trumpian fringe amongst the US Republicans scant majority is threatening to impose a debt ceiling on government which would reset it to 2022 limits and provide for a one per cent increase each year going forward.

Sounds reasonable until you consider this does not take account of the promised increase in defence spending promised to supply Ukraine and other frontline countries in Europe in dealing with the existential geopolitical threat from Russia.

Last week the Economist pointed out that the western world is developing into a fiscal fantasyland in an era in which there is little further appetite for yet another burst of austerity. It affects not just the US, but China, Japan, Germany and Italy.

So why am I telling you all this? Well, there’s been much publicity around the massive surpluses the Republic has been generating over the last year. By some estimates it could be as much as €20bn in two years time.

Needless to say there’s a lot of call on that money, some of it internal to the government, which will no doubt characterise discussions between various senior minsters in the cabinet as they vie for investment cash for houses, health and infrastructure.

But on Wednesday the Minister of Finance in Dublin announced what could be a ground breaking buttress to an Irish economy which, relative to others, is small and potentially vulnerable to arbitrary decisions of large FDI corporations.

It’s a national wealth fund of the kind that meant that Norway was able to get through the covid crisis without borrowing from the international bond markets. Cormac McQuinn writes in the Irish Times on Wednesday:

It is “blindingly obvious” that Ireland should set up a new long-term reserve fund in which to invest the massive corporation tax (CT) receipts expected in the coming years, according to Minister for Finance Michael McGrath.

The Fianna Fáil TD said such tax receipts will not last indefinitely, there are “enormous” costs coming down the line related to Ireland’s ageing population and “we have to make provision for the future”.

He called the proposal to set up a new long-term reserve fund “a once in a generation opportunity to make our nation’s finances safer.”

To define what is and what is not being proposed here, this is not a “rainy day” fund. Ireland already has one of those. When you hit a crisis as deep as the banking crash of 2008 it can quickly run out of cash (when it is gone, it is all gone).

What McGrath is proposing is a much longer-term savings vehicle, whose capital assets are deliberately protected from the ‘rainy day’ emergency draw down by governments caught short by sudden and unexpected changes in the economic weather.

The minister’s report is a paper published ahead of the budget process in the autumn and as such will be subject to a lot of horse trading amongst fellow cabinet minsters. But it singles out the following rule as the most fitting:

Annual withdrawals from the Fund cannot be greater than the expected real rate-of-return on capital and drawdowns can only start once the capital of the Fund is sufficiently large so that the annual expected return on the Fund can make a significant contribution to future age-related costs.

So a portion of the windfall tax can be transferred into the Fund annually. When the fund gets to a certain size drawdowns can be made to deal with some future costs, but they can’t exceed the expected return on the capital in the Fund.

This preserves the size and integrity of the fund and enables the state to provide a meaningful long-term contribution to alleviate future age-related and other long term costs over time. Why does this matter? The report’s conclusion notes:

…beyond the short-term, there are serious fiscal challenges on the horizon. Costs associated with financing an ageing population, as well as less-quantifiable costs linked to the climate and digital transitions will need to be borne by the public sector. In addition, the experience of the last few years appears to confirm that the economy is increasingly ‘shock-prone’.

These measures won’t get a lot of publicity (it didn’t for Starmer when he announced something similar last September) but channelling part of the budgetary surplus into a longer-term public sector savings vehicle is potentially transformational.

Ironically, it has come from a party (Fianna Fáil) in the present coalition which experienced a near death experience after the banking crisis permanently tarnished its reputation as Ireland’s natural party of government.

It shows two things: that political parties can learn from such adversities; and that populism on its own (let’s face it Fianna Fáil is the country’s Ur Populists) isn’t everything. As I have written elsewhere:

The new populist comes unincumbered with serious public expectation. So, he can befriend the most marginalized and neglected and scoop big electoral prizes. But his ability to tell stories is not usually matched with capacity to make the technocratic elephant dance.

The fact is we need our populists to be more technocratically able, and our technocrats to find sufficient humility to take instruction from those who put our elected representatives in charge of our public administrations. It’s not really a question of either/or, but both.

It’s no done deal as to. how much will be set aside. There are huge pressures on the public purse and the fact there’s a surplus has made some opposition parties certain that more should be put into housing even though there’s clear limits on capacity.

McGrath’s measure (for once in Irish public life) is a consideration of future generations at a rare moment when the country can afford to think like that. It’s a shame it wasn’t done in the 1990s when Norway made a similar investment, but better it’s done.

Crucially, more efficiently than a wealth tax, it is a means to access some of the private wealth that has accumulated in silos hidden far out of public sight to the point where it is only possible to calculate the size of it by looking at the size of global debt.

It’s the party of Charlie McCreevy finally putting that toe curling line “when we have it we spend it, when we don’t, we don’t” finally to bed. Along with the Celtic Interconnector, it shows what a thoughtful (if not exactly popular) government can do in a tighting space.

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