gov - Minister for Finance publishes department paper entitled ‘Future-proofing the Public Finances

last year, a general government surplus of €8 billion was recorded, largely on the back of corporation tax receipts
the corporation tax revenue stream has effectively doubled since just before the pandemic with, on balance, the evidence suggesting that much of this is windfall in nature
the Department of Finance estimates that windfalls were almost €11 billion last year, suggesting an underlying deficit of around €2¾ billion
it is not possible to predict a turning point for these windfalls; accordingly, the headline budgetary surplus is set to expand further in the coming years
at the same time, demographic-related pressures on the public finances are building
age-related expenditure will be around €7-8 billion higher by the end of the decade than it was at the start of the decade and these costs are set to increase exponentially thereafter
other structural changes will also require a budgetary response: financing the ‘twin transition’s (climate and digital)
to square this circle – the prospect of near-term headline budgetary surpluses funded by windfall receipts, alongside the building-up of medium-term spending pressures – Minister McGrath is developing proposals for a long-term savings fund that will be capitalised with some portion of windfall receipts and future budgetary surpluses
this approach would follow a well-trodden path of advanced countries establishing sovereign wealth funds in order to build fiscal buffers in good times to part pre-fund future liabilities

The Minister for Finance Michael McGrath today (Wednesday 10 May) published an analysis by his department entitled Future-proofing the Public Finances – the Next Steps. This scoping paper outlines some of the merits of establishing a long-term public savings vehicle in Ireland.

A key message from the paper is that the benefits of establishing a long-term public savings vehicle would be two-fold. Firstly, it would help to ensure that potentially windfall corporation tax receipts are not used to fund permanent expenditure increases or tax reductions. Secondly, such a fund could contribute to meeting known future budgetary pressures.

An important finding from the paper is that, under almost all of scenarios simulated, the drawdowns from such a long-term public savings vehicle would not be sufficient to cover the full increase in ageing-related costs by 2030, highlighting that other reforms to the pension system – including increases to the rate of PRSI – will be required.

Commenting on the scoping paper, Minister McGrath said:

“The analysis published by my department today highlights some of the vulnerabilities the public finances face from both revenue and expenditure perspectives.

“On the revenue side, while the headline budgetary accounts look to be in very good shape, this is largely the result of corporation tax receipts, which have increased more than five-fold in the past decade. My department estimates that around half of these receipts could be potentially transitory in nature.

“Looking ahead, Government is also aware of the major expenditure challenges on the horizon. Shifting demographics and adapting to the climate and digital transitions will impose large costs on the public finances.

“While the Irish demographic picture is currently favourable, developments in the coming decades will mean that we will be spending significantly more just to maintain the current level of service, all because of an ageing population.

“The paper my department published today outlines some of the options available to Government to help to mitigate against these risks to the public finances. Taking into account this analysis, it is my intention to bring forward proposals for a long-term savings vehicle which will be used to pre-fund part of the future costs of structural change.

“The paper also discusses different approaches to using the windfall receipts including for a new long-term savings vehicle, and using a portion to pay down debt and for additional, targeted capital investment. I was pleased to brief cabinet on this paper yesterday. Subject to government approval, setting up such a long-term savings vehicle will require primary legislation.”

Future-proofing the Public Finances – the Next Steps

Future-proofing the Public Finances – the Next Steps - Summary

Ireland’s public finances beyond the short-term: 10 facts

Notes

The paper, Future-proofing the Public Finances – the Next Steps, outlines the options around the establishment of a long-term reserve fund.

The document is a scoping paper, with the intention to highlight the pros and cons around the establishment of such a long-term public savings vehicle.

The paper describes the experience of establishing long-term savings vehicles both domestically and internationally. The funds profiled are: National Pensions Reserve Fund and National Reserve Fund (Ireland); Government Pension Fund Global (Norway); Future Fund (Australia); and, Government Pension Investment Fund (Japan).

The paper also simulates the potential contribution from such a long-term fund towards increases in future ageing-related costs under three capitalisation scenarios, whereby a portion of the estimated corporation tax windfalls are transferred into the fund. It illustrates the proportion of projected future ageing costs which would be covered by drawdowns of the expected return on such a long-term fund.

Minister for Finance publishes department paper entitled ‘Future-proofing the Public Finances – the Next Steps’

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