Department of Finance officials are weighing options to potentially broaden the use of windfall corporate tax receipts, as “rainy day” money stored in the new National Reserve Fund (NRF) nears its €8 billion cap.
Minister for Finance Michael McGrath this week transferred €4 billion into the NRF, building it to €6 billion. The fund was set up in 2019, but its initial €1.5 billion pot was withdrawn by the Government in late 2020 to help pay for Covid-19 pandemic costs.
Sources said the review being undertaken is looking at a number of options for the Minister. These include the potential to boost the returns on money in the fund, which is invested in low-yielding, short-term Irish exchequer notes issued by the National Treasury Management Agency (NTMA), or the raising of the €8 billion ceiling on the fund, they said.
‘Exceptional circumstances’
Officials are also assessing whether the mandate of the fund should be widened to maintain flexibility to allow it be tapped under “exceptional circumstances” but also allocate money for long-term investments to help pay for pensions as the Irish population ages. The Government decided last year against raising the State pension age from 66.
Another option would be to set up a separate national pensions fund, similar to the one established in 2001 but raided during the financial crisis to help pay for bank bailouts, they added.
Most potential changes would require legislative changes. A spokesman for the department declined to comment.
More than €10 billion of the €22.6 billion of Irish corporate taxes collected last year are estimated to have been windfall, or transitory, receipts — turning what would otherwise have been a €5 billion budget deficit into a surplus.
Mr McGrath noted on Tuesday that the setting aside of €6 billion in the NRF in the past five months came as the Government also allocated €11 billion of supports to households and businesses in Budget 2023 to help individuals, families and businesses deal with the rising cost of living.
“While we have acted to deal with this immediate challenge, there are future costs which we must be prepared for including the consequences of an ageing population, the digital transition and climate change,” he said.
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There are five tax-contributing workers for every one person over 65, but in 20 years this ratio will drop to three to one, according to a Department of Health report published in December.
The Irish Fiscal Advisory Council said in a report late last year that the NRF needed “some rethinking”.
Large downturns
The Government’s statutory fiscal watchdog said the €8 billion cap means it only captures a portion of windfall corporate taxes, would not necessarily cover large downturns, and that its size relative to the economy would diminish over time. It added that the political discretion attached to allocations to the fund would not lessen “lessen Ireland’s tendency in the past to ramp up spending and cut taxes during a boom”.
“One option for the Reserve Fund might be to redefine it as a new Pension Reserve Fund,” it said in the report. “This would set a new goal for the large assets that are being accrued; it would give it a mandate to invest in assets with potentially greater returns, and help deal with a long-standing problem — the expected shortfall in pension funding over the coming decades.”
A pension fund would also take some of the pressure off the tax system having to raise additional revenues to meet these shortfalls, it said.
