New Irish sovereign funds ‘could cut net debt to about 40% of domestic economy by 2030′

Two new Irish sovereign funds announced in Budget 2024 last week could help drive the Government’s net debt down to close to 40 per cent of size of the domestic economy by the end of the decade, according to Goodbody Stockbrokers economist Dermot O’Leary.

The net debt ratio stood at almost 69 per cent last year, according to the Department of Finance.

Mr O’Leary estimates that the combined assets of the so-called Future Ireland Fund (FIF) and the Infrastructure, Climate and Nature Fund (ICNF) could amount to €50 billion by the end of 2029, including Government contributions and the performance of investments in the portfolios.

“Under reasonable assumptions of [economic] growth in line with its long-term potential, investment returns of 5 per cent per annum, and a continuation of current fiscal plans, net debt could approach 40 per cent by the end of the decade,” Mr O’Leary told The Irish Times.

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Uncertainties include a change in government policy on the savings funds, an economic downturn, inferior investment returns and adverse corporate tax developments. Therefore, any estimates should be seen as scenarios rather than forecasts

—  Dermot O'Leary, Goodbody Stockbrokers economist

The net debt ratio estimate is set against gross domestic income star (GNI*), a measure of the domestic economy. Official Government forecasts currently only go out to 2026 and the Goodbody economist said that making projections that stretch to the end of the decade are “fraught with difficulty” and must carry a wide margin of error.

“Uncertainties include a change in government policy on the savings funds, an economic downturn, inferior investment returns and adverse corporate tax developments,” he said. “Therefore, any estimates should be seen as scenarios rather than forecasts.”

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The Department of Finance estimates that the main planned sovereign wealth fund, the FIF, will receive €70 billion-€75 billion of government contributions, driven by windfall corporate tax returns, by 2035. Combined with investment returns, the fund is seen reaching about €100 billion by that stage.

Mr O’Leary said that FIF might equate to about 10 per cent of gross domestic product (GDP) at that stage, which suggests the Republic would by then be a €1 trillion economy.

The FIF is being set up to pay for additional healthcare and pension costs associated with a growing and ageing population from 2041.

The ICND is being designed to ensure that capital spending on infrastructure and climate-action projects is maintained in the event of a future economic shock.

An investment of €2 billion will be added to this fund each year from 2024 to 2030, building to a total of €14 billion by 2030.

As much as a quarter of the fund can be used to protect infrastructure spending in a year where there is deemed to be a significant deterioration in the public finances. In normal times up to 22.5 per cent of the fund can be spent in a given year on climate-focused projects that cut emissions, up to a cumulative value of €3.15 billion by 2030.

The National Treasury Management Agency will be in charge of both funds. A full investment strategy for the funds has yet to be determined.