The establishment of a so-called rainy day fund will help absorb “inevitable” future economic shocks, the Government has said.
A new consultation paper was published as part of Budget 2018, outlining the basis for setting up the fund, the announcement of which has been broadly welcomed.
The fund, which will start in 2019, is to be given an initial injection of €1.5 billion from the Ireland Strategic Investment Fund (ISIF) and annual exchequer contributions of €500 million.
Announcing the fund in his Dáil budget speech, Minister for Finance Paschal Donohoe said it was an important step in "strengthening the national finances in a changing and risky world, especially in light of Brexit".
Fianna Fáil backed the setting up of the fund with the party's finance spokesman, Michael McGrath, describing it as "the right thing to do".
“Such a fund is a sensible part of budgetary policy and would be a sure sign we have matured and learned the lessons of the past,” he said.
Plans for a rainy day fund to help balance the economy were first unveiled in the 2016 Summer Economic Statement.
Vulnerable to fluctuations
Outlining the reasons for such a fund, the Government’s consultation paper notes that the Irish economy is extremely vulnerable to fluctuations.
“Our economic history – especially the most recent history – highlights the importance of creating a fiscal safety buffer to help absorb the shocks that are inevitable in the future while, at the same time, ensuring the long-term sustainability of the public finances,” it states.
The consultation paper suggests that drawdowns from the fund would be linked to a fixed, defined purpose such a specific emergency.
Research shows that rainy day funds governed by stringent requirements typically accumulate more and, in turn, were more effective in mitigating against shocks. An additional benefit is that countries whose funds operate under strict rules can receive a better sovereign rating, which can lead to a reduction in the cost of borrowing.
EY chief economist Neil Gibson said while termed as a 'rainy day' fund, the new pot was essentially "a Brexit mitigation fund."
“Given the lack of clarity surrounding the UK’s exit from the EU, there is merit in this approach. However, many interest groups would argue that this money should be spent now on challenges which are already known,” Mr Gibson said.
Siptu president Jack O’Connor referred to it as a “totally unnecessary ‘pet project’ fund”.
