Stimulus fund does not alter Government’s fiscal stance

A sovereign wealth fund is a nice thing to have. States enjoying windfalls often set up such funds. The Irish State enjoyed huge windfall tax gains from the property boom/bubble.

While Charlie McCreevy did many bad things during his seven years at the helm of the Department of Finance, including decentralisation, benchmarking and an utterly reckless spending splurge in the two years running up to the 2002 election, his setting up of a sovereign wealth fund more than a decade ago was one of his better decisions.

By the time the crash came, the National Pension Reserve Fund had grown in size to be worth €25 billion. Although small by the standards of the wealth funds of, say Norway or Singapore, it was not an insignificant sum.

Most of it ended up going not to pensioners, but to banks, their depositors and their bondholders. What was left – approximately €6 billion – was this week earmarked for a “stimulus”. Three Cabinet members and a Minister of State launched with fanfare the mechanisms through which the remainder of the fund would be channelled.

Instead of using the money to pay down the almost €200 billion in debt the State has run up – by overspending and ploughing €65 billion into bust banks – the Government has decided spend it. That is no surprise. Politicians love spending other people’s money. They like to be seen to be doing something to create jobs. And they feel obliged to counter accusations from Opposition benches that they are not doing enough to drive recovery.

Public investment can, of course, be beneficial, but before considering whether this tranche of money will be well spent it is necessary to be clear that the overall fiscal stance will remain contractionary. With a still-huge imbalance between spending and revenues, the Government has no choice but to continue its consolidation efforts. It is impossible to stimulate and consolidate simultaneously.

What of the longer-term returns on the projects the money is invested in? That remains to be seen. Limited detail on the investments is available and if cost/benefit analyses exist, the Government has not been making them available.