On moving quickly to present a memo to the Cabinet this week on the idea of a new State investment fund, Minister for Finance Michael McGrath is trying to tie his colleagues into a strategy of his making. Together with Minister for Public Expenditure Paschal Donohoe, McGrath wants the Cabinet to sign up to putting billions of euro into this fund to help pay for future bills. The Cabinet is likely to agree in time to this, but the key question will be on what terms.
As finance minister, Donohoe established a National Reserve Fund into which €6 billion has already been paid. However it is clear that this fund, which is capped at ¤8 billion, is now inadequate, given the €65 billion in surpluses forecast up to 2026. A significant part of this money will go towards paying higher bills to maintain current service levels, but decisions will have to be made about the rest.
The cash can be spent in broadly four ways – paying down debt, building up a fund, paying for investment or funding day-to-day spending. There is an argument for the first three, as they support the public finances and help develop the economy. However, it would be a mistake to push massive additional resources into extra day-to-day spending – or lower taxes – as problems would immediately be created if there was a big fall-off in revenue. Corporation tax, in particular, is seen as vulnerable, with the Department of Finance guesstimating that up to €12 billion of revenues in this area could be defined as being “windfall” and thus particularly vulnerable.
McGrath, by presenting his memo, will be trying to tie his colleagues into the more conservative route of putting cash aside to pay for future bills in areas like the ageing population and climate change. This is entirely sensible. We know these bills are coming down the road – and quickly. Opposition criticisms about rainy day funds – that it is raining already – ignore the fact that the key constraints in addressing areas like housing are not now financial. Massive resources are being applied to housing and these may now increase a bit further, but the real blockages are in areas like planning and in the shortages of builders and other construction workers.
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It remains to be seen how the debate develops. The Government will surely agree to establish the fund. But ministers know that spending money now to try to improve services or cut taxes could be popular. All too often over the years, this temptation has provided irresistible.
We have seen before the mistakes of inflating an already strong economy and how quickly the public finances can turn. This Government must use the current strong financial position to set the public finances on a strong course and underpin long-term investment. It is an opportunity which is unlikely to present itself again for many years. It must be grasped.