How much financial leeway does Ireland have if the public finances take a turn for the worse, most likely due to a fall-off in corporate tax revenue? Let’s have a look at what resources Ireland has and how they could be deployed.
1. Cash in the bank:
The clearest source of short-term support if tax revenues were to fall off is the cash held by the National Treasury Management Agency (NTMA). In its latest update to investors, it said its cash balances would amount to €30 billion by the end of the year.
These balances have built up over the last few years as the public finances have been in surplus and cash left over at the end of the year is held by the NTMA. As a result, it has not had to engage in major additional borrowing, raising just €6 billion on the market this year and indicating it may not have to raise much more next year. Given the late surge in tax revenues this year, helped by the first part of the Apple windfall, it is likely the final balances at the end of the year will be well above €30 billion and possibly closer to €35 billion.
How important is it? This huge wedge of cash is Ireland’s first defence in case of trouble. It could, for example, be enough to refinance the next two years of maturing loans carried in the national debt. Of course, if exchequer finances went into deficit the amount which would need to be borrowed would increase.
The Department of Finance has forecast budget surpluses over the term of the next government, though the plans put forward by the parties to spend more and tax less would reduce these. What are the risks?
A recent department report modelled two scenarios. In the first – a standstill in corporate tax revenues – budget surpluses under the EU borrowing measure would fall and the cash position of the exchequer would tighten. In the second – a return to pre-pandemic levels of corporate tax (more than a halving of current revenue) – government finances would be in trouble and in significant deficit. The cash pile could protect Ireland through a couple of difficult years, though if there was a structural change, such as the second scenario, in the public finances it would have to be addressed sooner rather than later via higher taxes or lower spending.
2. The two funds:
Two funds were established by the Government this year to save for the future in various forms. The Future Ireland Fund is a long-term savings vehicle due to help meet the additional costs likely to hit the exchequer from areas like an ageing population after 2040. The Infrastructure, Climate and Nature (ICN) Fund is designed to help to maintain investment in infrastructure from 2026 on should tax revenue take a hit, and also support climate-related investment. Under legislation, 0.8 per cent of GDP – just over €4 billion this year – must be paid each year into the Future Ireland Fund up to 2035 as well as €2 billion a year into the ICN fund.
There is now €10 billion in these funds (€8 billion of which is in the Future Ireland Fund) and this will grow to €16 billion by the end of next year, if the amounts mandated in legislation are again paid in.
So what leeway does these give Ireland? First, the contribution to the two funds can, under legislation, be halved in the face of an economic downturn or stopped completely if the downturn is severe. This would free up cash to be used elsewhere.
But could the next government actually get hold of the cash in the funds? Under the legislation, the money in the Future Ireland Fund could not be touched until 2041. However the cash in the ICN could be accessed. This is due to reach €4 billion by the end of next year and potentially in any year from 2026 to 2030, up to 47.5 per cent of the assets of the fund can be drawn down. Clearly there would be more to draw down later in the period as the fund builds up.
And, of course, it would be open to any new government to repeal the legislation and raid the funds, as happened during the financial crisis in relation to the National Pension Reserve Fund. The investments could then be sold and the money released to the exchequer.
3. Other money:
The Irish Strategic Investment Fund (ISIF), part of the NTMA, holds €4.8 billion in a global investment portfolio which would largely be liquid, though a portion is already committed to State housing agencies. The State, through ISIF, also retains 22 per cent of the share in AIB, worth around €2.65 billion at the current price, which is being gradually sold down.
4. The bottom line:
The current financial position of the Irish State is strong. The key point is simply that revenues are now in excess of spending. The State is not like a household – it can engage in ongoing borrowing once investors are confident they will be repaid. That said, the concern in relation to the concentration of Irish tax revenues and the uncertainties caused by the forthcoming Donald Trump presidency carry the risk of longer-term structural upset to revenues.
And remember that forecasters such as the Fiscal Council have indicated exchequer finances will come under pressure anyway due to the ageing population and the cost of climate change. At the moment, the dynamics of the Irish public finances are favourable – the debt burden is reducing and the State has spare financial capacity. This is the vital issue which investors watch.
The huge cash pile, together with these other funds and investments, gives Ireland potentially valuable room for manoeuvre if there is a hit to tax revenue. The NTMA has also pushed out the maturity date of Irish debt so the burden in the next few years is relatively low in terms of debt having to be refinanced. None of these are long-term solutions if tax revenue numbers are no longer keeping pace with spending growth, but they are valuable and substantial buffers, adding up to close to €50 billion.
