Thomas Lyons 
The Irish government is facing a decision on how to allocate budget surpluses of over €65bn expected up to 2026. Finance Minister Michael McGrath has announced a new sovereign wealth fund to house longer-term savings. The fund will be capitalised by windfall taxes as well as fractions of any future budgetary surplus. But where will this money go? What funds do we already have and what will be different about this one?
Established in 2001, the National Pensions Reserve Fund (NPRF) was set up as a long-term savings vehicle for Ireland’s ageing population. The objective of the fund was to cover as much of the fiscal cost of social welfare and public pensions as possible over the period 2025-2055. Every year, around 1% of Ireland’s GNP was transferred to the fund, with its day-to-day management under the responsibility of the National Treasury Management Agency (NTMA), who invested the funds both inside and outside the State.
During the sovereign debt crisis of 2008-2012 in which Ireland’s budget deficit skyrocketed following the collapse of the property bubble, the fund was partially liquidated, with the remaining amount being re-purposed as the Irish Strategic Investment Fund in 2014. Still under the management of the NTMA, the Irish Strategic Investment Fund (ISIF) invests on a commercial basis to support economic activity and employment in Ireland. The ISIF focuses on areas such as housing and green transition, along with Irish business, food and agriculture. As of 2021, the fund stood at €14.5bn, €9.6bn of which comprised the discretionary portfolio, with the remaining €4.8bn accounting for the directed portfolio – primarily for public policy investments.
Established in 2019, the National Reserve Fund (NRF) was set up as a form of ‘rainy day fund,’ involving the accumulation of highly liquid assets that could be deployed quickly to support the economy following a severe shock. As per legislation, €500m must be automatically transferred to the NRF each year until 2023, with additional payments allowable following a resolution from the Dáil. With a ceiling of €8bn, the fund now stands at 75% of its capacity following the covid pandemic in which it the full fund was withdrawn, with a recent transfer of €4bn by Mr McGrath bringing the total fund to €6bn. As the fund invests in highly liquid assets, this can lead to a lower rate of return, with high inflation exhibited in the last year adversely impacting the NRF’s real value.
With the Irish Strategic Investment Fund and the National Reserve Fund both in operation, Mr McGrath has announced his intentions to create a new sovereign wealth fund – a longer-term strategy targeting Ireland’s shifting demographics. Explaining the concept in a paper published by the Department of Finance, a sovereign wealth fund would “help reduce impending budgetary costs” and smoothen the impact on the public finances to promote inter-generational equity. Taking inspiration from Norway, Australia and Japan who have all set up their own sovereign wealth funds, Mr McGrath noted that the new model had “different mandates,” to existing funds telling the Irish Examiner, “The ISIF’s investments are in areas such as housing and green transition and so on. The fund that we will be setting up over the months ahead will have to have quite a diversified portfolio. It certainly won’t all be invested in Ireland, that wouldn’t be prudent from a risk management point of view.”
In a sense, the sovereign wealth fund will pick up where the National Pension Reserve Fund let off, by partly pre-funding the additional fiscal costs associated with an aging demographic and other structural changes. In addition, it would act as as a form of “rainy day fund,” offering a counter-cyclical buffer in the event of an economic slowdown, therefore, boosting the economy’ shock absorption capacity. Using windfall tax, the fund will be largely financed by a highly concentrated number of firms, with the top ten largest corporation tax payers accounting for around €1 in every €7 of all tax collected. Hence, the government aims to reconcile these policy challenges, using windfall taxes that many view as temporary to finance more long-term costs, mitigating concentration risk among tax payers while doing so.
