The Irish government’s plan to establish two wealth funds has raised eyebrows and sparked debate. Finance Minister Michael McGrath has outlined his intention to divert a portion of the country’s substantial tax revenues into a national savings or sovereign wealth fund. This move echoes the establishment of the National Pensions Reserve Fund in the early 2000s, which was later depleted to meet international creditor obligations during the financial crisis. However, what has caught the attention of economists and experts is McGrath’s proposal for a second fund specifically dedicated to infrastructure development.
Economist Seamus Coffey, a former chair of the Irish Fiscal Advisory Council, has questioned the viability and purpose of the infrastructure fund. Coffey argues that the fund is essentially a spending fund disguised as an investment vehicle, and should not be confused with a sovereign wealth fund or a national savings fund. While there is a clear need for improvements in areas such as housing, healthcare, and transport infrastructure, Coffey warns that the economy does not currently have the surplus resources to allocate to these sectors without risking significant inflation.
Coffey’s concerns hold weight given his expertise and experience in economic matters. He has previously conducted studies on the impact of corporation tax receipts on the Irish economy and has highlighted the country’s reliance on a small number of US companies for its recent prosperity. Coffey argues that a sovereign wealth fund would make sense if the economy was operating at or near full capacity, as it would help prevent excessive spending and inflation. However, he contends that the infrastructure fund is merely another avenue for spending and does not align with the principles of a true wealth fund.
Coffey points out that the government already has an infrastructure spending fund in the form of the capital spending envelope. While he acknowledges the need to increase investment in infrastructure, he also notes that there have already been numerous calls to tap into the proposed infrastructure fund for various projects, which he argues is indicative of its spending nature rather than a savings-focused approach.
To support his argument, Coffey cites the example of Norway’s sovereign wealth fund, which prohibits the domestic use of its resources to prevent undue influence from lobby groups and to maintain the fund’s integrity. He suggests that Ireland’s infrastructure fund falls short of international best practices and could potentially lead to pork-barrel spending by politicians.
However, business group Ibec has expressed its support for the infrastructure fund, emphasizing the need for capital projects to be completed regardless of economic performance. Ibec proposes that the fund be funded by the existing National Reserve Fund, which currently holds €6 billion, and grow to approximately €10 billion by the end of next year. The group argues that this would address capacity constraints and ensure the completion of key infrastructure projects in housing, healthcare, and transport, using the substantial tax revenues flowing into the exchequer.
Ibec believes that an infrastructure fund would also send a positive signal to international companies, demonstrating Ireland’s commitment to addressing its infrastructure deficits and attracting future investments. The group further highlights the potential for the government to run budget surpluses if corporate tax receipts continue to flow at their current levels.
The debate around the establishment of these two wealth funds reflects the complexity of balancing investment in infrastructure with the need for fiscal responsibility. While the government’s intentions are aimed at addressing critical areas in the country’s development, experts like Coffey caution against the potential risks of excessive spending and inflation. As the discussions continue, it remains to be seen how the government will navigate these challenges and ensure the effective allocation of resources for the benefit of the Irish economy and society as a whole.