Sovereign Wealth Funds: Making a Comeback or Just a Mirage?

“Ibec Supports Finance Minister’s Proposal to Establish Two Investment Funds, Igniting Debate on Sovereign Wealth Funds”

Ibec, a prominent business group in Ireland, has expressed support for Finance Minister Michael McGrath’s proposal to establish two investment funds – a long-term savings fund and an infrastructure fund. This development has reignited the debate surrounding sovereign wealth funds in the country.

Nearly 25 years ago, the National Treasury Management Agency (NTMA) unveiled plans to create a sovereign wealth fund aimed at addressing the State’s unfunded pension liabilities. The National Pension Reserve Fund was established in 2001 and was funded annually through tax revenues equivalent to 1% of the gross national product.

Within a few years, the fund grew to almost €15.5 billion and was projected to reach €140 billion by 2025, at which point the government could begin drawing from it. The NTMA was appointed as the fund’s manager by the National Pension Reserve Commission, and they invested the funds through a network of banks and investment advisers.

The investments were diversified across global stock markets, government and corporate bonds, property assets, and commodities. Journalists raised concerns about some of the investments, particularly those that contradicted government policies.

However, the National Pension Reserve Fund did not reach its second decade. As a condition for accessing €64 billion in international bailout loans, the troika of the European Union, European Central Bank, and International Monetary Fund required the fund to be used to repay private bank bond debts and recapitalize the surviving banks.

In more recent times, as significant corporate tax receipts flowed into the exchequer, a rainy-day fund transformed into an ad-hoc national reserve fund. This shift put sovereign wealth funds back on the agenda.

Earlier this year, Finance Minister Michael McGrath formally proposed the establishment of two investment funds. He intends to seek government approval for a long-term savings fund and a second fund to ensure that capital spending projects are not the first to be abandoned during future economic downturns.

McGrath’s plans faced criticism from Michael McMahon, the new chair of the Irish Fiscal Advisory Council (Ifac). McMahon cautioned against injecting spending into an economy with elevated inflation and historically low unemployment levels. Despite this, Ibec, a prominent business group, expressed its support for McGrath’s proposal, favoring both the savings fund and the infrastructure fund.

Ibec envisions an infrastructure fund of €10 billion by next year, which would facilitate the completion of infrastructure projects. However, critics argue that an infrastructure fund is fundamentally a spending fund rather than a savings fund. They contend that, like other countries, Ireland is already committed to spending on capital projects, making the case for an additional fund unclear.

Moreover, experience has shown that even a separate sovereign wealth fund does not shield public finances from disaster, nor does it protect the economy from a government’s pre-election budgetary decisions to increase spending and reduce taxes.

In conclusion, the debate surrounding sovereign wealth funds has resurfaced in Ireland. Finance Minister Michael McGrath has proposed the establishment of a long-term savings fund and an infrastructure fund, with Ibec expressing support for these plans. Critics argue that an infrastructure fund is essentially a spending fund, while others question the necessity of an additional fund given Ireland’s existing commitments to capital projects. Ultimately, the effectiveness of sovereign wealth funds in safeguarding public finances and the economy remains a subject of contention.