Will the Rainy Day Fund Become Another Corporate Bailout?

Paul Sweeney's Predictions

Paul Sweeney03/09/2018

The last National Pension Reserve Fund was raided & most of it was squandered. Ireland had a Sovereign Wealth Fund – 1% of GNP plus profits over 7 years had generated over €21bn by 2007. Money was put aside for future old age pensions. It was perhaps the only good idea of the most profligate Finance Minister, Charlie McCreevy. They said it would not be touched until 2025.

But in 2009 it was raided, not to build houses or pay welfare, but to pay off the rich creditors of all Irish private sector banks.

A New Rainy Day Fund

As part of Budget 2019, our government is going to put money into another Rainy Day Fund. Is this fund likely to be raided to bail out private corporations just like the last? Or, is it a good idea to even out the business cycle and to put aside unexpected corporation tax receipts we get from MNCs’ tax avoidance strategies? Yet another idea: should the money be invested in social housing and in much-needed infrastructure?

Well, this fund’s amounts are small compared to the last – a total of €3bn compared to €21bn, which was rising. This amount is made up of half a billion a year from taxes for three years plus €1.5bn taken from the existing Rainy Day Fund, the Irish Strategic Investment Fund (ISIF). Minister Donohoe is setting aside just €0.5bn a year for three years, which is small compared to 1% of GNP that would generate more three times that amount (ie €2.7bn in 2019) and more each year after. Yes, we have a Rainy Day Fund—the ISIF with €9bn in it.

Question 1: Why duplicate? Why not put the money into the existing ISIF? They should be merged.

 

McCreevy’s only good idea laid to waste

The dominance of the market over the Irish state and its leaders does indicate that history may repeat itself under some guise during a crisis. The last Irish bank bailout was a massive upwardredistribution of wealth, perhaps the biggest in the world.

The NPRF should never have been wasted in this way. We had a choice. Government took the wrong path, though some still defend the action, arguing that we had to appease EU bank creditors or they would have caused a crisis here.

Finance Minister, Charlie McCreevy, whose inane fiscal policies (“when I have it I spend it”) from 1999 turned the sound Celtic Tiger growth era into a boom and then a bubble, almost destroying the Irish economy. It was pro-cyclical, inflamed the bubble, gave a away billions in unnecessary, regressive tax breaks, shifted taxes from incomes to consumption, gave taxpayer money to well-off savers, and was governed by the uber-liberal mantra of no or light regulation.

 

Question 2: Will these two Rainy Day Funds also be raided by government?

Ans: Possibly, but both are still good ideas, in my view.

 

NPRF was one of World’s top 20 sovereign wealth funds

At one time, Ireland’s  NPRF was one of the top 20 sovereign wealth funds in the world. Our money was supposed to be ring-fenced and set aside for a couple of decades to pay public sector and the state pension.No monies could be drawn down before 2025!

The fund had €21.1bn in net assets by December 2007. €15bn of this was invested in world stock markets. After the raid of public money, €20bn was given for the Bank of Ireland and AIB debts. This was not all lost and indeed much has come back, and we also own AIB and a bit of BOI, but nothing was returned from Anglo or Irish Nationwide.

How much did we give the Rich?

We, the Irish taxpayers spent two and a half years’ total tax revenues ie €64bn in paying off the private bank debts. Minister Brian Lenihan borrowed the money from the Troika: IMF, ECB, EU but he also raided our “untouchable Rainy Day Fund”, the NPRF.

In 2009 and 2010, the Minister for Finance directed the NPRF to invest a total of €10.7 billion in AIB and Bank of Ireland. In November 2010, the Government ordered the NPRF to further provide up to €10 billion of the State’s €17.5 billion contribution to the total €85 billion EU/IMF/ECB Programme of Financial Support for Ireland. A total of €20.7bn public money from the Fund went to private banks.

The NPRF Lost a Third of its Value

The original pre-funded scheme lost a staggering 30.4% of it value or €6bn in one year in 2008. The taxpayer had invested a total of €16.9bn in the initiative. Moreover, it had grown to a peak of €21.2bn in 2007 but fell to €16.1bn in 2008, losing all the gains it had made in more than 7 years.

 

Question 3: Can Ireland lose a lot of money investing in these funds?

Ans: Yes, possibly.

 

We already have a Rainy Day Fund: Irish Strategic Investment Fund (ISIF)

We already have a Rainy Day fund. Not all the NPRF capital was wasted on private sector bank bailouts. Some funds remained and were put in a new Irish Strategic Investment Fundin 2014 and as stated, we also got some capital back from two of the 6 banks that were bailed out.

 

Question 4. As the ISIF is already a source of patient state capital for private Irish firms, is a second Rainy Day fund needed?

Ans: Well, the new one is extra capital of €3bn but both should be merged.

 

The existing ISIF aims “to support economic activity and employment in Ireland.” It has a global portfolio and will transform this into an Irish one by 2020 as projects become available.vIt has €8.9bn so far to invest, of which €3.3bn was invested in 1,811 firms in Ireland at the end of 2017.

ISIF has invested €450m in Irish Water, €44m to Covantis for Poolbeg waste to energy plant, €52m in construction at Cherrywood, Dublin, and much more in property - real estate and €10m in whiskey stocks. Should we not be directly investing in social housing during the housing crisis? Really, whiskey, real estate, and milk?

The taxpayer is already the biggest investor in Ireland

The taxpayer is already the biggest investor in private firms Ireland as has been shown as such in my chapter in “Nuts and Bolts of Innovation.” The state invested €4.7 to €6.2bn in the private sector back in 2011. Thus, contrary to the dominant view, Ireland is not a privatised, but a mixed economy with a greater dependancy on public money and subsidies than many other EU states.

Is a Rainy Day Fund investing in private companies Ireland better than investing in public infrastructure like social housing, hospitals, and schools? Is a speculative fund that can lose money, as the NPRF did  - €6.4bn or almost one-third of its value - the best option?

 

Question 5:  Is the ISIF is making worthwhile investments in Ireland?

Ans: I hope so! The NPRF was well managed until the 30% collapse in its value during the Crash of 2008, and we have fine professional investors in NTMA. Our private sector is quite dependent on state subsidies and supports and this is yet another one but it is transparent.  But, we taxpayers must fully share in the upside, (often we don’t fully with Enterprise Ireland’s successes). Separately, the government should also build social housing directly, now.

 

 

Posted in: Banking and financeEconomicsThe Budget

Paul Sweeney     @paulsweeneyman

paul-sweeney

Paul Sweeney is former Chief Economist of the Irish Congress of Trade Unions.  He is a member of the Economic Committee of the ETUC and chair of TASC’s Economists’ Network. He was a President of the Statistical and Social Enquiry Society of Ireland, a member of the National Competitiveness Council of Ireland, the National Statistics Board, the ESB, TUAC, (advisor to OECD) and several other bodies. He has written three books on the Irish economy and two on public enterprise, including The Celtic Tiger; Ireland’s Economic Miracle Explained and Selling Out: Privatisation in Ireland, chapters in other books and many articles on economics.


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