Minister for Finance Michael McGrath is expected to bring forward proposals to ringfence billions of euros in corporation tax revenues over the next few years in a fund for future needs, effectively saving up tens of billions of euros until the 2030s.
Party leaders and senior officials will hold preliminary discussions on the plans, which have been flagged internally by Mr McGrath ever since the projections of large budget surpluses in the coming years.
While Mr McGrath and the Minister for Public Expenditure Paschal Donohoe are preparing for big spending increases in the autumn budget, the two believe that the current bumper revenues from corporation tax need to be set aside for future needs.
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Department of Finance officials have estimated that €12 billion of the €24 billion in corporation tax revenues expected this year is “windfall” in nature – and therefore cannot be relied upon to continue in future years.
The Ministers are likely to advise party leaders and colleagues that Ireland should quickly build up its reserves in the next few years to provide a buffer against a fall-off in corporation tax receipts in future and a resource to draw on when the costs of catering for an ageing population manifest themselves. A briefing paper suggests that standing still at the current level of services for the elderly will cost €9 billion by the end of this decade.
Last year’s budget set up a reserve fund into which €6 billion has so far been transferred. However, that fund is capped at €8 billion.
Sources say that firm decisions are unlikely to be taken by the Government for some time and it has not yet been decided whether to establish a new fund or to extend the remit of the existing one.
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Either way, it is expected that legislation will be introduced to put the scheme on a statutory footing. This would mean that any future Government that wished to cease transfers to the fund to use the money for other purposes would have to pass legislation through the Oireachtas.
It is also expected that the new fund will have a more diversified investment strategy than the current reserve fund, which holds mostly Irish Government bonds and short-term paper, sources said.
The new fund will have three phases, it is understood. In the first, the fund will be built up as quickly as possible with multibillion-euro transfers, funded by bumper corporation tax revenues. Once it is at a sufficient size, the return on its investment can contribute to the running costs of the State. Later, the capital fund itself could be used for exchequer purposes.
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The National Treasury Management Agency, which manages State debt, is likely to be tasked with managing the fund when it is set up.
Meanwhile, it is likely that the Government will breach its spending rule in the coming budget, increasing spending by more than the rate of economic growth for the second year in a row. The move is likely to be signalled in the Summer Economic Statement (SES), which Mr McGrath will publish in July.
The SES will signal the parameters for the October budget, but it is expected that the huge surplus, as well as the prospect of an election in late 2024 or early 2025, will mean a generous budget is in prospect.
Asked by Sinn Féin’s Pearse Doherty at the Oireachtas budget oversight committee last week if he would “stick to the 5 per cent rule this year”, Mr McGrath declined to give a commitment to abide by the Government’s own rule. But it is widely accepted in Government circles that the rule – which is supposed to constrain growth in core spending to the rate of underlying economic growth in the economy – will be breached again.
