Opening Statement by Minister Donohoe to the Budgetary Oversight Committee on the proposal to establish a Rainy Day Fund
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Thank you Chairman for the opportunity to speak with the Committee alongside officials from my Department. I am accompanied today by John Palmer and Eoin Dorgan, both of whom have been involved in developing the range of options as set out in the Rainy Day Fund Consultation Paper.
Background and Context
I would like to begin firstly, by providing some background and context to the proposal I have set out in relation to the setting up of a Rainy Day Fund. The concept was originally mooted by my predecessor as part of the Summer Economic Statement or SES in 2016. It was announced that once the Medium Term Budgetary Objective or MTO of a balanced budget was achieved, a rainy day fund would be set up. The establishment of the fund forms part of a wider policy commitment to ensuring sound public finances. It will play an important role in creating a fiscal safety buffer to help absorb inevitable future shocks to our economy, while at the same time ensuring the long-term sustainability of Ireland’s public finances. In the 2016 SES, the Government committed to consulting the Oireachtas before bring forward detailed proposals.
Outline of the proposal
The initial proposal for a rainy day fund envisaged an annual contribution of €1 billion per annum to commence post achievement of the medium-term budgetary objective or MTO. Subsequently, the government reduced the planned contribution to €500 million per annum for the years 2019 to 2021, in order to fund additional capital expenditure over the same period. The level of contributions thereafter was left as an open question and it is one of the many topics on which I welcome your views today.
In Budget 2018, I announced that government had decided to transfer €1.5 billion from the Ireland Strategic Investment Fund to the Rainy Day Fund when it is established. I also published the Consultation Paper to initiate this Oireachtas consultation process and I welcome the paper that I have received from Fianna Fáil along with the papers from the Fiscal Council and the Parliamentary Budget Office. Before I form any particular view on the specific details of the fund, I would hope today to get some initial views from the Committee in relation to the outstanding questions I have set out in the Consultation Paper. Some of these matters relate to the design, operation and purpose of the fund; as well as the issues of how it is resourced; withdrawal triggers and its governance, etc.
Contingency Reserve Fund
Broadly speaking, the current proposal is to design a rainy day fund that will primarily meet budgetary demands which may arise from specific, one-off shocks. As set out in section three of the Consultation Paper however, a natural question arises as to whether the rainy day fund should be used, in the first instance as a contingency reserve. It would be necessary to clearly define the circumstances under which funds in such a reserve fund could be deployed, so as to ensure it is used only during a time of crisis. Force majeure events which might necessitate access to the contingency reserve may include either natural disasters or public emergencies for example. Expenditure based on a withdrawal from a Contingency Reserve Fund would be permissible within the parameters of the fiscal rules. If at the end of a given budgetary year, the funds within the contingency reserve remained unused, they could then be transferred to a separate rainy day fund, the establishment of which would require primary legislation.
These are just some of the issues outlined in the Consultation Paper which require further consideration in relation to a possible Contingency Reserve Fund. Other important questions to be answered include: whether such a contingency reserve should be held within the Exchequer account or within a rainy day fund; how the withdrawal triggers should be determined; and what kind of shocks or events should be considered as triggers. As I mentioned at the outset, I am keen to hear the views of the members of the Committee today in relation to these and other questions put forward as part of the Consultation Paper.
Operational and Administrative issues
Sections 4 and 5 of the Consultation Paper raise questions on Operational and Administrative matters associated with the overall Rainy Day Fund. These design and operational issues relate to the deposit mechanism, the withdrawal mechanism, the size at which the fund should be capped and the replenishment methodology. Other practicalities to be considered include how the fund might be invested, what governance structures would be most appropriate and who should administer and manage the fund.
It is on these issues, as on all other points raised in the Paper, which I am looking forward to hearing the views of the Committee today.
Deposits, withdrawals and size of fund
To begin today’s discussion, I will identify some of the key design concepts of the fund on which your views will be important. The design of the fund is important, as it will underpin the effectiveness of its use.
At present, the proposal envisages a deposit mechanism whereby, aside from the €1.5 billion seed funding from ISIF, there will be an annual contribution of €500 million from the exchequer until 2021. Is this sufficient? Should additional seed funding be made to the rainy day fund? How should the size of annual contributions be determined thereafter? A number of options spring to mind. One would be to have a fixed contribution key in either nominal or as a percentage of GDP or GNI* terms. An alternative could be to lodge windfall tax revenue on the basis of revenues above target in general terms or in relation to specific taxes. I am sure that there are other options as well.
In respect of the withdrawal mechanism, clear and defined rules will be required in respect of the events and conditions which could trigger a withdrawal proposal, and the process by which such a proposal would be progressed by the various State actors. International evidence shows that these triggers tend to comprise economic and fiscal triggers, based on indicators such as unemployment, and revenue and expenditure levels, as well as democratic triggers relating to approval by the executive and parliament.
The design of these triggers will be a critical task in developing the fund. The triggers should be appropriate and relevant, as well as being based on data which is timely and transparent. There is a need to also strike a balance between sufficient checks and balances, and a process that allows the speedy utilisation of the funds given it will be needed in a crisis.
Maximum fund size
Associated with the interplay between deposits into and withdrawals out of the fund are the issues of the overall fund size and the process by which it should be replenished, if it used. The optimum size must be determined, so that we have sufficient capacity to address challenges emerging, but while also avoiding the carry costs of a cash or near cash fund which could become too large. Given the State’s debt levels are consistently identified as one of the State’s top risks, the State should always be seeking to pay down debt except where there is a better return for the State. In this case, the rainy day fund provides resources to mitigate tail-risk events that would have a significant impact on the Irish economy and public finances, thus justifying the additional interest costs on the debt that could be paid down by the rainy day fund.
Once the maximum size is achieved, should annual contributions continue for the purposes of budgetary discipline or cease? If they continue, should the surplus in the fund be used to pay down debt?
I consider that the rainy day fund should be of a sufficient size to act as a fiscal buffer to bridge the impact of the shock. The rainy day fund should give the economy and public finances time to make the longer term adjustments to re-establish debt market access at normalised levels. This is connected to the paying down of debt as the lower the State’s existing debt level, the more sustainable the cost of debt from markets.
Potential replenishment of fund
Subsequent to any withdrawal, and determined by the target fund size, the fund will need to be replenished to rebuild the fiscal buffer. Clearly, replenishment will also be influenced by the prevailing economic and fiscal conditions, which might impact on the timing of the exchequer’s capacity to recommence contributions to the fund. Should the provisions for the replenishment of the rainy day fund be determined now or should they be determined post the withdrawal of the funds so they can fully take account of the circumstances of the State at that time?
Compliance with EU fiscal rules
It is also important to note that a key consideration in the design of any rainy day fund, is that it must be compliant with Ireland’s legal obligations as set out in the Stability and Growth Pact, as well as the Fiscal Compact. The fiscal rules dictate that use of funds from a contingency reserve or payments into the Rainy Day fund would be treated as expenditure by the Exchequer. Payments made to the Fund are deemed a financial transaction within general government, but not counted as part of the general government deficit. In terms of withdrawals from the fund however, these will result in expenditure that worsens the general government balance.
In addition to all of these issues, the Consultation Paper outlines some options on the governance structure for the fund, and how it might be managed, with the NTMA indicated as a possibility.
In concluding, I look forward to a constructive engagement with you all as this will help us to form an evidence-based and considered proposal. Accordingly,
I welcome the views of the committee on the Consultation Paper and the various issues to which I have referred.
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