A Rainy Day Fund for Ireland: Why we Need to Invest in Protecting our Future
Sep 05, 2016
Saving is a fundamental element to future planning and basic financial prudence. From the cash on a business’ balance sheet, to a family’s holiday fund, to buying life insurance, there is an underlying understanding of the value that contingency planning plays in our lives. We take precaution to ensure that in the event that something goes wrong, we have a plan in place and a safety net for protection. This basic premise explains why, in the decade following the worst economic collapse in its history, Ireland should establish a Budgetary Stabilization Fund (BSF) or as it is often referred to a Rainy Day Fund.
A Budgetary Stabilization Fund is a countercyclical institutionalized form of state saving. The basic premise is to stabilize revenue collections and Government spending within the regular booms and busts of the economic cycle. In other words, the Government puts away a percentage of surplus tax revenue every year into a separate protected savings account. When the economy goes into recession, as it inevitably does, rather than needing to increase taxes or make spending cuts, the Government could opt to use some funds that it put away to pay for its operations.
Regional to National Governments in over fifty countries, such as Norway, the United States and Australia have successfully established BSFs that provide financial security during economic downturns. To highlight one specifically, Massachusetts in the United States provides a good example. Massachusetts had a BSF during the time of the 2008/09 financial crisis and was able to withdraw 216 million and 1.28 billion in fiscal years 2008 and 2009 respectively. The supplement to inadequate government revenue provided by the fund resulted in a lower unemployment rate and a smaller decline in median wages during the recession compared to the national average. Massachusetts is just one example of many that shows the success of BSFs to stabilize government spending and help boost the economy.
In the recent Programme for a Partnership Government there was a promise to establish a BSF . This is a particularly good idea for Ireland as our economy is particularly vulnerable to loss in tax revenue due to its localised economy with strong ties to foreign investment. The fund would operate similarly to a sovereign wealth fund allowing withdrawal during periods of economic recession. The money for the fund would come from a limited appropriation of the revenue surplus in any given fiscal year. Once the economy is officially in a recession, the Government can decide to allocate money from the fund to pay for essential services. During the recent economic recession, the Irish Government decided to use the National Pensions Reserve Fund in order to support the Irish banks in return for preference shares. The decimation of the NPRF during the economic crisis is an example of the need for a Budgetary Stabilisation Fund specifically for the purpose of supporting state services during times of economic downturn and to ensure a more secure economy for all.
As part of our submission on Budget 2017, we recommend that Ireland:
- Establish a budgetary stabilisation fund from general Government revenue surpluses to allow for ongoing Government capital investment during downturns and help smooth national income and expenditure profiles.