Why Ireland Needs a Rainy Day Fund
Jul 13, 2017
By Susan McDermott, Media and Communications Executive, Chambers Ireland
There has been much discussion in the media and current affairs commentary in recent days and weeks about the Rainy Day Fund and whether the Government will deliver on its commitment to allocate exchequer funding to such a measure.
What is a Rainy Day Fund?
A Rainy Day Fund is another term for a Budget Stabilisation Fund. Such a type of fund is a countercyclical institutionalized form of state saving. In other words a Rainy Day Fund can help to protect the vital investments required during a period of recession. Such funds have been used in many countries across the world as means of continuing investment in an economy during economic downturns
Does Ireland need a Rainy Day Fund?
As a small, open economy, Ireland is particularly vulnerable to external shocks. It is therefore important that Ireland plans to protect essential state capital spending in the future. With challenges facing the economy due to uncertainty arising from the UK withdrawal from the EU along with the risk of other global economic shocks it is essential that Ireland prepares its economy to deal with any potential downturns. Many of our Pre Budget 2018 asks relate to the need for Ireland to build a resilient economy by investing in infrastructure and providing Brexit supports for business.
The mistakes of the past should be avoided where possible and a Rainy Day Fund is an important aspect of building this kind of economic resilience The fund won’t have an immediate benefit for the economy but it is a long-term provision which will ensure that in the event of an economic downturn, funds will be made available to continue investment in infrastructure. Critics of the Rainy Day Fund concept feel that it takes money out of the economy that could be invested now. However, the Irish economy is currently performing strongly and now is the time to consider using some of the revenue being generated to save for potential future need.
Rainy Day Fund – Budget 2018
The Government committed to establishing a Rainy Day Fund as part of the agreed Programme for Partnership Government. The Minister for Finance then announced in Budget 2017 that the Government would introduce a ‘Rainy Day Fund’ once a balanced budget is achieved in 2018 of €1 billion annually.
There is a political importance to this commitment as Fianna Fáil view it as a fundamental measure agreed as part of the Confidence and Supply Agreement, whereby they agreed tpofacilitate the Fine Gael led minority Government to develop the annual Budget once consistent with the agreed principles.
Despite media speculation and discussion as to the merits of a Rainy Day Fund and the speculation of the political implications if it is not included, the Minister for Finance announced in the Summer Economic Statement that the Rainy Day Fund would be established from 2019 onwards to be capitalised with annual contributions of €500 million. This is half the amount that had been previously committed.
Chambers Ireland’s Pre Budget 2018 Submission calls for a Rainy Day Fund to be established in 2018 with an initial first contribution depending on the fiscal space available. When a balanced budget is achieved and as higher levels of investment are possible we recommend a gradually increased contribution to the fund to be made in 2019 and 2020 to approximately 0.5% of GDP.
The full version of the Chambers Ireland Pre Budget Submission can be accessed here
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