THE PHRASE ‘RAINY day fund’ is one that we might usually think of in relation to personal finance – that little fund to put a few quid in for a day when you really need it.
So what is the Irish government doing talking about a ‘rainy day fund’ of its own?
Weren’t we in recession just a few short years ago? Do we really have some cash we’ve found down the sofa – and if we do, shouldn’t we be spending it on infrastructure, homelessness, or something else worthy?
Here’s everything you need to know about the ‘rainy day fund’.
What is the fund?
In 2016, the then-Finance Minister Michael Noonan mentioned the establishment of a rainy day fund in that year’s Summer Economic Statement (which you can read here).
He said that the government “will not jeopardise the recovery by increasing public expenditure at a pace in excess of the capacity of the economy to absorb”.
Similarly, pro-cyclical fiscal policy will be avoided by, for instance, the establishment of a rainy day fund once a balanced budget is achieved.
The aim? To have a bit of a financial cushion for the country.
The plan was to put away a provisional amount of €1 billion per year from 2019 onwards into a rainy day fund.
He also said that: “Proposals for the operation of the rainy day fund and the circumstances under which the amount would be deployed as a fiscal support for the economy will be developed”.
Also, the Department of Finance was to produce a paper on the fund. That paper hasn’t been published yet.
According to the Summer Economic Statement, the Government would also consider the merits of using any one-off receipts (like windfall corporate tax receipts – or other windfall tax revenues) or part of the Ireland Strategic Investment Fund (ISIF) to capitalise the rainy day fund.
According to the new Finance Minister Paschal Donohoe in answer to a parliamentary question this year, the idea to set up the fund was influenced by what the country went through during the recession.
The crisis years clearly demonstrated that volatility in the economic cycle can be much more pronounced due to the open nature of the Irish economy. As such, the rainy day fund would provide a prudent counter-cyclical buffer, with annual transfers from the Exchequer to the rainy day fund expected following the achievement of the Medium Term Budgetary Objective, projected to be next year.
He said that the details would be explained in the 2017 Summer Economic Statement, which is due out this week.
Was this the first time we’d heard of the rainy day fund?
No. For example, back in December 2015, the Fianna Fáil Finance spokesperson Michael McGrath put forward the idea of a rainy day fund in a press release. He said at the time that this fund would “cushion the effects of any future shock in the economy”.
His party was also, he said, to bring forward proposals in its manifesto for the establishment of a rainy day fund.
On 22 December 2015, Fianna Fáil officially announced its plans for this rainy day fund, which would be administered by the NTMA (the National Treasury Management Agency) and would “hold any further windfall gains from Corporation Tax and other unexpected revenues”.
Funds would be released to spend on key investment projects should a future downturn arise.
The party described the concept as “similar to the National Pension Reserve Fund”, which was set up in 2001. (Money from this fund was used in the bank bailout – this fund has been rolled into the Ireland Strategic Investment Fund).
McGrath outlined why the party felt now was the time for the fund:
“It is important, now that the economy is growing with buoyant tax revenues, that we take the opportunity to start putting in place a new rainy day fund as these conditions, which are totally outside our control, will not last forever.”
The party proposed that, once a balanced budget is achieved in 2017, any increase in corporation tax revenue above this baseline of €6.7 billion should be put aside to lessen the impact of any future slowdown in the economy.
The funds would then only be drawn on if the unemployment level rose by 1% or was forecast to rise by that level.
“The money would be specifically used for job intensive infrastructure projects which would cushion the impact of a slowdown in the economy.”
In January 2016, Noonan had also said that Fine Gael’s pre-election long-term economic plan would leave a quarter of the available fiscal space (that’s the amount of money the next government will have available to spend over and above what it is already spending on public services like health, welfare, education, etc) unallocated as a Contingency and Stability Reserve.
In other words, a rainy day fund.
But McGrath said at the time that this proposal was “half-baked and indicative of muddled thinking on the Minister’s part”.
He said that it wasn’t a genuine rainy day fund, and that Fianna Fáil’s approach was more structured, with clear rules around when the money could be put in or taken out.
In June of last year, McGrath was still sending out press releases calling for the establishment of a rainy day fund:
What happened next?
On 7 June 2016, the Irish Fiscal Advisory Council released its tenth Fiscal Assessment Report.
Nestled in this was the mention of a rainy day fund:
By 21 June that year, the government had published its aforementioned Summer Economic Statement, and with it mention of a rainy day fund.
Fianna Fáil’s spokesperson on Public Expenditure and Reform, Dara Calleary, said that there was “scant detail” in the report about how the proposed rainy day fund would operate, describing the figure of €1bn per year from 2019 as “somewhat arbitrary” and called for a “clear set of rules”.
So why is it back in the news again?
Well, the Sunday Business Post reported last month that the new Taoiseach, Leo Varadkar, is “to scrap” the rainy day fund.
The newspaper reported that Varadkar “believes it does not make sense to salt away €2.5bn in a rainy day fund when the money is urgently required for new infrastructure such as public transport projects, schools, hospitals and roads”.
What was the reaction to the reports?
Not surprisingly, Michael Noonan wasn’t happy – he said that “sudden departures from policy wouldn’t be helpful” to economic stability, it was reported by the Irish Independent.
And while in Limerick, Noonan said there would be no need for Varadkar to use money from the fund for infrastructure specifically.
In addition, Reuters reported that Minister Donohoe said that the Taoiseach “never said he was against the rainy day fund, he merely and correctly asked questions regarding the rate at which we build it up and when we begin doing it”.
But what’s all this about the fund being empty?
Well, it soon emerged that there’s no money in the fund – because, like we explained above, it doesn’t actually exist yet, given that it’s due to kick in in 2019.
The record was set straight while the Public Accounts Committee was questioning officials from the Department of Finance. PAC chairman Seán Fleming asked Chief Economist John McCarthy if there was anything in the fund.
McCarthy said that the fund was empty because the country’s books were not balanced.
“[There's] nothing in it yet, but there is a provision at the moment for €1 billion to be provided in 2019, 2020 and 2021,” he continued.
“It doesn’t come in until we balance the books. We balance the books in 2018 so it doesn’t come until the year after, 2019.”
The committee was told that the fund is being reviewed and that more details will be in the summer economic statement.
Asked if the fund was empty, McCarthy replied “yes”.
Is this a policy u-turn?
The establishment of the fund is included in the Confidence and Supply Arrangement drawn up for the Fine Gael-led minority government. This is the deal that holds together the minority-government arrangement, and includes six key policy priorities.
So yes, Varadkar’s decision can be seen as a u-turn on policy.
In order to scrap the fund, Varadkar would need the support of Fianna Fáil because of the fact it’s in the confidence and supply agreement signed by the two parties.
What’s going to happen next?
The Irish Times reports that one senior Government official said that some but not all of the €3bn will be used for infrastructural spending.
So it looks like we’ll have some form of rainy day fund yet, if that source is correct.
But for now, we have to wait for the publishing of the Summer Economic Statement on Wednesday to give us an insight into what exactly is going to happen to it.
But do we need a Rainy Day Fund?
There are varying opinions on this. Clearly, those in favour of it believe it’s a worthy financial cushion to have – especially now that Ireland is no longer in recession and the books are looking healthier.
But we also know that Ireland’s health service is in dire need of more investment, that broadband is a pressing problem around much of the rural areas of the country, and that homelessness and housing are huge issues.
SIPTU’s general president Jack O’Connor said the union disagrees with the establishment of a rainy day fund, as it “will deprive the Irish economy of vital resources required to house our people and rebuild our public infrastructure”.
And Labour’s Joan Burton TD said that it “would have been much more appropriate to prioritise better public services at this stage” of the country’s recovery than set up such a fund. She also said it “sounds catchy but is difficult to fathom”.
In addition, Dublin Fine Gael MEP Brian Hayes suggested that the government should sell of its 14% Bank of Ireland stake – which should net €1bn – and put that into the rainy day fund.
So Varadkar taking money out of the fund and using it to benefit infrastructure in the country would certainly be welcome by some.
But as for his exact plans, we’ll know them tomorrow. And for now, the ‘rainy day fund’ doesn’t technically exist, and lies empty.
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