Factbox-How Ireland’s new sovereign wealth fund will work
DUBLIN (Reuters) – Ireland detailed on Tuesday how it plans to turn some of Europe’s healthiest public finances into a 100 billion-euro($106 billion) sovereign wealth fund to ease future healthcare, pension and climate costs linked to its growing and aging population.
Here is how the fund – which reflects Ireland’s success in attracting major companies with its low corporate tax rate – is going to work:
SIZE OF THE SOVEREIGN WEALTH FUND
– For each year from 2024 to 2035, the government will be mandated by law to invest 0.8% of nominal gross domestic product, currently equivalent to 4.3 billion euros, into the new Future Ireland Fund. If extra resources are available, they can be added.
– With accumulated contributions set to total 70 to 75 billion euros, the finance ministry estimates that the fund is likely to grow to around 100 billion euros by 2035, taking account of the estimated 4% return on investment.
– The fund will be initiated with 4.1 billion euros from the dissolution of Ireland’s current rainy day fund.
RULES ON WITHDRAWALS, USE
– The fund will be maintained over the long term and planned legislation will stipulate that it cannot be accessed until 2040 when it is envisaged that investment income, but not the capital, can be drawn down to support government expenditure.
– There will be mechanisms included in the legislation to stop or slow payments into the fund if the economy goes into a downturn and the forecast large budget surpluses are missed.
– While the fund can help with the anticipated costs of aging, climate change and other fiscal challenges, the legislation will not tie it to any specific area and it will be up to the government of the day to decide how it is spent.
SECOND FUND TARGETING INFRASTRUCTURE AND CLIMATE
– A second, smaller ‘Infrastructure, Climate and Nature Fund’ will also be set up with a target of reaching 14 billion euros in size. It will be available to catch up on targets to cut greenhouse gas emissions and act as a buffer against capital spending cuts in future downturns.
– The fund will be seeded with the remaining 2 billion euros from the rainy day fund with annual contributions of 2 billion euros to follow from budget surpluses between 2025 and 2030.
– A quarter of the fund can be used to protect infrastructure spending in a year where there is deemed to be a significant deterioration in the public finances. In such a downturn, the climate change provision will be suspended.
– In normal times, up to 22.5% of the fund can be spent in a given year on climate-focused projects that cut emissions, up to a cumulative value of 3.15 billion euros by 2030.
OPERATION OF THE FUNDS
The funds will be put under the ownership of the finance minister of the day and managed by the National Treasury Management Agency (NTMA) which oversees the country’s debt. The NTMA operates the existing 15 billion-euro Ireland Strategic Investment Fund (ISIF) which will continue to be commercially invested in Ireland.
The Infrastructure, Climate and Nature Fund is expected to invest in high-quality, short-term liquid instruments while the bigger sovereign wealth fund will focus on longer-term, riskier instruments. Both funds will be invested mainly outside Ireland.
DEBT REDUCTION
Any budget surplus remaining after the planned investments into the two funds will be used to pay down debt. The finance ministry forecasts that Ireland’s general government debt will fall to 200 billion euros by 2030 from 225 billion euros, or around 79% of modified gross national income last year.
($1 = 0.9438 euros)
