A Modest Proposal

Posted on December 08, 2013 by Tom Healy

Tom Healy, Director NERI
Tom Healy, Director NERI

Suppose you were the Minister of Finance in 2009 and that you were held up and forced to hand over a lot of money to a number of bust banks?. You didn’t have the money at the time so you took it out of a special pension savings fund built up by taxpayers meant for the next 50 years. Suppose that, in the meantime, one of the banks involved turned solvent and returned a modest sum of money plus interest? What would you do? Say thank you and don’t do that again and now you are going to use the money to pay off some other debts? Or, would you use it to invest in the future with a return right of way and for many years to come? In this blog I outline a modest proposal for an investment stimulus based on the monies taken from our pension fund but to be returned to us by Bank of Ireland.

During one of the world’s greatest bank bailout Irish taxpayers contributed €64 billion to prop up the banks. Most of this was by way of cash transfers to the banks with little or no prospect of ever seeing the money again. However, there was some good news recently because some of this money is to be returned to the taxpayer in form of a purchase by Bank of Ireland of these shares currently held, on our behalf, by the Minister of Finance/National Treasury Management Agency (NTMA). 

In simple terms the taxpayer handed over money in 2009-2011 to go directly into the coffers of banks that were bust. Since then, it appears that there has been some improvement in the overall position of one of the banks – Bank of Ireland (which is now 15% owned by the State). Bank of Ireland has been able to raise money on the global markets and is now in a position to ‘buy back’ the capital put into it by the taxpayer. But where did this money come from in the first place? Answer – the National Pension Reserve Fund (NPRF). 

That was a Fund created at the start of the current millennium to pay for future pensions. The plan was that Government would pay in 1% of GNP each year until 2055. That came to an end in the aftermath of the Crash of 2008 when the discretionary part of the pension fund was raided and depleted over three years in order to save the banks. Just to recall - €20.7 billion was taken from the NPRF over the period 2009-2011 of which an estimated €4.7 billion was put into Bank of Ireland. A sum of €1.7 billion of the latter was converted into equity in June 2010 while a total of €1 billion was sold off in January 2013 in ‘CoCo Bonds’). Some €1.3 billion was also raised in sales of state equity in Irish Life and Permanent in March 2013. Further detail may be found in Séamus Coffey’s informative post here.

In September of this year the NTMA held as the NPRF, on our behalf, €15.6 billion of which €6.6 billion was in a ‘discretionary portfolio’ and the rest, €9 billion was in a ‘directed portfolio’. This latter portfolio comprised the various ordinary and preference shares invested in AIB and Bank of Ireland. Earlier in June the Government announced an ‘Ireland Strategic Investment Fund’ (ISIF) which was to comprise the ‘discretionary portfolio’ (valued at €6.4 billion at the time). This Fund was to be used on a ‘commercial basis’ for investment ‘as suitable investment opportunities arise and are developed’.  The Government also prepared The NTMA (Amendment) Bill 2013 to establish the ISIF as well as formally establish NewERA the holding company for some existing commercial public enterprises. The announcement in June was that ‘the proposals will be effected later this year.’ €375m from this Fund was to be used for to provide equity, credit and restructuring / recovery investment for Irish small and medium sized businesses (SMEs).

To date, very little progress or delivery is apparent whether in terms of the legislation or the delivery of significant capital projects. Contrary to indications last summer Budget 2014 saw a further cut back in public capital spending in 2014 (€100 million). With total investment – public and private – at close to 10% of GDP we are at the lowest since the 1950s and the lowest in the European Union, currently. This has serious implications for social and economic infrastructure as well as lost opportunities in terms of employment and economic recovery.

In the midst of this investment crisis planned public spending is not only being cut but is not being spent as planned. For example, the recent Exchequer Statement showed a 14.5% under-spend (€375 million) in the 11 months to November 2013.  

There is a very strong case for Government to use all of the proceeds of the sale of shares in Bank of Ireland to bring forward investment plans in priority capital projects. The case for an investment stimulus and how it might be funded and rolled out has already been outlined in a number of NERI publications since 2012. In this case we are about to receive €1.8 billion which has not been borrowed by Government. Rather, the money was shifted from one part of the NPRF to another but could now be used for other purposes such as reducing the overall level of debt or maintaining high levels of cash. 

Another way of looking at this is to consider the sale of Bank of Ireland preference shares as a sale of state assets. It was already promised that 50% of the proceeds of the sale of all state assets could be used for job creation. So, why not apply this to the sale of bank shares held by Government?

An investment stimulus in 2014 could be funded without recourse to additional borrowing in a number of ways. This modest proposal offers only just one of a number of possible ways. The jobs and domestic demand impact of a stimulus would be significant and timely based on the empirical evidence reviewed by my colleague Dr Rory O’Farrell in The Effects of Various Fiscal Measures.

In summary:

  • We have an unemployment crisis at over 12% of the workforce.
  • We have serious under-investment in key areas of infrastructure
  • At least €1.8 billion will be returned to the State by way of cash for equity.
  • The Troika is leaving town.
  • There is no reason other than fiscal dogmatism not to use this money for strategic investment which could create additional employment, income and revenue streams for the State.
  • Lets go for it! It was and still is our money in the first place.



Digital Revolutionaries