Blog written by Dr. Rory O'Farrell, an economics lecturer at TU Dublin discussing the Future Ireland Fund put forward in Budget 2024.
One of the measures put forward in Budget 2024 is the establishment of a €100 billion Future Ireland Fund to pay for ageing costs from 2040 onward. However, despite large sacrifices, this will have little effect.
Ageing costs, such as pensions and medical care, are expected to rise from just under a quarter of GNI* (the modified measure of national income which removes profits of foreign multinationals) to almost a third by 2070 (Figure below). Such costs can be dealt with by saving money in advance, or by directly reducing the costs (such as by raising the pension age).
The government’s plan is to front-load ageing costs by creating the Future Ireland Fund. It is planned that the fund will be seeded with funds from the National Reserve Fund (NRF), and each year the equivalent of 1.5% GNI* (0.8% of GDP) will be saved until 2035. This money will not be invested in Ireland, but abroad. It is anticipated that a fund of €100 billion would be accumulated, and the returns from this fund would be drawn down from 2040 onwards.
Despite the high upfront costs, the benefits of the fund will be relatively small. As shown in the above figure, setting aside 1.5% of GNI* over the next decade will only reduce ageing costs by 1% in 2040, falling to 0.6% by 2070. This small impact is because the economy is expected to grow over the next decades: effectively Ireland will be saving while we are relatively poor to spend when we are relatively richer. Restoring the pension age increases abandoned in 2022 would have a similar effect on ageing costs, but without the upfront pain.
Instead of creating a fund that invests abroad, the government should use windfall corporation tax receipts to create a fund that will invest in infrastructure in Ireland. Such a fund has been proposed by groups such as NERI and IBEC, and there is a consensus that windfall taxes should not be spent immediately.
An infrastructure fund would have two main benefits. Firstly, it would ensure secure funding of infrastructure and prevent the boom-bust pattern following the Global Financial Crisis. Secondly, and more importantly, it would allow expertise to be retained within a single infrastructure procurement agency. It is inevitable that errors are made in procurement (such as with the National Children’s Hospital). However, at present what is learned from such mistakes is not retained.
Ireland now has an opportunity, not just to build infrastructure, but also to build on the experience gained from previous projects.