Leo Varadkar's ‘rainy day fund’ doesn’t yet exist

Promises by incoming taoiseach Leo Varadkar to raid the Government’s “rainy day fund” to fund capital investment are not just optimistic – they are premature. The fund isn’t even set up yet, so anyone looking to raid would come away empty-handed.

The outgoing Minister for Finance, Michael Noonan, on Monday warned Varadkar of the dangers of loosening economic policy and urged the incoming administration to follow the agreements in the programme for government. Noonan said that "sudden departures from policy wouldn't be helpful".

At present, the fund is little more than a line in a speech – a policy promise rather than a worked-out plan.

Fianna Fáil first proposed the fund back before the last election, signalling that "windfall" tax revenues which exceeded expectations could be channelled into a fund which could be built up over years, providing a buffer for the public finances in the event of an economic downturn.

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The idea was included in the confidence and supply agreement struck between Fine Gael and Fianna Fáil and also featured in the programme for government. Noonan announced it in last year's summer economic statement. He reiterated the commitment in last year's budget speech, promising that an amount to the order of €1 billion a year would be set aside for the fund.

Government’s prudence

The move was hailed as an example of the Government’s prudence, and its determination that the reckless fiscal management of the past – from which consequences the country was still emerging – would not repeated.

However, there was a touch of the St Augustine about it; Noonan wanted to be virtuous – but not yet.

The fund is not scheduled to be set up until late 2019, and only then on condition that the medium-term objectives for the Irish economy are met next year.

No doubt the Government – or the outgoing Government, as we must now understand it – was sincere in its intentions, but it is relatively easy to make commitments that will fall to your successor to implement.

The last two budgets were not characterised by such ostentatious prudence; both saw Noonan find a few hundred million late in the day to ease the politics. Certainly, the experience of recent budgets suggests that it will be asking a lot of the next government to forgo a billion euro a year of its fiscal space. It would mean Ministers deciding not to increase spending and cut taxes in advance of an election. Perhaps they will; perhaps not.

But as of now, the rainy day fund is no more than an idea. In his budget speech last year, Noonan said the Department of Finance would produce a paper on how the fund would work, late last year or early this year. There's no sign of it yet. However, Noonan remains attached to the idea – he said on Monday the new government should be able to increase capital expenditure while maintaining the rainy day fund.

Big expansion

Varadkar seems unconvinced. Speaking to reporters, he reiterated his intention to increase the levels of capital investment in preference to leaving money sit in a fund. A big expansion in planned capital investment – roads, schools, public transport, broadband, housing and so on – is fast emerging as a key early theme in Varadkar’s plans.

The Minister for Public Expenditure, Paschal Donohoe, had already been preparing an enlarged capital plan, but Varadkar apparently wants to go beyond this.

He suggested during the Fine Gael leadership election campaign that Noonan's target of bringing the national debt down to 45 per cent of gross domestic product (it's currently about 70 per cent) over the medium term should be abandoned and a new target of 55 per cent set. This would free up perhaps another €20 billion for capital projects. He will also have €3 billion from the sale of AIB, knocking around, though European rules say that should be used for debt repayments. Whatever way you look at it, a major multiyear programme of public investment and building projects seems on the cards.