Ireland and Portugal to Create New Sovereign Funds for Investing Budget Surpluses

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Ireland is set to invest more than half of its coming corporation tax windfall in two new sovereign wealth funds, providing revenue for infrastructure projects and future economic challenges.

Dublin’s announcement came on Tuesday shortly before Portugal said it would set up its own public fund, initially injecting about €2bn from its budget surplus to invest in infrastructure and tackling climate change.

The two countries are among the few EU members enjoying surpluses, albeit for different reasons. Portugal is benefiting from its government’s fiscal discipline while Ireland is pocketing an estimated €10bn-€12bn per year of tax paid by global tech and pharmaceuticals companies attracted by its low corporate tax rate.

Irish finance minister Michael McGrath said the long-awaited sovereign wealth funds would together receive €6.3bn a year from annual corporate tax receipts. However, the government believes the windfall could prove temporary.

Michael McGrath
Michael McGrath: ‘We have a window of opportunity we must grasp’ © Reuters

“We have a window of opportunity we must grasp,” McGrath said, calling the funds “a step-change in how we plan for the future”.

Corporate tax receipts have more than tripled since 2015 and are forecast to reach €23.6bn this year and €24.5bn in 2024.

But the government says it has to be cautious because the revenues, generated by companies that have their European headquarters or large operations in Ireland to take advantage of the country’s low tax rate, are volatile and may suddenly dry up.

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The planned funds cement a remarkable turnaround for Ireland’s economy, which needed a €67.5bn bailout from the IMF and EU in 2010 after an economic and banking crash.

Ireland’s corporate tax rate, which at 12.5 per cent is one of the lowest in the world, has been an important driver of its recent strength. Under a global deal, this will be raised to 15 per cent from January.

As a result of the bonanza, the government is now expecting budget surpluses totalling €46bn between 2023 and 2026.

It will pay 0.8 per cent of gross domestic product — about €4.3bn — into the new Future Ireland Fund every year from 2024 to 2035. Next year, it will also pay in an extra €4.1bn from an existing rainy-day fund, which is being wound up.

The government expects contributions and returns from investments in international instruments to raise the Future Ireland Fund to €100bn by 2035. It can access the fund from 2040 for pensions and health spending for an ageing population, plus decarbonisation and digitisation projects.

In addition, it will invest €2bn a year in a new Infrastructure, Climate and Nature Fund between 2024 and 2030 to amass a maximum of €14bn by 2030. It will use the rest of the rainy-day fund for next year’s contribution.

The ICNF is designed to ensure that Ireland, which slashed spending after its crash and is now suffering a chronic housing shortage and constraints on infrastructure, has the cash to keep spending in a future downturn.

Up to 22.5 per cent of the ICNF can be used in any given year after 2026 to support climate and nature-related projects if the government is failing to meet its climate goals. The ICNF funds will be invested in high-return, short-term instruments.

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Full details and investment criteria will be contained in legislation expected to be put to parliament by the end of October.

Much of the rest of the surpluses will be ploughed into reducing general government debt, which Ireland expects will fall below €200bn by 2030, from €225bn at the end of 2022.

Portugal said its new fund for “structural investments” was intended to replace the inflow of post-pandemic EU recovery funds that will cease in 2026. The initial €2bn investment is roughly equal to the size of this year’s expected budget surplus, which equates to 0.8 per cent of gross domestic product.

Next year’s surplus is forecast to shrink to 0.2 per cent of GDP because the Portuguese government also announced measures in a new budget to raise household incomes, including a cut in income tax and boosts to public-sector salaries and pensions.

Fernando Medina
Fernando Medina: the budget ‘responds to people’s needs’ © AFP via Getty Images

Fernando Medina, finance minister, said the budget “responds to people’s needs” amid cost of living and housing crises that have left many Portuguese voters asking for the Socialist government to do more.

The finance ministry said a teacher earning the average wage of €2,141 a month would pay €385 less in annual income tax. Public sector workers will receive a pay rise of 3.1—6.8 per cent next year, while state pensions will increase by about 6.2 per cent.

Portugal also confirmed it would end tax breaks for foreign residents that have turned the country into a magnet for the well-off.

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Lisbon aims to keep reducing its public debt, which is set to be 103 per cent of GDP this year and is forecast to drop to 98.9 per cent next year — the first time it would be below 100 per cent since 2009.