Government borrowing to top up its saving funds was always a 'very real possibility', says McGrath

THE STATE BORROWING to fulfil its saving fund commitments was always “a very real possibility”, according to European Commissioner and former finance minister Michael McGrath. 

Under his tenure in government, a number of saving funds were set up, with the stated intention of steeling the public finances against future economic shocks and financing long-term policy commitments.

These include the Social Insurance Fund, Future Ireland Fund, the Infrastructure, Climate and Nature Fund, the Ireland Strategic Investment Fund and the National Training Fund. 

In June, however, the Irish Fiscal Advisory Council (IFAC) hit out against the government stating that it will have to borrow to top up its new savings funds. 

The independent watchdog also criticised the government for increasing spending faster than any other European economy in the medium term while continuing to rely on risky corporate tax revenue. 

“Some of these funds were created as a vehicle to save volatile revenues for future spending. But the government is now planning to spend most of these risky revenues, rather than save them,” the independent budgetary watchdog said.

“Planned surpluses are not large enough to fund contributions to these funds,” it said. 

‘Circumstances where it makes sense’

Asked about whether this is a prudent financial move, to borrow money only to save it, McGrath recalled that this very issue was considered when the funds were being designed. 

“We considered this very real possibility, and our conclusion was that there are circumstances where it does make sense, particularly if you’re able to borrow from the markets at very low rates of interest. You may well be earning a higher rate of return on the funds that you are investing,” he told The Journal.

“It’s not black and white that it’s always wrong for a country to borrow at low rates to put into a fund that can grow at a higher rate and can meet long term commitments that you have,” he said. 

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The commissioner went on to say that was always envisaged in the preparation of the legislation underpinning the funds that “at some stage” this could be the case. 

“And we built that in at the time, the necessary flexibilities, to allow for that,” said McGrath. 

Building up buffers

The former finance minister said it makes sense to continue to build up “those buffers” stating that demographic changes are only going to accelerate over the years ahead. 

“Sometimes these funds get called ‘rainy day funds’. They’re not, they are for costs that primarily, particularly on the demographic side, we know will come. They are coming in terms of healthcare and pension costs, and so on,” said the commissioner. 

McGrath said the second fund is to make sure that over the long run, a consistent high level of capital investment can continue.

“I think it is sound financial management to have that long-term policy in place, and I wish the government well in implementing it,” he said. 

He told The Journal that he is delighted to see that the two long-term funds he proposed as minister for finance are up and running, stating that, for him, it was always about providing long-term resilience to the public finances in Ireland. 

Asked if he had any advice for Simon Harris, who will be doing is first budget as finance minister in October, McGrath said “the last thing he needs from me is advice”.

The Department of Finance will have “plenty” of advice for him, said the commissioner, who called Harris “highly experienced”. 

“Overall, Ireland is in a good position. The economy continues to perform strongly. Ireland has a budget surplus,” he said.

He no longer gets involved in domestic issues since taking up a job at the European Commission, he said, but he wished Harris and Public Expenditure Minister Jack Chambers well. 

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