Professor Stephen Kinsella:

I thank the clerk for the invitation to address members today. I have given evidence to the committee on several previous occasions and it is a privilege each time to do so on my behalf and that of the University of Limerick. This occasion is a little different in that I have chosen to take a particular angle, which is that I allocated myself the role of research assistant to the committee. I am aware the committee has a large briefing staff, but this is a very technical area. In my capacity as professor of economics and as someone studying the Irish economy, I decided to ask myself what the financial landscape of the Irish economy looks like when a third savings fund is included. That is the context in which I place my remarks. I do not propose to read through the document I have provided or to read out prepared remarks. The briefing note is more than sufficient to contain my thoughts.

The first point is that it is a welcome act of foresight by the Government to try to cope with two simultaneous factors. The first of these is the windfall from corporation taxes, which the Department of Finance estimates at €65 billion. However, if one is looking into the national finance figures as long as I have been, one starts looking carefully at how the Department does its forecasts and one realises it is maximally prudential. That means we should expect the €65 billion to be the lower bound of any estimate. The sum could be €70 billion, €80 billion or €90 billion. It could be larger. Therefore, the problem the Government is trying to solve could be larger, and it is a problem of allocation.

That is how I started thinking about this. Were one to allocate a large but temporary surplus, the only thing one would do is think about saving it or investing it. I set out five actions the Government could take with an unexpected windfall. One is to increase current spending. We all know how that would be done. The other possible actions are to decrease current taxes, increase capital spending, invest the surplus into a long-term financial asset, which is the proposal today, or pay down the stock of sovereign debt. That debt stands at approximately €240 billion, with an average interest rate of 2%. It is not too expensive for us at the moment, but if we think about the State as a private business, the cost of funds to keep going is approximately 2%. We need something that will generate more than 2%.

The Department's briefing note seems to me a cursory briefing note, not designed to be in detail. It is designed to give a bit more detail to the proposal but it is by no means the final arbiter. It says something to the effect that the Department would like to use this sovereign wealth fund to do one thing, which is to cope with ageing, that is, to fund the extra €7 billion to €8 billion that will have to be spent to support an ageing population. Given most of this is pensions, it strikes me that calling it a sovereign wealth fund is probably a bit of a misnomer. It is really the National Pensions Reserve Fund, NPRF, 2.0. In essence, it is storing up money for the pension payments that will have to be made into the future.

There are a couple of issues with this and a couple of questions I have about it. First, it is important to look at where we are in the economic cycle. The graphs I have included in my document clearly show that we are in the unusual policy position of having to allocate the benefits of a primary surplus. As we see from the first graph, deficits are more our norm. We have had longer deficits for much longer than we had previously. The second thing to note is that the economy is more or less at its full potential. Unemployment is below 4%. Capital spending is rising very sharply relative to its trend. As we have seen from the various economic statements, we have large increases in forecasted receipts. We have an economy in which increasing current spending probably will be inflationary and raising capital spending will immediately run into the implementation challenge we have seen in recent years. We may not get any extra houses or hospitals for the increased expenditure, which will merely increase the profits of the private companies that are already building those houses and hospitals.

The third issue, which is worth teasing out, is the nature of the investment and financial landscape in this country today. There is approximately €14 billion in the Ireland Strategic Investment Fund, ISIF, which is the remainder of the previous NPRF. We have the national reserve fund - the so-called rainy day fund - which has approximately €6 billion in it and goes up to some €8 billion. Then there is this third reserve fund, which is predicted to go up to somewhere between €90 billion and €120 billion, depending on how capital is injected. Therefore, we have three funds. One of them, ISIF, invests pretty much entirely in Irish equities, the other is a straight-up savings fund and the third is what we will call a sovereign wealth fund for the sake of argument. However, the latter has a number of interesting features that are quite different from what the standard literature looking at sovereign wealth funds would suggest. I provide a number of links in the footnotes of my document to big literature reviews that look at the 50-, 60- or sometimes 70-year history of these funds, what they do, how they behave and what the key issues are with them. One learns a lot from these kinds of meta-analyses. The first thing we learn is that our fund has a 20- or 25-year time horizon. Already, that is a bit strange. The pension funds in Canada, Singapore, Norway, Australia, Africa and the rest of south-east Asia have an unlimited time span. They are not supposed to stop at some point. However, that is very much the case for the Irish fund.

Another interesting thing to note is the size of the fund, in that it is quite small relative to what we would normally understand as a traditional sovereign wealth fund. Even arriving at the largest amount of €90 billion if most of the windfall is saved, which may be politically challenging for various reasons, we still have only €90 billion under management, which places it as a very small sovereign wealth fund relative to the larger ones. This is a little tricky in that we are producing a relatively small fund using one source of assets, which is the windfall from corporation taxes. There is no discussion of what would happen if we had an auction for 5G or 6G, for example, and how those funds might be used. There is no discussion about other sources of revenue, such as whether any excess profits from offshore winds would go into this fund. There is no discussion about that. We are only talking about one source of funds, but there should be many sources. They could all be one-off sources. If we decided, for instance, on a big privatisation, with a big release of funds, those moneys could and should go into something like this. However, there is no discussion about sources. Moreover, on the uses of the funds, there is only one, which is to deal with the ageing population. We can think about climate change and many other uses for these funds. In fact, sovereign wealth funds are used for all of that.

The other issue the committee and the Department really should consider is the need to get very much into the weeds on this. The real devil is in the detail of how we decide to extract funding and what the rules should be for taking funding from this source. If there is a crisis in the morning, how is the Minister for Finance of the day to take this money?

How is that possible? It is a very complicated question. It is not clear to me that there is a sufficient understanding of the difficulties with this.

My final point on this relates to transparency, governance and operations. The transparency issue is very important. Sovereign wealth funds exist on a spectrum from essentially completely opaque and almost personal wealth all the way to maximally transparent. Where we want this to be depends on the goals of the fund. If we can assume that it is going to be managed by the NTMA and that we can expect similar levels of transparency, there are still questions as to how it is going to be operated. Are we going to have private operators allocating these funds? How do we ensure that the transactions costs are very low so that we are not spending the interest rate increase and whatever money we make on behalf of the taxpayer paying for the various money managers? There is a question as to implementation. What incentives do we use in that regard?

While it is not mentioned in the report anywhere, I am assuming that this will have a very strong environmental, social and governance, ESG, component and that we will not invest in oil and gas and so forth. However, I do not know that.

For my final point, I will raise four major open questions. Why is there an upper limit on the fund? Why are we only allowing such and such to happen? It strikes me that we are building institutional architecture for the State and that we should let it get as big as it needs to get. If it needs to get smaller, that is fine. We need to study other countries' experience. The White Paper gives four countries as examples. There are quite literally hundreds of examples and we need to study those. The withdrawal rules need to be studied very carefully. My concrete suggestion to this committee is that a committee of five experts on sovereign wealth funds be appointed to ensure that international best practice is followed and that these withdrawal rules are written down extremely clearly and publicly. The source of funds is simply assumed to be one area. I would like that to be examined.

My final point is a major one. This is really a piece of institutional architecture that should not just outlast this Dáil or this decade, but that should still be here in a century. If we want to build something that is really of long-lasting value, we should have a sense of where it sits in the overall blueprint. My question for this committee - it may be a wider question - is: where is the blueprint? It feels like this is reactive thinking as a response to an unexpected circumstance. It is a good thing but it would be great to have a proactive process in which there would be a portfolio of three sovereign wealth funds or savings funds. They would do different things, which is great. Perhaps we would need a fourth or perhaps we would only need two but we should have a sense of how these things connect and what their relationship to one another is.