Paschal Donohoe (Dublin Central, Fine Gael)
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I thank the Chairman for the opportunity to address the committee. I am accompanied today by colleagues from the Department who have been involved in developing the range of options as set out in the rainy day fund consultation paper.

I begin by providing some background and context to the proposal on the setting up of a rainy day fund. The concept was originally mooted by my predecessor as part of the Summer Economic Statement, SES, in 2016. It was announced that once the medium-term budgetary objective, MTO, of a balanced budget was achieved, a rainy day fund would be set up. The establishment of the fund forms part of a wider policy commitment to sound and sensible public finances. It will play an important role in creating a budgetary safety buffer to help absorb inevitable future shocks to our economy, while at the same time ensuring the long-term health of Ireland’s public finances. In the 2017 Summer Economic Statement, the Government committed to consulting the Oireachtas before bringing forward detailed proposals.

The initial proposal for a rainy day fund envisaged an annual contribution of €1 billion per annum to commence post-achievement of the medium-term objective. Subsequently, the Government reduced the planned contribution to €500 million per annum for the years 2019 to 2021 in order to fund capital expenditure over the same period. The level of contributions thereafter was left as an open question and it is one of the many topics on which I welcome the committee's views today.

In budget 2018, I announced that the Government had decided to transfer €1.5 billion from the Ireland Strategic Investment Fund to the rainy day fund when it is established. I published the consultation paper, on which the Chairman has commented. I welcome the paper I have received from Fianna Fáil along with the papers from the Irish Fiscal Advisory Council and the Parliamentary Budget Office. Before I form any particular view on the specific details of the fund, I hope today to get some initial views from the committee on the outstanding questions I have set out in the consultation paper. These matters relate to the design, operation and purpose of the fund; as well as the issues of how it is resourced; withdrawal triggers; and its governance.

Broadly speaking, the current proposal is to design a rainy day fund that will primarily meet budgetary demands which may arise from a specific, one-off shock. As set out in the third section of the consultation paper, a natural question arises as to whether the rainy day fund should be used in the first instance as a contingency reserve. It would be necessary to clearly define the circumstances under which such reserve funds could be deployed in order to ensure it is used only during a time of crisis. Force majeureevents which might necessitate access to the contingency fund may include a natural disaster or a public emergency.

Expenditure based on a withdrawal from a contingency reserve fund would be permissible within the parameters of the fiscal rules. If at the end of a given budgetary year, the funds within the contingency reserve remained unused, they could then be transferred to a separate rainy day fund, the establishment of which would require primary legislation.

These are just some of the issues outlined in the consultation paper which require further consultation on this reserve fund. Other matters to be discussed include: whether such a contingency reserve should be held within the Exchequer account or within a rainy day fund; how the withdrawal triggers should be determined; and what kinds of shocks or events should be considered as triggers. As I mentioned at the outset, I am keen to hear the views of the members of the committee today on these and other questions that I put forward in the consultation paper.

Sections 4 and 5 of the paper raise questions on operational and administrative matters associated with the overall rainy day fund.

These design and operational issues relate to the deposit mechanism, the withdrawal mechanism, the size at which the fund should be capped and the replenishment methodology. Other practicalities to be considered include how the fund might be invested, what governance structures would be most appropriate and who should administer and manage the fund.

I will identify some of the key design concepts of the fund about which the views of the committee will be important. The first is the deposit mechanism. The proposal as currently drafted envisages a deposit mechanism whereby, aside from the €1.5 billion seed funding from ISIF, there will be an annual contribution of €500 million from the Exchequer until 2021. Clearly, it would be my intention that the annual contribution would continue beyond that point. Is this a sufficient level of contribution? Should we be looking to bring additional seed funding into the rainy day fund? How will name and determine the size of annual contributions after that? Many options spring to mind. One would be to have a fixed contribution key in either nominal or as a percentage of gross domestic product, GDP, or gross national income, GNI, terms. An alternative could be to lodge windfall tax revenue on the basis of revenues above target in general terms or with regard to specific taxes. I am sure that members will have other options as well.

In respect of the withdrawal mechanism, clear and defined rules will be required in respect of the events and conditions which could trigger a withdrawal proposal and the process by which such a proposal would be progressed by the various State actors. International evidence shows that these triggers tend to comprise economic and fiscal triggers such as the level unemployment and revenue and expenditure levels, as well as democratic triggers relating to approval by the Executive and Parliament. The design of these triggers will be a critical task in developing the fund. They should be appropriate and relevant as well as being based on data which is timely and transparent. There is a need to also strike a balance between sufficient checks and balances and a process that allows the speedy utilisation of the funds given they will be needed in a crisis.

Associated with the interplay between deposits into and withdrawals out of the fund are the issues of the overall fund size and the process by which it should be replenished if it used. The optimum size must be determined so that we have sufficient capacity to address challenges emerging but also while avoiding the carry costs of a cash or near-cash fund which could become too large. Given the State's debt levels are consistently identified as one of the State's top risks, the State should always be seeking to pay down debt except where there is a better return for the State. In this case, the rainy day fund provides resources to mitigate tail-risk events that would have a significant impact on the Irish economy and public finances thus justifying the additional interest costs on the debt that could be paid down by the rainy day fund.

Once the maximum size is achieved, should annual contributions continue for the purposes of budgetary discipline or cease? If they continue, should the surplus in the fund be used to pay down our debt? I consider that the rainy day fund should be of a sufficient size to act as a fiscal buffer. The rainy day fund should give the economy and public finances time to make the longer term adjustments to re-establish debt market access at normalised levels. This is connected to the paying down of debt as the lower the State's existing debt level, the more sustainable the cost of debt from markets.

Subsequent to any withdrawal and determined by the target fund size, the fund will need to be replenished to rebuild the fiscal buffer. Clearly, replenishment will also be influenced by the prevailing economic and fiscal conditions, which might impact on the timing of the Exchequer's capacity to recommence contributions to the fund. Should the provisions for the replenishment of the rainy day fund be determined now or should they be determined post the withdrawal of the funds?

It is also important to note that everything we do must be must be compliant with the Stability and Growth Pact, as well as the Fiscal Compact. The fiscal rules dictate that use of funds from a contingency reserve or payments into the rainy day fund would be treated as expenditure by the Exchequer. Payments made to the fund are deemed a financial transaction within general Government but not counted as part of the general Government deficit. Therefore, any withdrawals from the fund will result in expenditure that worsens the general Government balance. In addition to all of these issues, the consultation paper outlines some options on the governance structure for the fund and how it might be managed with the NTMA indicated as a clear, and in my view, very good, possibility.

I look forward to a constructive engagement with the committee now and in the coming months as we pull together the proposal and the legislation relating to this matter. It is my objective to be in a position that allows us later this year to complete all the work that is necessary to draft this legislation to present it to the Oireachtas. Accordingly, I welcome the views of the committee on the consultation paper and the different ssues to which I have referred.