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Dublin: 23°C Tuesday 9 August 2022

The Rainy Day Fund will not be used for Brexit

The rainy day fund will be supplemented with an annual €500 million from the Exchequer, starting this year.

Image: Shutterstock/iurii

THE BILL, WHICH will allow for the setting up of the much talked about Rainy Day Fund, won’t be used for a Brexit fallout. 

A Department of Finance briefing note for Finance Minister Paschal Donohoe on the fund, which was released under Freedom of Information, notes that it should not be used for Brexit or climate change, stating that it “is vital that the Rainy Day Fund is not earmarked to meet challenges of which we are already fully aware”. 

It adds that to set out from its inception that the Rainy Day Fund would be available to meet Brexit or climate change challenges could lead to “moral hazard problems”.

“All of us in Government and the Oireachtas must take responsibility for addressing these challenges by planning and taking mitigating actions. We cannot plan on just using the Rainy Day Fund,” the note reads. 

In addition, it envisages that the Rainy Day Fund would only ever be used “for an extreme outcome…  a ‘tail-risk scenario’ of one of these challenges”. 

Ever since the bank bailout, there has been discussions about a rainy day fund, with the then Finance Minister Michael Noonan proposing the idea back in 2016. Fianna Fáil’s Michael McGrath had previously floated a similar plan the year previous. 

Money goes to the fund this year

However, in announcing the establishment of the fund last year, Donohoe said money will start going into the fund in 2019 – first with an initial deposit of €500 million, followed by further annual contributions of €500 million in 2020 and 2021.

These amounts are on top of the €1.5 billion in seed funding which has already been committed to.

The view that the fund should not be used for Brexit differs somewhat from the Fianna Fáil position, which is set out in their recent submission on the fund.  

The party believes the fund should be used in the case of a “natural or other disaster but it also could be another threat”.

Brexit here is an example of an issue that could greatly threaten the Irish economy. If, for example, there is a hard Brexit and the UK leaves the Customs Union without a deal it would be disastrous for the Irish economy.

However, the department has confirmed that the fund will only be used to mitigate severe events, as opposed to the normal fluctuations of the economic cycle. 

In light of this, the Parliamentary Budget Office has stated that if the fund is to be used as a contingency fund for once off events then “it should not be called the rainy day fund” as the office states this term is more appropriate for a fund that is used as a counter-cyclical policy tool.

Bailing out the banks 

While the fund is being ruled out for spending on the likes of Brexit, and any major domestic crises like in housing or health, one area where the fund could end being used in the future is another bank bailout.

The minister’s memo outlines answers to the question as to whether the fund could be used to bail out financial institutions.

The document outlines that the core objective of EU banking policy is to separate the sovereign from the banks, adding that “the Bank Recovery and Resolution Directive is designed so as to impose the cost of bank failures on the banks, their shareholders and the holders of their eligible liabilities”.

The minister’s briefing memo says that there is no expectation that the fund will be needed by banks because of the current “regulatory regime”. 

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It adds: “However, I would caution against closing off future uses of the Rainy Day Fund at this time, particularly given:

  • we do not know what crises could be faced in the future; and
  • it is proposed that the Oireachtas will have an opportunity to oppose the motion for a withdrawal from the Rainy Day Fund when it is proposed.”

‘A severe economic downturn’

It goes on to state that the Rainy Day Fund will be deployed only with the consent of the Dáil and only due to exceptional circumstances. The circumstances, defined by the EU, can result from:

  • An unusual event outside the control of the Member State and with a major impact on the financial position of general government or
  • A severe economic downturn.

The minister’s memo adds: “Accordingly, we could deploy the Rainy Day Fund to meet such a force majeure events and still be compliant. By way of example, some Member States under the unusual events clause, have increased expenditure related to recent refugee inflows or terrorism security measures.”

Sinn Féin is opposing the Bill which seeks to establish the fund on a statutory footing.

The Bill is currently at Third Stage. 

Sinn Féin’s Jonathan O’Brien said that in the midst of a housing and homelessness crisis, and with overspends in the National Children’s Hospital resulting in other capital projects throughout the country being stalled and deferred as a result, it is in the public interest to know where up to €8 billion is going in the next five years, and what it will be for.

He said the use of the fund is “obscure and unclear”, adding that it is most probable it will be used to bail out the banks “at a time when we should be investing in housing and infrastructure to future-proof our economy from future threats”.

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