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Why is Ireland creating a sovereign wealth fund? Reasons behind Ireland’s unique initiative explained.

Ireland’s Ambitious Plan: A Sovereign Wealth Fund for a Secure Future

Turning Public Finances into a 100 Billion Euro Sovereign Wealth Fund

Ireland has unveiled its plan to transform its robust public finances into a 100 billion euro sovereign wealth fund. This initiative aims to address the future challenges posed by healthcare, pensions, and climate costs associated with the country’s growing and aging population.

The Perfect Timing for Launching a Sovereign Wealth Fund

While many European Union countries struggled with deficits, Ireland stood out by achieving a budget surplus last year. Furthermore, the country foresees continued surpluses in the coming years, building upon the already impressive 2.9% of national income recorded in 2022.

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These surpluses have been primarily fueled by a significant increase in corporate tax revenue over the past decade. Ireland collects taxes from a small number of foreign multinationals that have established their European headquarters in the country.

The Irish finance minister views this windfall as a unique opportunity to invest in securing the nation’s financial stability, rather than incorporating it into already generous annual budgets.

Unveiling the Origins of the Corporate Tax Boom

Between 2009 and 2014, Ireland’s annual corporate tax revenue averaged 4 billion euros. However, a global crackdown on countries with no corporate taxes led to major multinational companies transferring substantial intellectual property to Ireland, attracted by the country’s low 12.5% tax rate.

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While this tax boom has been advantageous for Ireland, the finance ministry cautions against relying too heavily on the decisions of a few firms for a significant portion of the country’s income. They estimate that around half of the projected 24 billion euros in corporate tax for this year cannot be relied upon to continue flowing in.

Utilizing the Fund for Long-Term Costs

The Irish government aims to annually expand the sovereign wealth fund and generate sufficient returns to cover rising long-term expenses, including pensions, healthcare, and funding for climate and digital transitions.

The proportion of Ireland’s population aged 65 and over is expected to increase from 25% in 2020 to 46% in 2050. In addition, fulfilling climate targets could cost the country 2% of gross national income annually from 2026, according to estimates by Ireland’s fiscal watchdog.

Furthermore, a smaller 14 billion euro infrastructure and climate fund will be established to address more immediate climate-related expenses and act as a safeguard against potential capital spending reductions during economic downturns.

International Models for Inspiration

Ireland’s finance ministry looks to countries such as Norway, Australia, and Japan for inspiration. These nations have successfully established forward-thinking funds using budget surpluses, windfalls, or revenue from natural resources.

Norway’s sovereign wealth fund, valued at $1.4 trillion, stands as one of the world’s largest investors. Japan has also built a substantial pension fund over the past 17 years. Australia’s Future Fund, created in 2006 and valued at $131 billion, closely aligns with Ireland’s aspirations.

By capitalizing on its healthy public finances, Ireland is taking a proactive approach to secure its future. The establishment of a sovereign wealth fund will provide stability in the face of demographic changes, climate challenges, and evolving economic landscapes.

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