Bonds vs NPRF

IrishTrajan · 15-05-2015 11:52pm #1

I'm just wondering something, so if it is a bit stupid, forgive me.

In 2013, the cost of the Public Sector was around €14(?) billion per year (which works out at around €650 million spent every fortnight), yet the NPRF is valued at around €27bn.

I'm wondering as to why we don't take ~€550-600 million from the NPRF to set up a "Current Expenditure Fund" to cover the costs of paying wages. This can be topped back up to €600 million when taxes come in.

It would mean €600 million less for investment purposes, but would it not make it easier for us to operate in the future, as we would not require bonds except in times of urgency. It may take a few years to filter through, but surely the cost savings in interest rates would outweigh the investment return had we left €600 million in the NPRF to be invested?

Why then do we operate on the bond markets?

frankbrett · 16-05-2015 10:54am

IrishTrajan wrote: »

I'm just wondering something, so if it is a bit stupid, forgive me.

In 2013, the cost of the Public Sector was around €14(?) billion per year (which works out at around €650 million spent every fortnight), yet the NPRF is valued at around €27bn.

I'm wondering as to why we don't take ~€550-600 million from the NPRF to set up a "Current Expenditure Fund" to cover the costs of paying wages. This can be topped back up to €600 million when taxes come in.

It would mean €600 million less for investment purposes, but would it not make it easier for us to operate in the future, as we would not require bonds except in times of urgency. It may take a few years to filter through, but surely the cost savings in interest rates would outweigh the investment return had we left €600 million in the NPRF to be invested?

Why then do we operate on the bond markets?

Firstly the NPRF no longer exists. It is now the Irish strategic investment fund (ISIF), which has a dual mandate for stimulating the domestic economy and achieving commercial returns where possible.

Secondly, 2/3 of the fund is tied up with the state holdings of BOI/AIB shares, leaving the actual discretionary fund closer to €7bn. A large amount of this would be legacy assets of the NPRF.

Bonds aren't necessarily issued to cover short term mismatches in exchequer funding- this would typically be covered by short term borrowing in the money markets at very low rates. bonds would represent the cost of the accumulated exchequer deficit over time and would still need to be rolled over even if day to day funding was exactly matched.

andrew · 18-05-2015 3:38pm

To add to what the above poster said, I believe current expenditures would be funded via Treasury Bills and similar short term instruments and not, as s/he mentioned, bonds.

More generally, the government's funding needs you're referring to are short term. The point of the NPRF (or ISIF) is to make long term investments. It doesn't make sense to use long term investments to fund short term liabilities.

realitykeeper · 18-05-2015 11:09pm

In the past, governments issued bonds to raise funds for specific projects e.g building a dam or a major motorway. Investors would be told specifically what the bond would be used for. Nowadays it seems like government bonds are defined by their maturity date.

Large investment funds like pension and insurance groups buy bonds because traditionally, bonds were the safe haven investments.

Unfortunately, due diligence is no longer given the same amount of consideration as in the past. Consequently, bonds are no longer safe although the perception of bonds as a safe investment remains.

Geuze · 19-05-2015 9:59am

IrishTrajan wrote: »

I'm just wondering something, so if it is a bit stupid, forgive me.

In 2013, the cost of the Public Sector was around €14(?) billion per year (which works out at around €650 million spent every fortnight), yet the NPRF is valued at around €27bn.

14bn ??

Total Govt exp was more like 70bn pa in recent years.

http://www.cso.ie/en/releasesandpublications/er/gfsa/governmentfinancestatisticsapril2015/#.VVr65PlViko

antoobrien · 19-05-2015 3:03pm

Geuze wrote: »

14bn ??

Total Govt exp was more like 70bn pa in recent years.

http://www.cso.ie/en/releasesandpublications/er/gfsa/governmentfinancestatisticsapril2015/#.VVr65PlViko

The poster is more correct that you are, the cost of the public sector was ~14bn in 2014.

That 70bn you have referred to includes sports, arts and other community grants, social welfare spending, infrastructure maintenance & other capital spending, financing borrowing to pay for said public sector wages (among other things) etc. etc.

Geuze · 19-05-2015 4:40pm

Okay, if by "public sector", you mean the public service paybill.

andrew · 19-05-2015 4:44pm

realitykeeper wrote: »

In the past, governments issued bonds to raise funds for specific projects e.g building a dam or a major motorway. Investors would be told specifically what the bond would be used for.

Wars were another big one. As far as I know wars precipitated the creation of government bonds in the first place. I don't think it's quite right to say that in the past bonds were usually issued to fund specific expenditures. As far as I know bonds have always been issued to fund general expenditure, certainly in the last 100 years.

antoobrien · 20-05-2015 3:07pm

Geuze wrote: »

Okay, if by "public sector", you mean the public service paybill.

It's fairly clear that the o.p was referring to wages, here's some emphasis to help clarify it:

IrishTrajan wrote: »

In 2013, the cost of the Public Sector was around €14(?) billion per year (which works out at around €650 million spent every fortnight), yet the NPRF is valued at around €27bn.

I'm wondering as to why we don't take ~€550-600 million from the NPRF to set up a "Current Expenditure Fund" to cover the costs of paying wages. This can be topped back up to €600 million when taxes come in.

antoobrien · 20-05-2015 3:33pm

IrishTrajan wrote: »

I'm wondering as to why we don't take ~€550-600 million from the NPRF to set up a "Current Expenditure Fund" to cover the costs of paying wages. This can be topped back up to €600 million when taxes come in.

The NPRF was set up to fund future pensions (not sure if it was just PS, the wider SW pension or both) to explicitly avoid using to to fund current spending. As is pointed out it has not been replaced, so your point is moot anyways.

IrishTrajan wrote: »

Why then do we operate on the bond markets?

Future funding - scheduled debt repayments and budgeted expenditure. The NTMA holds several months worth of government expenditure (currently ~15bn) on behalf of the exchequer to fund spending (to the end of April spending was ~23bn).

There are also various bond payments and other debt requirements that need to be made. By going to the bond markets we can make these payments more manageable e.g. the 7 year bonds that were issued recently are being used to partially fund repayments to the IMF. If we'd have stayed to the original schedule, we'd have been repaying these loans (at a higher interest rate) over between now and 2020. As things stand we still have to find just over 13bn, 16bn & 20bn to cover the various types of debt coming due from 2018-2020.

glacial_pace71 · 24-05-2015 9:07pm

andrew wrote: »

Wars were another big one. As far as I know wars precipitated the creation of government bonds in the first place. I don't think it's quite right to say that in the past bonds were usually issued to fund specific expenditures. As far as I know bonds have always been issued to fund general expenditure, certainly in the last 100 years.

Local authorities once had the power to issue debt, e.g. the concept of being incorporated municipalities was to be in a position to raise monies for specific items of capital expenditure (roads, bridges, port works, drainage, street lighting etc) against which they'd pay a coupon in the expectation of the income-generating nature of the works providing for increased revenues from ratepayers. (The idea was that it could be amoritised over several generations). It did indeed become a problem of general expenditure rather than specific 'big ticket' items. Irish local government was hollowed out in the 1930s anyway, and so the point became moot anyway, even if the notional powers were still represented in the names of certain municipalities such as 'Drogheda Corporation' or 'Dublin Corporation', i.e. whether at county borough or sub-county level (prior of course until the abolition of the latter).

Dr_Bill · 02-06-2015 8:48am

frankbrett wrote: »

Firstly the NPRF no longer exists. It is now the Irish strategic investment fund (ISIF), which has a dual mandate for stimulating the domestic economy and achieving commercial returns where possible.

Secondly, 2/3 of the fund is tied up with the state holdings of BOI/AIB shares, leaving the actual discretionary fund closer to €7bn. A large amount of this would be legacy assets of the NPRF.

Bonds aren't necessarily issued to cover short term mismatches in exchequer funding- this would typically be covered by short term borrowing in the money markets at very low rates. bonds would represent the cost of the accumulated exchequer deficit over time and would still need to be rolled over even if day to day funding was exactly matched.

Am I right in saying the NPRF now ISIF used to stand at around €70 Billion pre-bust?

Burning through the Nation's nest egg to pay wages doesn't seem like a sound investment to me. If your putting your hand in the till to cover day to day running expenses it would be prudent to look at the cost base! Oh wait... lets chuck in a pay rise of 500+ million for our public servants

Taxpayers must love paying high rates of PAYE, PRSI, USC, Water, Standing Charges on energy, Bin Charges, LPT etc. I'm sure adding it all up people probably don't realise how much the effective tax rate really is. God forbid you might decide to raise a family and have children... the next tax is optional thou mind and is called creche fees!

If you can't get any more money out of the taxpayer then its off to the bond markets to keep the show on the road.

frankbrett · 02-06-2015 11:16pm

Dr_Bill wrote: »

Am I right in saying the NPRF now ISIF used to stand at around €70 Billion pre-bust?

Burning through the Nation's nest egg to pay wages doesn't seem like a sound investment to me. If your putting your hand in the till to cover day to day running expenses it would be prudent to look at the cost base! Oh wait... lets chuck in a pay rise of 500+ million for our public servants

Taxpayers must love paying high rates of PAYE, PRSI, USC, Water, Standing Charges on energy, Bin Charges, LPT etc. I'm sure adding it all up people probably don't realise how much the effective tax rate really is. God forbid you might decide to raise a family and have children... the next tax is optional thou mind and is called creche fees!

If you can't get any more money out of the taxpayer then its off to the bond markets to keep the show on the road.

Nope. It was around €23bn pre crash and was worth around €21bn at the end of 2014

Bonds vs NPRF

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