Atlantic Canada can learn a thing or two from Alberta

Lessons from Alberta’s experience with natural resource revenue

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By Robert Roach
Jeff Collins
and Marco Navarro-Genie
Atlantic Institute for Market Studies

CALGARY, AB, and HALIFAX, NS Jun 10, 2015/ Troy Media/ – The recent drop in oil prices is an opportunity in disguise for Newfoundland and Labrador (and Atlantic Canada more generally). It’s an opportunity to step out of the intoxicating smoke of provincial resource revenue and say: “What on earth were we thinking by spending all our oil revenue as fast it flowed in! Let’s get off this rollercoaster and transform our oil resources into a permanent financial asset that will pay off in perpetuity.”

The short-term pain this will cause will be more than worth it for three main reasons: It will address the problems created by the volatility of resource revenue, increase the value of the asset over time and guarantee that the benefits provided by selling-off natural resources are enjoyed for decades to come.

Atlantic Canada needs to start saving

When oil prices are high you have large surpluses that are difficult to spend wisely on the fly. When prices are low, you have a budget hole that has to be rapidly filled by a haphazard combination of debt, cuts or higher taxes. This encourages overspending in good years and underspending in bad. It also undermines accountability as windfall cash is used to plug rather than properly repair holes in the ship of state.

atlantic canada
Alberta’s Heritage Fund is an example to Atlantic Canada of the power of saving

Putting the revenue in a fund and only spending the interest (after inflation-proofing the principal) does not eliminate volatility as the fund’s earnings will still fluctuate over time, but a well-managed fund’s earnings will be much less volatile than annual resource revenue.

A fund also allows you to get more bang for your resource dollar by growing that dollar through sound investments. The money is put to work so it can grow in value and generate returns that can be used to fund programs or reduce taxes in perpetuity.

If you decide to save less than 100 per cent, you get some of the benefits of saving but you don’t maximize them. What’s worse is that you remain addicted to the volatile revenue that you don’t divert into the fund.

In addition, diverting resource revenue into a fund is the only way to guarantee that future residents benefit appropriately from the sell-off of the province’s natural resource endowment.

It’s a simple principle: current spending should be paid for by current residents. But what about infrastructure that is used by future residents and investing in education today so we have the skilled workers we need tomorrow? Since future residents benefit from these things, they should help pay for them through the use of today’s resource revenue and “smart” debt. This would make sense if these were exceptional one-time expenses akin to a family taking out a mortgage to buy a home, but infrastructure and education are routine annual government expenditures. Using the future’s portion of our resource endowment to pay for them just means that future residents won’t have that portion when it’s their turn to fund annual infrastructure and education costs.

Alberta’s Heritage Fund is an example of the power of saving. Slightly less than $18 billion in deposits and retained earnings have generated $35.5 billion of investment income and the fund will keep generating billions in perpetuity. This shows what can happen when you convert unstable resource revenue into an income-generating financial asset.

Feel the pain or reap the gain

The kicker is that it will take a number of years to build a fund to a size where its earnings are equal to or greater than the resource revenue that has been flowing in and out of government coffers on an annual basis.

A government that decides to make the switch, even if it phased it in over several years, would have to vastly improve the efficiency of the public sector (a worthy goal on its own), cut programs or temporarily raise taxes.

Newfoundlanders (and Atlantic Canadians anywhere resources are yield provincial government revenue) need to decide if they want to feel the pain now so they can reap benefits later or stay on the resource revenue rollercoaster and let the next generation pay the bill.

Robert Roach, Jeff Collins, and Marco Navarro-Genie are, respectively, Senior Fellow, Research Associate, and President at the Atlantic Institute for Market Studies (AIMS.ca). They are co-authors of the recently-released policy paper A Good Problem to Have: Lessons for Atlantic Canada from Alberta’s Experience with Natural Resource Revenue.

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