Even with the Heritage Fund, Alberta is dependent on oil revenues: Andrew Leach

Saving and spending is always political

Andrew Leach 1
Oil drum with Canadian money

(Cogal/Getty)

“I’m not dependent on my employment income this year because I save 30% of what I earn for the future.” That’s something you don’t hear very often, most likely because it doesn’t make sense. If you’re determined to save for the future, whether for a comfortable retirement, your children’s education, or for some other cause, a cut in your income today will make achieving your goals more difficult. In order to stay on track, you have to cut current spending to make up the shortfall.

Given a drop in income, some of you would cut your savings instead, choosing current spending over future goals. That’s fine—it’s your choice. It’s a choice we should also recognize that governments have, no matter what their source of revenue, and no matter how much they currently spend. Some governments will choose to prioritize savings, some governments will spend, and others will spend under the guise of savings—you’ll recognize this when they refer to spending as investment.

We hear all the time that Alberta should save more of its resource revenue for future generations, and many argue that doing so would make Alberta less dependent on resource revenues. I can certainly see why we should have a discussion about the first, but I can’t see how, given that discussion, that the second would be true. Certainly not in the short term; not even, perhaps, in the long term.

Suppose Alberta set a goal—they actually have—to increase the value of the Heritage Fund from its current value of $17 billion to $24 billion dollars in three years. In order to accomplish that goal, Alberta will have to spend (i.e. divert from general revenues) about $2 billion per year, assuming the fund earns a 5% annual return on equity and that all earnings are retained, regardless of what resource revenues are in the next three years. If they under-invest, they’ll fall short unless returns are higher than 5%. You might not think that goal is sufficiently aggressive, and that’s fine, but it’s fine for my purposes here, so I’ll run with it.

Alberta’s projected revenues for 2013-2014 were $38.6 billion. So if those projections come true, Alberta would have to devote about 5% of its total revenue from all sources to growing the Heritage Savings and Trust Fund in order to meet its goals. If all Albertans agreed that this was a top priority—the top priority, even—for government expenditures in the fiscal year, meeting the goal should not be a problem at all.

But of course that’s not the case: Governments in Alberta have put off savings for years, despite record government revenues. Increasing savings for the future draws on general revenues just like any expenditure—wanting to increase savings doesn’t decrease your dependence on resource revenues, it increases it.

What if Alberta had a more aggressive goal? What if the government committed to save $10 billion per year (equivalent to the average of the last 5 years’ of resource revenue) for future Albertans (whoever they may be)? Why would you immediately assume that this would leave Alberta less dependent on resource revenues than it is today? Unless you’re saying that saving for future generations is both immensely valuable and should be held as a lower priority than all other things, this savings plan would simply be another draw on government revenues and would be much more easily accomplished with high resource revenues than without. High revenues would make it easy to have savings for the future, lower taxes, and high current spending, while lower revenues would mean sacrificing higher priority items. To suggest that Alberta would be less dependent on resource revenues because they could easily forgo savings doesn’t make any sense as an argument for more savings.

Besides, we’ve already been down that road, and apparently we made the decision you expected us to make—we decided to forgo savings, and yet you still seem to think we’re too dependent on resource revenues.

Even if Alberta succeeded in building a large fund (we did have one—the Heritage Fund was, in 1987, equal in value to the entire government budget), we’d still have to make tradeoffs at the margin to avoid drawing down the fund to maintain spending (something Alberta has, as noted above, been unable or unwilling to do).

On what would current spending be based? Well, as in Norway, the government could draw revenue from the Fund and supplement that with resource revenue and other taxes. Even today, it’s worth noting that without oil revenues, Norway would face a significant budget deficit or would have to exceed its mandatory withdrawal limit from their fund. If Alberta had a fund today the size of Norway’s, and had the same withdrawal rules, the income from such a fund would reduce Alberta’s dependence on resource revenues as a share of government expenditures to about 13%—resource revenue would still be a major and volatile source of government revenues.

Savings and spending will always be a matter of priorities and politics, no matter where the revenues come from or how much has been spent or saved in the past. Governments will still have decide which activities or priorities deserve funding and which do not, and saving to build an endowment fund is no different. The sooner we realize that, the sooner we can have a more constructive conversation about what those priorities should be and what problems a higher savings rate would and would not solve.

One comment on “Even with the Heritage Fund, Alberta is dependent on oil revenues: Andrew Leach

  1. Pingback: Roundup: More concerns about the elections bill | Routine Proceedings

Leave a comment

Your email address will not be published. Required fields are marked *