Learn from Alberta’s mistake

Provinces should save resources.

As they put together their 2013 budgets, the Canadian and Alberta governments complained mightily that lower-than-expected commodity prices were forcing them to make tough choices between spending and deficit reduction. Yet they wouldn’t be in this fix if they weren’t counting on volatile resource revenues to fund their spending plans in the first place.

What both governments should do instead—what every province in Canada should consider—is follow the lead of our global peers and treat non-renewable resource revenue as capital to be saved and invested, rather than income to be spent. In other words: establish sovereign wealth funds.

There have been feeble attempts to do this in Alberta and Quebec. British Columbia looks set to join them if the Liberal government lasts and follows through on its budget promise to set up a Prosperity Fund for natural gas revenues. And the Northwest Territories has put a structure in place for its own Heritage Fund. Yet every government in Canada that collects significant revenues from oil, gas or minerals—in other words, nearly all of them—should have such a fund. And those that exist should be implemented with a great deal more rigour. This was, in fact, one of the International Monetary Fund’s recommendations in its latest review of the Canadian economy.

Why is this a good idea? If done right—which means sticking to commitments to put money in, investing it wisely and resisting temptation to raid the fund—this use of non-renewable resource revenues fulfills at least three important purposes: it ensures that future generations will benefit; it stabilizes government revenues; and it dampens the impact commodity price movements have on a currency (when fund assets are invested abroad) and on wage and price inflation (when assets are invested in neighbouring provinces or countries).

This isn’t a new idea. Kuwait used its petroleum revenues to set up a sovereign wealth fund in 1953. There are now about 45 such resource-backed funds around the world, and more are being created all the time.

Norway sets the gold standard. Since 1996, it has put almost all of its revenues from oil and gas into a separate savings fund, drawing only on the income for government spending. Its fund is now worth more than $600 billion. Alberta, which started its fund 20 years earlier, has a mere $16 billion set aside because it quickly lost the will to make regular deposits. Quebec, which began in only 2006, has saved even less.

There are four main objections to such schemes. We need the money now. We should pay down debt first. Future generations already benefit from current spending on education and health. And, politicians are never able to resist temptation and will surely raid the fund. These are valid objections, but none is insurmountable. True, setting revenues aside is not an attractive idea at a time of deficits and debt. The solution is to do it gradually, setting out a time frame for putting an increasing share of resource revenues into a fund. Norway, for instance, set up its resource fund in 1990, but only made the first deposit in 1996. Political temptation can be curtailed by erecting sturdy barriers against raids. The Canadian Pension Plan Investment Board, which has never been raided, can serve as a model.

Political horizons rarely stretch beyond the next election, which makes spending more attractive than saving. Still, the moves by the Northwest Territories and B.C. indicate that change may be in the wind. What’s required now is for other governments that collect non-renewable resource revenues—think of potash in Saskatchewan, oil and gas in Newfoundland and Labrador, and the multiple mining riches of Ontario—to get on board.

If they so choose, our governments could get off the roller coaster of commodity booms and busts. A new commitment to saving the proceeds of Canada’s natural resource riches stands the best chance of ending what has become an increasingly hair-raising ride.

Madelaine Drohan is the author of the Canadian International Council’s report The 9 Habits of Highly Effective Resource Economies: Lessons for Canada, and a Canadian correspondent for The Economist.