CALGARY, Oct. 28, 2014 /CNW/ - Albertans have long known that their provincial government has shown a lack of discipline when it comes to investing royalty revenues into the Heritage Savings Trust Fund. Meanwhile, Norway has built a massive fund that pays for almost all social services. What went wrong? And is it too late to be fixed?
Those are the questions asked and answered by a ground-breaking new report released today by The School of Public Policy. Authors, Ton van den Bremer and Rick van der Ploeg of Oxford University take a hard look at the state of Alberta's savings. While Alberta's fund was established in the mid-1970s, more than a decade before Norway began its national savings program, the Norwegian fund was worth more than $900 billion as of the beginning of 2014 - Alberta's is worth only $15 billion today. Many economists, politicians and pundits have long pointed to Norway as the model for Alberta to follow, but the authors argue this would be the wrong approach for Alberta. Indeed, the authors argue that the right plan could put Alberta in even better shape for the future, than Norway.
Norway deposits all resource revenue into its fund, which then distributes an annual dividend to the government of four per cent of the fund's wealth. As the fund grows, so too does the dividend. Yet, as wealth is converted from oil to cash and investments, the oil becomes gradually but inevitably depleted. At some point, all of Norway's oil wealth will have been converted into cash, and the dividend will fall. A more sustainable approach, that Alberta should pursue, is where the dividend is a falling proportion of fund assets. In other words, the province should calculate a dividend that is a fraction not just of the size of the financial fund, but a constant fraction of total wealth — the value of the resources in the ground asset portfolio. This way, the dividend grows in line with GDP.
Of course, this presumes real savings of revenue by government. The authors argue that a feasible amount for Alberta to save is 30 per cent of revenue. With that, the province will be able to build the fund so that it is worth the equivalent of 40 per cent of provincial GDP by 2030, 100 per cent by 2050, and 165 per cent in 2100. Within just 16 years, the Heritage Fund would be worth $200 billion — more than thirteen times its current size.
The plan requires the Alberta government to finally get serious about preparing itself to preserve wealth for future generations through the use of disciplined and meaningful investment in the resource fund. That also means that the fund should not be used as a source of capital investment. The authors conclude by arguing that Albertans need to insist that their government commit to a strategic plan for investing its oil revenue.
Video with caption: "Fixing the Way Alberta Budgets". Video available at: http://stream1.newswire.ca/cgi-bin/playback.cgi?file=20141028_C2051_VIDEO_EN_7226.mp4&posterurl=http%3A%2F%2Fphotos.newswire.ca%2Fimages%2F20141028_C2051_VIDEO_EN_7226.jpg&order=1&jdd=20141028&cnum=C2051
SOURCE: The School of Public Policy - University of Calgary
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