Two new reports are calling on Ottawa and the provinces grappling with oil-related revenue shortfalls to look to Norway for a better way to handle their finances. Provinces would be wise to follow the Scandinavian country’s lead and sock away their resources revenue to help cushion the blow the next time oil prices slide, the reports suggested.
The Macdonald-Laurier Institute released a report Thursday arguing that the creation of so-called “sovereign wealth funds” would take money out of the hands of politicians interested in spending in the short-term and instead place it into long-term investments. The funds are government-owned and managed, but kept separate from other reserves. They would keep generating returns on investment even after a non-renewable resources dries up.
Alberta is not contributing to a decades-old fund and B.C. is the only other province to float the idea. The federal government has also dismissed the creation of a sovereign wealth fund.
The idea of a sovereign wealth fund — the type that has made every Norwegian a theoretical millionaire — has received renewed interest in the past few months as Canadians take in the economic damage caused by a huge slide in the price of oil.
The federal government has taken the unusual step of delaying its budget announcement as it scrambles to balance the books despite the toll the slumping oil price is taking on its finances. The price of a barrel of oil has hovered between $50 and $60 a barrel in recent weeks, about half as much as it was worth during the summer months.
The Alberta government, mired in debt, has floated the idea of introducing a provincial sales tax after decades of vehement opposition.
The report's author Greg Poelzer, a professor at the University of Saskatchewan, says the impact of oil price volatility in places like Alberta would have been mitigated if the province had invested its revenue from taxes and resource royalties the way Norway has. The country, which deposits 100 per cent of its revenue from the oil sector into its fund, worth $905 billion.
“As a country, we have been poor fiscal stewards of our natural resource wealth,” he said.
“Norway shows that governments blessed with petroleum resources can build modern, stable, and prosperous economies on the bedrock of oil and gas.”
Poelzer says governments should learn from Alberta’s mismanagement of oil money.
In 1976, the province established the Alberta Heritage Trust Fund, which started off with significant contributions that have tapered off and the fund’s totals have stagnated at about $17 billion as it also draws from it for short-term expenses. If the government had followed the Norwegian model, the fund would have grown to about ten times that figure, he suggests.
A separate report issued Thursday by B.C.-based Resource Works concluded that it is time for the provincial government to have serious discussions about how best to set up and utilize a sovereign wealth fund.
In 2013, Premier Christy Clark created the BC Prosperity Fund using potential future revenues from liquified natural gas, but the province has done little work on implementing it.
“Essentially, by collecting, saving and reinvesting a portion of the government’s revenue from resources, it transforms a non-renewable natural resource into a renewable financial resource,” the report argues.
“It smoothes out the bumps in boom-and-bust resource cycles and creates government cash-flow that will keep going even if the natural resource used to build the fund expires.”
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