Learn from Alberta’s mistake – by Madelaine Drohan (Canadian Business Magazine – March 18, 2013)

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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.

For the rest of this column, click here: http://www.canadianbusiness.com/economy/learn-from-albertas-mistake/