Writing in the Saskatoon StarPhoenix, Macdonald-Laurier Institute author Greg Poelzer MLIPoelzerCommentaryRotatingWebsitemage02-15WebReadysays that provincial governments should spend the revenue they earn from natural resources on long-term sovereign wealth funds rather than ephemeral provincial budgets.

“The sirens of energy resources, it seems, have once again seduced governments with the promise of brimming coffers, only to cruelly draw them onto the rocks of falling oil prices”, writes Poelzer.

Poelzer is the author of the MLI paper What Crisis? Global lessons from Norway for managing energy-based economies”.

By Greg Poelzer, Feb. 20, 2015

To say the rapid drop in oil prices has sent shock waves across the global economy might be the understatement of 2015. Only a few months ago, Canada was touting its aspirations and capacity to become an energy superpower. Today, the federal government and oil-producing provinces that include Saskatchewan and Alberta are urgently dealing with unanticipated budget deficits.

In January, Finance Minister Joe Oliver announced that the federal government would postpone its budget by at least two months - a move that is almost without precedent. In Alberta, the engine room of Canada's emerging energy superpower ambitions, Premier Jim Prentice warned of spending cuts of nine per cent in the upcoming budget.

Saskatchewan is tightening its belt, with Premier Brad Wall announcing wage freezes for politicians and senior bureaucrats and warning of funding cuts to municipal governments.

Around the world, the impact is even more severe. For example, Russia's geopolitical resurgence, fuelled by high oil prices, is now stalled and the country is reeling from a massively devalued ruble. Oil and gas make up more than 50 per cent of the revenues in Russia's federal budget.

The sirens of energy resources, it seems, have once again seduced governments with the promise of brimming coffers, only to cruelly draw them onto the rocks of falling oil prices.

Across the Atlantic, however, Norway tells a radically different story. There, the drop in oil prices is a cause for prudent concern, not panic, even though oil accounts for 25 per cent of the Norwegian economy, the same as Alberta. Norway, moreover, has no plans to radically change its forecast budget and it even has a budgetary buffer of $8.5 billion should things get worse - an amount similar to the $7-billion to $10-billion shortfall Alberta could be facing.

The difference between Norway and most other oil-producing countries is 25 years ago it had the wisdom to establish a sovereign wealth fund - the Government Pension Fund-Global (GPF-G) - to capture its oil revenues and take these out of the economy.

The revenue for the GPFG comes primarily from taxation on the petroleum sector, as well as the dividends from the governmentowned Statoil. None of the oil revenue goes directly into government budget revenues; 100 per cent goes into the fund.

As a consequence, the fund now stands in excess of $1 trillion. Only the real return (interest minus inflation) from the fund, currently estimated at four per cent, can be used for non-petroleum national government budget deficits.

The GPF-G plays a critical role in ensuring stability in Norwegian government budgets, reducing the risk of turmoil due to boom and bust cycles of energy commodity markets. The fund also dampens the ability of governments to make large, politically expedient expenditures that may not be in the long-term interest of the country.

Premier Wall has demonstrated acumen in managing the province's debt and vision in commissioning the MacKinnon report on a Saskatchewan savings fund. The debate is whether to invest in a sovereign wealth fund today or to start only after the debt is retired.

In our own households, we face the same choice: invest in RRSPs or pay off our mortgage? We do both. So should Saskatchewan. The province could put an incremental one-20th of resource royalties into a fund each year and achieve 100 per cent investment of resource wealth - like Norway - within 20 years. The current shock wave caused by the fall in oil prices is a wake-up call to change policy course.

Saskatchewan can and should build a modern economy using its oil, potash, and uranium as critical foundations. But such efforts will only be successful if Saskatchewan makes a fundamental policy choice.

As Norway has shown the world, prudent fiscal policy, especially creating a sovereign wealth fund to manage earnings from non-renewable resources, is necessary to ensure a much more stable, dynamic and wealthier resource-based economy.

Greg Poelzer is founding director and executive chair of the University of Saskatchewan International Centre for Northern Governance and Development. He is the author of the recent Macdonald-Laurier Institute report, What Crisis? Global Lessons from Norway in Managing Energy Based Economies.