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Canada should follow Norway’s example by taking natural resource revenues out of the hands of free-spending politicians and placing them into investments that can be used over the long-term, argues a report from Ottawa-based Macdonald-Laurier Institute.

Provincial governments across Canada are currently feeling the pinch as plummeting oil prices put a strain on budgets.

Read: Canada’s crude output growing

The federal government has taken the unusual step of delaying its budget. Alberta, after violently resisting for decades, even floated the idea of introducing a provincial sales tax. This volatility would not be nearly as pronounced if Canadian governments had followed Norway in establishing an investment fund, says Greg Poelzer, a University of Saskatchewan professor.

The paper makes the case that Canada should invest 100% of its natural resource revenue into sovereign wealth funds – a set of government-owned and managed investments sourced through resource-related taxes and royalties.

“As a country, we have been poor fiscal stewards of our natural resource wealth,” Poelzer writes.

“If Canada is to build stable, powerful and sustainable economies, and to secure our place as an energy and natural resource power globally, the federal government, the provinces and territories need to commit to building SWFs.”

Energy development also plays an important role in Norway but, in contrast to Canada, it has no plans to radically change its budget as a result of the oil crisis. In fact, it has a budgetary buffer of $8.5 billion.

Read: Low oil boosts emerging markets

The difference is that, 25 years ago, Norway created a sovereign wealth fund to capture its oil revenues and remove them from general government revenues. This takes away the temptation for free-spending politicians to use an ephemeral benefit – revenue from natural resources – to plug holes in government budgets brought on by swings in the economy or over-spending.

Norway’s example contrasts sharply with Alberta’s, Poelzer says. That province established a fund in the 1970s but declined to pay into it with the same zeal. The amount of contributions declined over time and were eventually stopped altogether in 1987.

Norway, on the other hand, deposits all of its revenue from the petroleum sector into the fund; none of it goes into general government revenue. The government is also only allowed to use a portion of the interest it earns on a yearly basis.

As a result, Norway’s fund is now worth $US890 billion. Alberta’s is worth only about $17 billion.

“Norway shows that governments blessed with petroleum resources can build modern, stable, and prosperous economies on the bedrock of oil and gas”, writes Poelzer.

Poelzer says these examples hold several lessons for Canada, including:

  • Building gradually over a few decades, the aim should be for 100% of non-renewable resource revenues to be committed to federal and territorial/provincial SWFs;
  • Governments should only use the interest and not touch the principal, otherwise governments will overspend, putting programs at even greater risk when resource commodity prices fall, as they always do.

Read: Canadian banks exposed to oil sector’s decline

Originally published on Advisor.ca

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