Good on you, John Hamm.

Brian Lee Crowley

This piece was adapted for New Brunswick readers and appeared in the Moncton Times & Transcript. To read that version click here.

No one is more vocal than I in denouncing the pathological short-termism of politicians, so it is worth taking a moment to celebrate a politician who, given nearly a billion dollars, actually did the right thing with it.

No sooner had Nova Scotia and Newfoundland and Labrador struck their deal with Ottawa over offshore resources than the Nova Scotia premier made his announcement. The lump sum payment the province was to receive against future royalty entitlements was to go immediately against the more than $12-billion in provincial debt.

Lots of interest groups immediately protested nothing had been chosen from their shopping list of goodies. But all of these calls for new long-term spending commitments show just how hard it is for people to get their heads around natural resource royalty revenue, which is not like income or sales or excise taxes.

One way to see the difference is to think in terms of a private household. Suppose you own a nice little house, and you decide to sell in order to move into a better neighbourhoood. But before you find the new house you want, you get bedazzled by the big whack of cash the sale of your old home put in your hand. Suddenly you have visions of all the things you’ve deprived yourself of over the years being within your grasp.

You buy that new car, those new clothes, you take the cruise you’ve always wanted, you take your friends out to fancy dinners. You live high. For a while.

Then reality catches up to you. Your real income can’t support this extravagance, which has only been made possible because you’ve been spending your assets. Now not only can you not afford to keep the new car and your fancy lifestyle, but your standard of living will be lower than it was before, because you no longer have the capital to invest in the new house, and you have to go back to renting. In other words, spending that has to be repeated year after year after year, like mortgages, groceries and the like, should only be paid out of streams of income that are also repeated year after year, like wages or interest on investments.

That’s the difference between assets and income. The assets generate income. But if you spend the assets on ordinary consumption, both the asset and the income it could generate, get used up.

For governments, income and sales and similar taxes are those infinitely repeatable items of income. As long as taxpayers keep working and buying stuff, government will be able to pay for ordinary public services by taking a slice off the top of that activity.

Natural resource revenue is not the same. Royalties from the offshore represent the one-time sale of precious limited assets, and it is vital that we treat them as such.

There are two basic ways that can be done. We can set the cash from the asset sales aside and invest it to produce income, as Alberta has done with its Heritage Fund. Or we can use it to retire debt, as Alberta has also done and John Hamm now proposes that Nova Scotia do as well. Economically, these are pretty equivalent alternatives. Politically, however, they are quite different.

The chief difference is in the kinds of spoils they produce. If John Hamm put the new money in a provincial legacy fund, the immediate result would be a battle royal over how to invest the money. We all know that every politician’s pet scheme is transformed by the alchemy of desire from mere venal “spending” into a noble “investment” in our future. But if I sell the house to buy the groceries I will soon have neither shelter nor food, no matter how much I call my lunch an “investment” in the person I will be tomorrow.

But if the money is used to retire debt, the money is gone. There is no capital to fight over, no need to agree on what is mere consumption and what is genuine investment. The only thing to fight over is the money that is freed up because it no longer must be spent on interest payments.

In the present case, the $830-million in debt that Dr. Hamm has decided to pay off consumes about $50-million in interest payments every year. That may not sound like much, but over 20 years, that’s a billion dollars in public services or tax cuts or further debt reduction. And whatever we decide to do with that money is sustainable, because that money will be available year after year. All because John Hamm can tell the difference between income and capital, and has the courage to act on that knowledge.

Brian Lee Crowley is president of the Atlantic Institute for Market Studies (www.aims.ca), a public policy think tank in Halifax. E-mail: brianleecrowley@aims.ca.