By Brian Lee Crowley
NON-RENEWABLE “natural resource revenues are non-reliable revenues” and “Natural resource wealth doesn’t belong just to this generation. It belongs to our children and our children’s children.”
These are the two key messages delivered by former Alberta treasurer Jim Dinning at a recent speech in Halifax. And because we are all quick to assume that natural resource revenues are a boon, not a daunting challenge, there is a lot of value in thinking quite carefully about Mr. Dinning’s messages.
Dinning is somebody who knows all about natural resources and the revenues – and problems – they create for governments. He was the provincial treasurer in the early days of the Ralph Klein government. He masterminded the plan to bring provincial revenues and spending into line, and put the province’s surpluses into paying down debt. In so doing, the province has freed up many millions of dollars in tax money that used to go every year to interest payments. That money is now available for spending on roads and hospitals, schools and police.
But it wasn’t always like that. In fact, the Klein government was elected in large part to fix the fiscal mess left by Klein’s predecessor, Don Getty, and his government. Life under the Getty government looked a lot like life under John Buchanan in Nova Scotia. Cockamamie schemes to have the province invest in business ventures abounded, with the usual disastrous results. The province spent like a drunken sailor, with no regard for where the revenues would come from to support it. As a result, in a few short years the province, the wealthiest in the country, built up substantial debt.
Klein and Dinning wrestled public spending into shape, but only at the cost of a lot of pain in cut programs and jobs in the public sector. In doing so, they were helped by a surge in natural resource revenues. In fact, revenues were so high that Albertans began to dream of the possibility of eventually eliminating their provincial income tax.
But then reality bit them. Those non-renewable resource revenues again proved to be non-reliable. The provincial budget last year, for instance, was based on projections of natural gas at $5 per thousand cubic feet. It fell to around $2. Each drop of just 10 cents meant a reduction of $142 million in provincial revenues.
That’s why Dinning emphasized over and over that the biggest risk in managing resource wealth is treating the money as if it is a reliable and stable revenue stream that will last forever. It isn’t. And yet the big income jumps in good years create huge expectations in the population and within the government. That’s why he warned that Alberta’s experience has been that revenue creates spending.
And it can create a particularly dangerous kind of spending. A rise in natural resource royalties is no foundation for ongoing spending programs. If you make a commitment this year to hire civil servants and promise people money year after year for new programs, those commitments stand even when the resource revenues dives – unless you make painful and disruptive spending cuts.
What’s the solution, given that Nova Scotia will be looking at hundreds of millions of dollars in natural gas royalties over the next decade or so?
Most important, we should not think of those revenues as ordinary ones. They are not like income or sales or fuel taxes. Royalties are what we get when we sell our natural capital endowment. Just as you get cash when you sell your house or your business, we get cash when we sell our natural resources. But just as you wouldn’t use the proceeds of the sale of your house to buy the groceries or a new dress, we shouldn’t squander our capital on ordinary spending. We must invest that money, so as to put it to work for all Nova Scotians, not just today, but across the generations. The gas we are pulling out of the ground belongs to all of them, and not merely the Nova Scotians alive today.
Jim Dinning invited Nova Scotians to think about how to create a legacy for future generations, as his province did with its Heritage Fund. The Hamm government announced, in its recent energy strategy paper, the creation of such a fund, but we have no details yet about how much royalty revenue should go into that fund. My view is that we should put 100 per cent of the royalties in the fund, and only spend the income that the fund generates. That way, we can smooth out the ups and downs of natural resource revenues, build up some capital assets to balance against our huge debt, and create a legacy that will be conferring benefits on our children and grandchildren long after we are gone. It’s the right thing to do.
Brian Lee Crowley is president of the Atlantic Institute for Market Studies, a public policy think tank in Halifax. E-mail: email@example.com