by melville mcmillan department of economics university of alberta for

1Department of Economics Institute for Public Economics

A Government’s Natural Resource Revenue Quandary?

orWhatever Happened to Alberta’s Heritage

Savings Trust Fund?by

Melville McMillanDepartment of Economics

University of Alberta

for32nd USAEE/IAEE Conference

Anchorage, AlaskaJuly 28-August 31, 2013


Some governments receive significant non-renewable natural resource

revenues (NRRs).

If so, the quandary is

Spend all -------------------------- Save all

or, how determine the optimal balance?And, how address NRR volatility?

?


Alberta faced this problem in the early 1970s

Established the Alberta Heritage Savings Trust Fund (AHSTF) in 1976• 30% of NRRs allocated to the AHSTF• Investments in three divisions

i) Alberta Investment Division ii) Capital Investment Division iii) Canada Investment Division

• Multi-purpose


1972-73

1974-75

1976-77

1978-79

1980-81

1982-83

1984-85

1986-87

1988-89

1990-91

1992-93

1994-95

1996-97

1998-99

2000-01

2002-03

2004-05

2006-07

2008-09

2010-11

2012-13

-5000

0

5000

10000

15000

20000 NRR updated

Contributions to HSTF

Inflation Proofing Re-tentions to HSTF

Sustainability (& Capital) Fund

Contributions to Other En-dowment Funds

Mill

ions

of (

nom

inal

) Dol

lars

Figure 1. Alberta's Natural Resource Revenues and

Savings from Those Revenues, 1972-73 to 2012-13

HSTF established and received ini-tial contributions

Inflation proofing of HSTF be-gan in 1996 (periodically)Occasional endowments Sustainability Fund estab-lished 2002-03


1972-73

1974-75

1976-77

1978-79

1980-81

1982-83

1984-85

1986-87

1988-89

1990-91

1992-93

1994-95

1996-97

1998-99

2000-01

2002-03

2004-05

2006-07

2008-09

2010-11

2012-13

-4000

-2000

0

2000

4000

6000

8000

10000

12000

14000

16000

NRR

Total NRR Sav-ings

Mill

ions

of (

nom

inal

) Dol

lars

Figure 2. Alberta's Natural Resource Revenues and Total Savings from Those Revenues, 1972-73 to 2012-

13


Major Savings Funds year established April 2013 value

AHSTF 1976 $16,800 millionAHFMR (medical research) 1980 1,436AHS (scholarships) 1980 820AHSEREF(science & engineering) 2000 826ACL (cancer research) 2006 500

______________________

$20,382 million


And there is theestablished in April 2013 value

Sustainability Fund 2002 $2,774 (millions)

• down from $16,800 in 2008-09• forecast to be $691 in 2013-14

Aside AIMCO – the Alberta Investment Management

Company (2008)


1972-73

1974-75

1976-77

1978-79

1980-81

1982-83

1984-85

1986-87

1988-89

1990-91

1992-93

1994-95

1996-97

1998-99

2000-01

2002-03

2004-05

2006-07

2008-09

2010-11

2012-130

50

100

150

200

250

NRR Ag-gregated

NRR Saving Aggre-gated

Billi

oins

of (

nom

inal

) Dol

lars

Cumulative NRRs and Savings from NRRs: Alberta, 1972-73 to 2012-13

At end of 2012-13, NRR Savings = 11.8% of cumulative NRR Net Financial Assets = 9.9% of NRRs


1972-73

1974-75

1976-77

1978-79

1980-81

1982-83

1984-85

1986-87

1988-89

1990-91

1992-93

1994-95

1996-97

1998-99

2000-01

2002-03

2004-05

2006-07

2008-09

2010-11

2012-13

-20

-10

0

10

20

30

40

50

NRR (annual)

Net fi-nancial assets (debt)

Billi

ons o

f (no

min

al) D

olla

rsFigure 3. Alberta's Net Financial As-

sets (and NRRs)

Saving, Dissaving and Debt too!


Alberta has also made ad hoc cash disbursements:• Energy Tax Refund (2000 and 2001)

$300(total)/person 16+ at a cost of $690 million

• Resource Rebate (2006)$400 per capita (all ages) at a cost of $1,320 million

And,• Subsidized natural gas

from 2000 to 2009 at a cost of $3.7 billion


So, there has been a diverse use of NRRs• Government operating and capital expenditures

(and tax relief)

• Savings • Endowments• Rainy day fund

• Repay debt

• Direct subsidies

• Cash disbursements to citizens


What has happened to the AHSTF?

1976-77

1978-79

1980-81

1982-83

1984-85

1986-87

1988-89

1990-91

1992-93

1994-95

1996-97

1998-99

2000-01

2002-03

2004-05

2006-07

2008-09

2010-11

2012-130

2000

4000

6000

8000

10000

12000

Real

(201

2) D

olla

rs P

er C

apita

Figure 4. Real Per Capita Value of the AH-STF: 2012 Dollars, 1976-77 to 2012-13

Less than 1976-77 value

Withered to one-third of peak (real per capita) value.


1982-83

1983-84

1984-85

1985-86

1986-87

1987-88

1988-89

1989-90

1990-91

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

-10

-5

0

5

10

15

Net In-come of AHSTF

Transfers to Gen-eral Rev-enues

Perc

enta

geFigure 5. Net Income of the AHSTF and Trans-fers to General Revenues as a Percentage of Pro-vincial Program Expenditures, 1982-83 to 2012-

13

About 3%

About 10%


2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-1305

1015202530354045

Total Rev-enues

NRRs

Sust. FundBi

llion

s of D

olla

rs

Figure 6. Revenue Trends and the Sustainability Fund Balance, 2002-03 to 2012-13

What’s Happening to the Sustainability Fund?

Using in the bad times and the good?


1972-73

1974-75

1976-77

1978-79

1980-81

1982-83

1984-85

1986-87

1988-89

1990-91

1992-93

1994-95

1996-97

1998-99

2000-01

2002-03

2004-05

2006-07

2008-09

2010-11

2012-130

5

10

15

20

25

30

35

40

NRRs

Program Expendi-tures

Perc

enta

ge

Figure 9. Alberta's NRRs and Program Expenditures as a Percentage of Personal Income

1972-73 to 2012-13

The Magnitude of NRRs in Alberta’s Public Finances


1981-82

1982-83

1983-84

1984-85

1985-86

1986-87

1987-88

1988-89

1989-90

1990-91

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

2012-130

5

10

15

20

25

30

35

40

Program Expendi-ture

Non-NRRs Own Source Revenue

Perc

enta

ge

Figure 14. Alberta's Program Expenditure and Non-NRRs Own Revenues as a Percentage of Personal In-

comes, 1981-82 to 2012-13

Very large expenditures, Low taxes

Adjust-ment

Comparable expendi-tures,

Even lower taxes

The Changing Role of NRRs in Alberta’s Public Finances


1981-82

1982-83

1983-84

1984-85

1985-86

1986-87

1987-88

1988-89

1989-90

1990-91

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-120

5

10

15

20

25

30

35

40

ABProv Av

Perc

enta

geFigure 12. Program Expenditures

as a Percentage of Personal Incomes: Alberta and Provincial Average


Thoughts on the Utilization of NRRsFrom Outside the Provincial Government

• Dividends: Courchene & Melvin (1980), McMillan & Norrie (1980), Warrack (2007)

• Pension: McMillan (2002)

• Canada West Foundation (2005, 2006, 2007) – save 50% and a range of suggestions for expenditure/uses

• Fixed Deposit-Fixed Withdrawal Stabilization Fund: Landon & Smith (2010, 2013a, 2013b)

(50% of annual NRRs deposited, 25% of assets withdrawn annually)


Thoughts (continued)…

Provincial Government Initiated

• The 1996 AHSTF reforms: To a financial investment fund

• Financial Management Commission (2002): the Sustainability Fund (and Capital Account)

• Financial Investment and Planning Advisory Commission (2008) – increase savings ($100 million by 2030)

• Premier’s Council for Economic Strategy (2011)-- increase savings, transformative investments


And,

• Budget 2013 (plan):

• Restore $5 billion balance to the Contingency Account/Sustainability Fund

• AHSTF retain all (net) investment income (by 2015-16)

• Deposit up to 50% of NRRs in the AHSTF (5%-50% depending on the level of NRRs)

But, the purpose of the additional savings in the AHSTF is yet to be specified.


Obviously, after 40 years,

Alberta’s NRR utilization policy

remains a work in progress.


Thank you.

by melville mcmillan department of economics university of alberta for

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