Why Save?(and other questions)

  Stuart Landon

 Department of Economics

University of Alberta

Rationales for saving resource revenues: 

• Stabilization of expenditures

• Intergenerational equity 

Stabilization

• Resource revenue volatility anduncertainty often leads toexpenditure volatility.

  • Expenditure volatility has economicand social costs.

• Create rainy day/stabilization fund.

• Contribute to the fund whenrevenues are high and withdrawwhen revenues are low (rainy day).

Goal: Smooth government spendingthrough time.

Question #1:

  How do we know how much to save fora rainy day?

How do we know when it is a rainyday?

Intergenerational Equity

• Natural resources are finite

• Save resource revenue today soservices can be provided to futuregenerations after the resource isdepleted.

Goal: Smooth expenditures over time.

Question #2:

  Does Alberta need separate saving andstabilization funds?

Norway uses one fund for both purposes.

Savings and stabilization funds havea similar purpose – smooth government expenditures over time.

A savings fund can stabilize revenue if:

• Deposit a portion of volatile resourcerevenues in the fund.

• Contribute a portion of the assets inthe fund to general revenues eachyear.

Question #3:

  How large a fund?

The required amount of savings depends on the future path of resourcerevenues.

Two extremes:

• The resource runs out tomorrow – save all resource revenue.

• Resource revenues stay constantforever – no need to save.

Other factors that justify greater saving:

• Known future expenditure increase(baby boomer health spending)

• Risk of a future significant reduction in resource revenues

Question #4:

Should the Government set a nominaldollar savings target, such as $100billion?

Norway solution:

Specify a percentage of resourcerevenues to save each year and apercentage of assets to withdraw.

Question #5:

  What percentage of resource revenuesshould be saved? 100%?

Simple example:

• Resource revenues are constant for 30years and then end.

• Real interest rate = 3%

• Savings rate of 40% during the first 30 years will support constantexpenditure forever.

 

Saving 100% of resource revenues is probably too much.

This would impose a high cost on the current generation.

A cautionary note:

• Large funds can be negated bygovernment borrowing against theassets in the fund.

• Must combine saving withexpenditure discipline.

Question #6:

  Does the rationale for saving constrainthe investment strategy?

Question #7:

Why save?

When and how will the funds be used?

END