Thursday, November 14, 2013

On legacies

Peter MacKinnon's report (PDF) on the possibilities for a Saskatchewan heritage fund is well worth a read. And I'll readily agree with the central premise that it's well worth setting up such a fund to turn one-time resource revenues into long-term benefits.

But it is worth noting that MacKinnon's proposed rule of thumb for deposits into a fund leave a couple of glaring loopholes which may undermine the fund in the long run:
2. Cap Reliance on Non-renewable Resource Revenues

The Government of Saskatchewan establish a cap on reliance on non-renewable resource revenues for all purposes other than deposits in the Futures Fund. This can be done by freezing the use of non-renewable resource revenues in the budget at the average of the five previous provincial budgets (2009 to 2014), which is approximately 26 per cent (See Chart 2).
This cap would stipulate that government’s use of non-renewable resource revenue beyond 2014 would not make up more than 26 per cent of the provincial budget, thereby maintaining our use of these revenues at current levels. All non-renewable resource revenues in excess of this cap shall be committed in accordance with recommendation 10.
So what's wrong with applying the average level of resource revenues from past budgets as the standard for future ones? Let's look at two loopholes in such a plan, and how they affect the overarching goal of turning current resource extraction into future income.

First, the threshold leaves the door wide open for a government to simply decide to reduce its resource income through yet another set of corporate giveaways.

As long as resources are extracted without the government actually bringing in any corresponding royalty revenue, MacKinnon's standard would see no basis for any deposit to the Futures Fund. And particularly when our current government has been perfectly happy to gift resource extractors hundreds of millions of dollars in would-be royalty payments, there's plenty of reason to worry we'd simply see royalties slashed and corporate tax credits expanded to funnel money away from a fund and toward the Sask Party's backers.

Second, the threshold limits any discussion of budget impacts to the present year. Once again, that only figures to exacerbate some of the Sask Party's warped decision-making patterns: it allows for any number of P3s and other schemes to kick the can down the road, enabling a government to commit to an unlimited amount of future spending (which might dwarf the amount of money saved in the fund) while letting some later government deal with the budgetary fallout.

Fortunately, both of those issues can be solved relatively simply - by setting a deposit floor based on a percentage of the value of the resources extracted in a particular year (effectively forcing the government of the day to ensure royalty rates are at a sufficient level to meet that standard), and by counting future spending streams as part of the size of the budget in defining the cap. But without those changes, a fund might only encourage the Sask Party to continue with its worst habits - and wouldn't figure to save anything at all for the long run.

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