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.

Friday Morning Links

Assorted content to end your week.

- Jeffrey Simpson marks Peter Lougheed's passing by discussing what he brought to Alberta's political scene that's been sorely lacking ever since:

Mr. Lougheed, defending Alberta’s jurisdictional turf in conflicts with Liberal and Conservative governments in Ottawa, navigated his province through these shoals. The shame of his successors is that they took two of his cardinal convictions and discarded them in the rush for quick spoils and easy money – that natural resource revenues belong to the people and should be developed in a measured, balanced fashion, and that considerable money from those resources should be husbanded in a Heritage Fund for future generations.
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Mr. Lougheed governed not as an ideological opponent of the state – the red meat of modern-day conservative thinking – but as its ally. The state, he believed, was the people’s friend, which is what Tories tend to believe. And he used the state aggressively, perhaps in a few cases too aggressively, to buy an airline and make public investments, help the early oil-sands industry get its legs, create the Heritage Fund, build new social programs – all the while believing in the free-enterprise system as the best wealth-creation generator. He used the state aggressively, when necessary, against what he saw could be invidious practices of the oil and gas industry, for which he was banned from the Petroleum Club.

Put simply, Mr. Lougheed always understood the importance of the industry for Alberta, but he never directly equated its interests with the wider interests of Alberta.

 - Tim Harper makes the case as to why the Cons should have plenty to answer for in cutting off all diplomatic ties with Iran:

Those who argue that leaving Tehran is a matter of principle, miss the point that we have eyes and ears on the ground, not on principle, but to promote our point of view and our sovereign interests.

Those who would argue that Tehran wasn’t listening to us anyway, miss the point that we should still have Canadian eyes on the ground to bear witness. Waving the white flag, taking our ball and going home, is hardly the high road.
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Largely unheralded, they do not remain in dangerous environments because they are welcomed but because they subscribe to the well-worn dictum that you hold your friends close, but you hold your enemies closer.

We have kept embassies open during wars. We did not shut down during the darkest days of the Cold War.
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Harper is correct that our diplomats are not soldiers, but often they are the next closest thing.

He owes it to the foreign service, allies and Canadian voters to give us a fuller accounting of why we decided to leave Iran behind.

-  But then, Aaron Wherry reminds us why the Cons' talking points are more safely presumed to be farce than fact.

- Rick Salutin discusses why any positive change in our schools needs to be based on treating teachers and unions as essential stakeholders in any functional education system - rather than adopting the Lib/Con position that they're enemies to be beaten down.

- Finally, Travis Waldron posts about the latest evidence that tax cuts aimed at the already-wealthy don't do anything at all to help the wider economy.

The great giveaway

No, Brad Wall's new musings about changing Saskatchewan's resource royalty structure won't pass without comment from this corner. But it's worth noting that the reason for concern lies not a mere flip-flop from the Sask Party's 2011 election platform, but what's all too consistent in its behaviour since taking power.

At the outset, let's remember that Wall's position while in power has never been that the tax structure surrounding royalties is set in stone; instead, it's been that any change has to result in greater returns for corporate conglomerates at the expense of the province in order to be acceptable. So the Sask Party has been perfectly happy to hand out freebies such as head office tax credits on top of the system that was working perfectly well before it took power.

It's only when the NDP suggested that the province should benefit more from high prices and increased development that the Sask Party decided all existing arrangements were sacrosanct. Which leads to the foundation Wall is setting up for the mother of all resource giveaways:

Saskatchewan Premier Brad Wall is musing about adjusting the way the province collects money from companies that extract natural resources.

Wall says companies should have royalty stability especially after they've spent billions investing in the economy.

But the premier also says it's important that taxpayers are properly compensated if in 20 years potash production has doubled.

The current complex system is based on price rather than volume and Wall says it needs to change.

So let's compare what we have now to what Wall seems to be proposing.

At the moment, Saskatchewan's royalty structure results in our province sharing in the value of our resources. If prices rise - reflecting no particular merit on the part of either developer or province, but an increase in value in the resources which we're allowing to be removed from our common wealth - then so too does the province's revenue. And it's that structure which allows for the prospect of a Bright Futures Fund which ensures that money is invested for the province's benefit when times are good, and available to meet our needs when prices drop.

In contrast, Wall apparently sees it as unacceptable that Saskatchewan, as the owner of the resources being extracted, should share at all in the gains when those resources increase in price. Instead, he's setting out to establish "royalty stability" based strictly on the volume of resources removed from our province. And if prices happen to rise - well, as far as Wall is concerned, that windfall belongs solely to his corporate benefactors.

Needless to say, his resource-sector puppeteers will have every reason to be happy with that outcome. But once again, it's the people of Saskatchewan who stand to lose out from a system designed to eliminate the benefit we'd otherwise enjoy from our own resources. And if Wall is indeed planning to force through changes during the course of this term in office, then the resource question may be the most important fight we face over the next few years.

[Edit: fixed formatting.]

Sunday Afternoon Links

This and that for a sunny Sunday.

 - Mitchell Anderson's second article on Norway's success in converting oil resources into a massive source of public wealth focuses on the country's history of resistance to outside ownership. But I wouldn't see much reason why Canada couldn't turn its own sense of hard-earned independence from the world's dominant powers (which has always defined our relationships to the U.K. and U.S.) toward our corporate overlords.

- And in a guest post at Progressive Economic Forum, Tony Clark highlights why there's reason to be skeptical of the demands of our oil barons - as a "labour shortage" being used as an excuse for importing disposable foreign labour in fact reflects nothing more than a refusal to share the benefits of a profitable industry with Canadian workers.

- Bruce Johnstone rightly criticizes Stephen Harper's pardons to Customs Act violators for valuing nebulous economic rights far more than the real rights and freedoms his government has attacked while in power.

- Finally, I'm not sure how much circulation Yvonne Marton's profile of Thomas Mulcair's car ownership will receive. But it looks like a neat example of Mulcair fitting into the NDP's set of priorities - focusing on function and value in comparison to the Cons' preference for shiny trinkets.

Thursday Morning Links

This and that for your Thursday reading.

- Mitchell Anderson reports on how Norway has assured itself of long-term fiscal security by saving a fair share of its oil resources:

Norway produces 40 per cent less petroleum than Canada and has one-seventh our population, but has saved more than $600 billion in oil revenue and counting. This is equivalent to about 140 per cent of Norwegian GDP, or about $120,000 for every man, woman and child in the country. In contrast, every Canadian is in the red about $16,000 due to our $566-billion national debt.
 
While Canada is eliminating 19,000 public sector jobs in an effort to balance the budget, Norway is debt-free, enjoys full employment and has fourth highest per capita GDP in the world. Canada is twelfth.

Beyond economics, Norway is an obviously fortunate place to live. It is routinely ranked number one in the world on the Human Development Index, is the world's best-governed nation according to the Democracy Index, and is the best country in the world to be a mother.

And in spite of being the world's third largest exporter of crude oil, Norway is ranked number three in the world on the Environmental Performance Index. Canada is thirty-seventh (behind Nicaragua, Albania and Columbia).
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How is all this paid for? Since the 1970s, Norway as a matter of policy has collected between 70 per cent and 80 per cent of the resource wealth generated from their oil industry through corporate taxes twice as high as Canada, and a special tax on oil profits. In Alberta, royalties collected on all oil sands production in 2010 were 10 per cent of industry revenues.

Norway also required that foreign companies train Norwegian workers, transfer proprietary technologies to their state-owned oil company Statoil, and in some cases even hand over producing oil platforms free of charge after a predetermined period.

This insistence on national participation has paid off. Companies controlled by the Norwegian taxpayer now directly own about 30 per cent of the nation's oil production, providing another significant source of income as well as technical input on how their resource is developed.

 - Michael Harris questions the RCMP's move into environmental politics:

What a remarkable coincidence. The Mounties are worried about those very same radical environmentalists that Natural Resources minister Joe Oliver says want to use foreign money to hijack hearings on the Northern Gateway Pipeline. The same ones that the man who is cornering the market on Fossil Awards, Environment Minister Peter Kent, said might be “laundering offshore foreign funds.” No really, David Suzuki is Meyer Lansky with an electron microscope.

And here I thought the RCMP was about enforcing the criminal code in federal matters, not the government’s energy policies. I wonder if this transforms Christy Clark from a poker-playing politician into a radical environmentalist? I wonder if farmers who opposed ditching the Canadian Wheat Board will show up in some future de-classified RCMP threat assessment for opposing government policy? (Never forget, they have combines.) Or maybe there will even be a thick file on poor scribes critical of corporate wars, sleazy politics, suppressing public information, ministerial mendacity and forbidding Canadian public servants and scientists from speaking?

- Meanwhile, the Cons have made clear that they feel entitled to proclaim their supporters free of any law they don't like. And apparently the rules surrounding honesty and transparency in government advertising are on that list.

- Finally, CTV reports on the latest steps in the New Union Project which could see a merger between the CAW and CEP.

New column day

Here, on how Saskatchewan's election campaign pits a party pushing instant gratification against one basing its policies on an appeal to voters' altruism.

On deposits

I posted yesterday about the Sask Party's opening offering in this fall's election campaign. But it's worth pointing out the NDP's first policy event as well, as Dwain Lingenfelter unveiled more details about the party's proposal for a Bright Futures Fund. And what's perhaps most notable is that the NDP is committing to build up the fund beyond the obvious immediate source of money.

After all, any talk of a public resource fund has mostly been driven by the unprecedented resource prices of the past few years. And so the obvious purpose for a public wealth fund is to serve as a destination for unbudgeted windfalls (particularly when the alternative is tax slashing which creates future structural deficits).

But the NDP is proposing to go further, building annual contributions of at least $100 million per year into its plan in addition to possible funding from windfall revenues. Which looks to signal a determination to build public wealth in the long-term rather than budgeting strictly to buy votes in the short term - raising an obvious question as to whether the Sask Party has any interest in following suit.

Sunday Afternoon Links

Assorted content for your long weekend reading.

- Bruce Johnstone comments on the real source of Saskatchewan's relative economic success over the past few years - and not surprisingly, it has nothing at all to do with the Sask Party government that's so desperate to take credit:

Doug Elliott, publisher of Sask Trends Monitor, the statistical monthly newsletter, noted last year that the province's real economic growth (accounting for inflation) averaged a tepid 1.1 per cent during the previous five years, including two years (2005 and 2009) of economic contractions.

And Elliott observed that most of what was deemed to be an economic boom (such as the four-per-cent plus growth in 2008) was largely due to price increases for our resource commodities.

"There was no 'economic boom' in real GDP, the statistic used by most economists to measure economic activity. The growth in 2007 and 2008 was purely price-related," Elliott said in his October 2010 report.
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(T)he very resources and commodities that drive our economy - oil and gas, potash and uranium, grains and oilseeds - tend to fluctuate in price. As a result, our economic growth is likely to be bumpy and unpredictable, rather than slow and steady, like larger, more diversified economies.

That's nothing to be ashamed of.

But let's not jump to conclusions about how we came to enjoy such impressive economic growth as we've seen in the past couple of years.

Neither should we be under any illusions about how permanent and predictable our economy has become either.

Which, in addition to calling into question the Sask Party's attempt to claim credit for any development, would seem like a rather compelling case to make sure that short-term price boosts turn into longer-term development through a Bright Futures Fund.

- Via Aaron Wherry, the Literary Review of Canada publishes Jack Layton's take on the place of idealism in politics:

The idealist current holds that human society has the potential to achieve liberty when people work together to form a society in which equality means more than negative liberty, the absolute and protected right to run races against each other to determine winners. Idealists imagine a positive liberty that enables us to build together toward common objectives that fulfill and even surpass our individual goals.

In Canada and in other “developed” democracies, we have seen positive understandings of social institutions pushed aside in recent decades. Suspicion has been cultivated of anything done by “government” …

Canadians have not been quite so quick to jump to these absolute positions, however … When asked what they value most about their country, many Canadians will cite the fundamentals of our public healthcare system, even as they underline certain shortcomings. A collective project, caring for one another irrespective of financial means or resources, is seen as a fundamental, a defining characteristic, a source of quiet pride and a good reason to stay at home. Canada’s healthcare system is, in many ways, an incarnation of the positive perspective on freedom—the power to work together, through our democratic institutions, to build the kind of community in which we want to live.

In response to the challenges we face, we need to work together to build a Canada in which government is the vehicle for our collective efforts to make the better world we all hope to leave to future generations. Canadian Idealists can help guide our thinking.

- Meanwhile, Barrie McKenna questions the mindset that's limited the place of idealism for far too longer:

(T)hree decades of...supply-side policies have produced the same economic problems they were supposed to fix, including stagnant growth, high unemployment, deflationary pressures and piles of public sector debt, according to Mr. Curtis, a fellow at the Centre for International Governance Innovation in Waterloo, Ont., and Mr. Ciuriak, former deputy chief economist at the Department of Foreign Affairs and International Trade.

And now with the world awash in goods people can’t afford, the solution of choice in many countries is to spur even more production and to slash transfers to debt-burdened families.

There’s an inherent contradiction in the model. Those policies are causing household incomes to fall, making consumers less able to buy things, and driving inflation lower. The recent sharp plunge in the prices of oil, wheat, copper and other vital commodities suggests that’s exactly what’s happening.

Second-guessing supply-side economics is more than an academic exercise. Some of the prescriptions now on the table to get the world out of this mess may actually be hastening another recession.
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Accepted beliefs can, and do, change. Today’s orthodoxy can become tomorrow’s heresy.

It’s certainly worth asking the right questions so we avoid repeating the same mistakes.

- Finally, Michael Geist points out that consumers' interests are noticeably lacking in the CRTC's consultation report on Internet video services.

New column day

Here, on how Saskatchewan's election campaign is shaping up as a choice between personality and policy.

And for the latest noteworthy policy proposal from the NDP, see yesterday's community hospital announcement.

On inexplicable delays

Yes, the positive media response signals how important the impending debate over the NDP's Bright Futures Fund proposal figures to be in the lead-up to Saskatchewan's November election. But the even more significant bit of fallout looks to be part of Bill Boyd's panicked response which has less to do with the fund than its source of revenue:

A review of resource revenues would “make some sense” after the incentives in place to grow the mining industry wind down in 2014 or 2015, Boyd said.

Keep in mind that to date, the Sask Party's usual position has been that any review of resource royalties to make sure Saskatchewan's citizens receive a fair price for their shared resources would be absolutely intolerable at any time and under any circumstances. Which is at least a logically coherent position, if not likely to be a popular one.

But in his response to the NDP's proposal for a resource revenue fund, Boyd has effectively given the game away on royalty rates as well.

After all, it surely can't escape notice that the royalty rates applied over the next few years - before any new development is actually finished - have nothing at all to do with incentives to promote that development. In fact, any argument actually based on certainty for new investments would work in the opposite direction: better to review royalties now and set up a structure that will last in the longer term, rather than opening up a window for some future review which would affect new projects just as they begin production.

Meanwhile, the obvious beneficiaries in the absence of a royalty review are...resource extractors who have existing operations that don't require further investment. After all, they can take advantage of what are generally acknowledged to be unduly low rates by seeking to extract as much as possible over the next few years and skim off the profits - without any reason to think that the temporary windfall will result in any additional development whatsoever.

So the difference between the NDP and the Sask Party on a royalty review is now merely whether one should be carried out 8 years after the previous one or 11 years afterward - when there's nothing even faintly approaching a reasonable economic argument for the latter.

In effect, Boyd is declaring on behalf of the Wall government that the province needs to put up with three or four more years of handing hundreds of millions of dollars in undeserved free money to his party's corporate benefactors - while simultaneously arguing that the prospect of a review when the Saskatchewan Party deigns to get around to it won't affect investment which will be subject entirely to the new rates. And the combination of abandonment of principle and glaringly flawed logic in the Sask Party's new position should do nothing but help the NDP make the case for an immediate royalty rate review as a matter of fairness to Saskatchewan's residents.

[Edit: fixed wording.]

On bright futures

In this morning's column, I pointed out how the Wall government's focus on short-term electioneering and rule-tweaking betrays its insecurity over November's election. And the Sask Party will have all the more reason for concern in the wake of the NDP's official Bright Futures Fund announcement.

Not that it's much surprise that the NDP would announce an idea that's been in the works since its policy convention. But the more voters think and talk about the choice between gratuitously shovelling the province's resources into the hands of foreign investors and saving a fair share for Saskatchewan's long-term well-being, the tougher the Saskatchewan Party's road figures to be.

New column day

Here, on the Saskatchewan Chamber of Commerce's distraction tactics for this fall's provincial election.

For more reading...
- A couple of greatest hits from the Saskatchewan Chamber of Commerce in its complete neutrality and altruism, including its later-denied cheerleading for nuclear power, and its regular efforts to push the Regina Chamber's proposal to dedicate every single dime of interest savings to a business-friendly property tax cut.
- While I don't always agree with the Canada West Foundation, its review of the possibilities for Alberta's provincial resource fund would seem equally applicable to Saskatchewan.
- And finally, there's CUPE's Imagine What We Could Do blog, with plenty of ideas as to the possibilities open to Saskatchewan if it does look to the longer term.

Wednesday Morning Links

Miscellaneous material for your mid-week reading.

- Yes, plenty of attention is being paid to Canada's weak ranking when it comes to innovation. But it's well worth noting that the failure isn't for lack of billions of dollars being tossed down a sinkhole due to the Cons' distaste for active and effective government:

Other countries prefer to just give tax money to companies that perform a lot of research. We’re allergic to that kind of thinking in Canada, so the chart for direct national-government spending on private-sector research looks like this:

But since the point of supporting private-sector research is to produce more private-sector research, and not just to show up in a flattering place on a chart, it’s pretty clear that Canada’s preference for tax incentives over direct subsidy doesn’t work.

- Meanwhile, there may be room to quibble with a few of Serge Coulombe's points. But this much looks dead on in describing what we should be doing with our resource revenues (which in turn need to be high enough to support the cause):

Newfoundland and Labrador saw the largest improvement in production per worker because the province moved away from a low-productivity natural resource business, fishing, to a higher-productivity natural resource activity, oil extraction, and it recorded the largest improvement in education.

This boom in production per worker growth on the back of higher resource prices is inherently temporary. When Newfoundland and Labrador’s oil runs low, just as the fish stocks did, or resource prices falter, the province will need to rely on savings stuffed away now to invest in better education, infrastructure and technology.

Alberta has had among the lowest growth rates of educational achievement and production per worker, partly reflecting young workers not investing in higher education because of the easy money in the oil sands.

For provinces booming now because of high resource prices, saving non-renewable resource revenues in rainy-day funds is crucial to keeping the good times rolling.

- Marc Lee expands on the CCPA's finding that B.C.'s tax system is now outright regressive by tracing what's happened under the province's Lib government over the past decade:

Unsurprisingly, total BC taxes as a share of income declined for every income group. This has undermined funding for public services, but has also led to a shift in who pays how much. The average tax cut was 2.3% of income, though there were larger gains as income increased. Tax reductions were only worth about 1% of income for the lower-middle deciles, increase to 1.8% of income for the upper-middle, then rise to 3.6% for the top 10%. However, the top 1% got tax cuts worth 5.1% of their income. In dollar terms, that is a gain of $41,000 for the top 1%, while those in the bottom deciles average a tax cut of a couple hundred bucks.

By contrast, in 2000 BC had a relatively flat tax system, with a modest bump in tax rate for the top 1%. By 2010, the tax system as a whole had shifted to become regressive. Income tax cuts, unsurprisingly, were the principal driver of lower taxes. The value of income tax cuts averaged about 0.2% of income for the bottom decile, rising to 5.2% for the top 1%. The provincial income tax system continues to be progressive, but has flattened out over the course of the decade.

Gains from income tax cuts were somewhat offset by increases in MSP premiums for middle-income groups, as much as half of a percent of income. But as “head tax” MSP premiums inevitably shrink as a share of income as income rises. So much so that for the top 1% the difference between 2000 and 2010 is negligible (and rounds to zero).

- Finally, it may seem like somewhat of a "dog bites man" story. But Glen McGregor catches Sun Media fabricating outrage against the CBC.

[Edit: fixed sizing on chart.]

On bright ideas

One of the key proposals worth highlighting from the Saskatchewan NDP's policy review is a Bright Futures Fund which will ensure that one-time resource revenues are reserved for the longer-term benefit of the province - making for an ideal contrast against the short-sightedness of the Sask Party. But don't take my word for it when even Bruce Johnstone is on board:

Another NDP bright idea worth looking at is the Bright Futures Fund, which was contained in a draft policy paper released this week that will form the party's 2011 election campaign platform.

The Bright Futures Fund would be modelled after Norway's sovereign wealth fund, which has been investing a portion of the country's North Sea oil and gas production for the last 15 years.

The fund now has $518 billion in investments, or one per cent of global stocks, and allows the Norwegian government to spend about four per cent of its value every year on services for its citizens.

Alberta's 35-year-old Heritage Fund is another example of a 'legacy fund' that collects about 30 per cent of the province's non-renewable resource revenues and has generated about $32 billion in investment income since 1976.

The Bright Futures Fund will "maximize the benefits of our non-renewable resource revenues for current and future generations of Saskatchewan citizens," the NDP says.

The key word is here "future" generations. As stewards of the province's resource riches, we have no right to spend non-renewable resource revenues as if they were ongoing sources of revenue. By definition, they're not. They're sales of assets that should remain on the province's balance sheet, not shovelled into the maw of government spending.

Therefore, we should save a portion, say one-third, of those resource revenues in some sort of fund to be invested solely to generate income for future generations.
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It's not only good public policy; it's the right thing to do.