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