stuart landon -- alberta economic summit
DESCRIPTION
Why save, asks University of Alberta economics professor Stuart Landon, during Alberta's Economic Summit.TRANSCRIPT
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Why Save?(and other questions)
Stuart Landon
Department of Economics
University of Alberta
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Rationales for saving resource revenues:
• Stabilization of expenditures
• Intergenerational equity
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Stabilization
• Resource revenue volatility anduncertainty often leads toexpenditure volatility.
• Expenditure volatility has economicand social costs.
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• Create rainy day/stabilization fund.
• Contribute to the fund whenrevenues are high and withdrawwhen revenues are low (rainy day).
Goal: Smooth government spendingthrough time.
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Question #1:
How do we know how much to save fora rainy day?
How do we know when it is a rainyday?
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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.
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Question #2:
Does Alberta need separate saving andstabilization funds?
Norway uses one fund for both purposes.
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Savings and stabilization funds havea similar purpose – smooth government expenditures over time.
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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.
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Question #3:
How large a fund?
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The required amount of savings depends on the future path of resourcerevenues.
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Two extremes:
• The resource runs out tomorrow – save all resource revenue.
• Resource revenues stay constantforever – no need to save.
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Other factors that justify greater saving:
• Known future expenditure increase(baby boomer health spending)
• Risk of a future significant reduction in resource revenues
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Question #4:
Should the Government set a nominaldollar savings target, such as $100billion?
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Norway solution:
Specify a percentage of resourcerevenues to save each year and apercentage of assets to withdraw.
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Question #5:
What percentage of resource revenuesshould be saved? 100%?
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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.
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Saving 100% of resource revenues is probably too much.
This would impose a high cost on the current generation.
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A cautionary note:
• Large funds can be negated bygovernment borrowing against theassets in the fund.
• Must combine saving withexpenditure discipline.
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Question #6:
Does the rationale for saving constrainthe investment strategy?
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Question #7:
Why save?
When and how will the funds be used?
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END
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