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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 and
uncertainty often leads to
expenditure volatility.
• Expenditure volatility has economic
and social costs.
• Create rainy day/stabilization fund.
• Contribute to the fund when
revenues are high and withdraw
when revenues are low (rainy day).
Goal: Smooth government spending
through time.
Question #1:
How do we know how much to save for
a rainy day?
How do we know when it is a rainy
day?
Intergenerational Equity
• Natural resources are finite
• Save resource revenue today so
services can be provided to future
generations after the resource is
depleted.
Goal: Smooth expenditures over time.
Question #2:
Does Alberta need separate saving and
stabilization funds?
Norway uses one fund for both
purposes.
Savings and stabilization funds have
a similar purpose – smooth government
expenditures over time.
A savings fund can stabilize revenue if:
• Deposit a portion of volatile resource
revenues in the fund.
• Contribute a portion of the assets in
the fund to general revenues each
year.
Question #3:
How large a fund?
The required amount of savings
depends on the future path of resource
revenues.
Two extremes:
• The resource runs out tomorrow –
save all resource revenue.
• Resource revenues stay constant
forever – 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 nominal
dollar savings target, such as $100
billion?
Norway solution:
Specify a percentage of resource
revenues to save each year and a
percentage of assets to withdraw.
Question #5:
What percentage of resource revenues
should 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 constant
expenditure 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 by
government borrowing against the
assets in the fund.
• Must combine saving with
expenditure discipline.
Question #6:
Does the rationale for saving constrain
the investment strategy?
Question #7:
Why save?
When and how will the funds be used?
END
Stuart Landon -- Alberta Economic Summit

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Stuart Landon -- Alberta Economic Summit

  • 1. Why Save? (and other questions) Stuart Landon Department of Economics University of Alberta
  • 2. Rationales for saving resource revenues: • Stabilization of expenditures • Intergenerational equity
  • 3. Stabilization • Resource revenue volatility and uncertainty often leads to expenditure volatility. • Expenditure volatility has economic and social costs.
  • 4. • Create rainy day/stabilization fund. • Contribute to the fund when revenues are high and withdraw when revenues are low (rainy day). Goal: Smooth government spending through time.
  • 5. Question #1: How do we know how much to save for a rainy day? How do we know when it is a rainy day?
  • 6. Intergenerational Equity • Natural resources are finite • Save resource revenue today so services can be provided to future generations after the resource is depleted. Goal: Smooth expenditures over time.
  • 7. Question #2: Does Alberta need separate saving and stabilization funds? Norway uses one fund for both purposes.
  • 8. Savings and stabilization funds have a similar purpose – smooth government expenditures over time.
  • 9. A savings fund can stabilize revenue if: • Deposit a portion of volatile resource revenues in the fund. • Contribute a portion of the assets in the fund to general revenues each year.
  • 11. The required amount of savings depends on the future path of resource revenues.
  • 12. Two extremes: • The resource runs out tomorrow – save all resource revenue. • Resource revenues stay constant forever – no need to save.
  • 13. Other factors that justify greater saving: • Known future expenditure increase (baby boomer health spending) • Risk of a future significant reduction in resource revenues
  • 14. Question #4: Should the Government set a nominal dollar savings target, such as $100 billion?
  • 15. Norway solution: Specify a percentage of resource revenues to save each year and a percentage of assets to withdraw.
  • 16. Question #5: What percentage of resource revenues should be saved? 100%?
  • 17. 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 constant expenditure forever.
  • 18. Saving 100% of resource revenues is probably too much. This would impose a high cost on the current generation.
  • 19. A cautionary note: • Large funds can be negated by government borrowing against the assets in the fund. • Must combine saving with expenditure discipline.
  • 20. Question #6: Does the rationale for saving constrain the investment strategy?
  • 21. Question #7: Why save? When and how will the funds be used?
  • 22. END