This document discusses rationales for saving resource revenues, including stabilization of expenditures and intergenerational equity. It also poses several questions about how to determine an optimal savings strategy, including how much to save, whether separate savings and stabilization funds are needed, how large the fund should be, whether to set nominal or percentage-based savings targets, and how invested funds can be used while still meeting savings objectives. The document suggests that saving a portion of volatile resource revenues can help stabilize government spending over time in a way that benefits both current and future generations.

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.

10. Question #3:
How large a fund?

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