Heritage Fund Requires Long-Term Commitment From Alberta Government – Canadian Energy News, Top Headlines, Commentaries, Features & Events – EnergyNow

Heritage Fund requires long-term commitment from Alberta government

In Budget 2024, the Smith government committed to building up the Heritage fund so its annual earnings can replace resource revenue in the budget, and ultimately reduce Alberta’s reliance on this volatile source of revenue. That’s an important and worthy goal, but it will take commitment over the long term to get there.

A simple calculation helps illustrate this point, but first, a few points to clarify. The Smith government has committed to growing spending by less than the rate of inflation and population growth. Such spending restraint, in both theory and practice, should lead to surpluses (i.e. savings) which can be deposited in the Heritage Fund.

It’s simplest to consider the impact of this policy change from a historical perspective from 2013/14 to 2022/23. This calculation assumes that annual savings from spending restraint over the period—the difference between actual spending, and spending restrained by growing at inflation and population growth (minus 1 percentage point)—was deposited in the Heritage Fund. This calculation also assumes that the Heritage Fund’s principal and incremental earnings from new savings are retained and reinvested over the period (this does not apply to actual Heritage fund earnings, which were in large part withdrawn over the period).

Based on the past 10 years—again, from 2023/24 to 2022/23—the savings from spending restraint is roughly $33.2 billion. If we assume earnings of 5 per cent annually, total deposits plus compound interest is worth $40.2 billion. If we assume earnings of 8 per cent annually, total deposits plus compound interest is worth $44.3 billion and if we assume earnings of 10 per cent annually, total deposits plus compound interest is worth $47.1 billion. Given that the actual Heritage Fund was valued at $19.0 billion as of 2022/23, the hypothetical total size of the Heritage Fund, depending on the assumed rate of return, would range from $59.2 billion to $66.1 billion.

So, would annual earnings be sufficient to replace resource revenue in the budget?

No, far from it. Resource revenue is projected to be $19.4 billion in 2022/23 and based on various rates of return, annual earnings would fall significantly short of that. Indeed, assuming a 5 per cent, 8 per cent, or even 10 per cent return, annual earnings would be $3.0 billion, $5.1 billion, or $6.6 billion, respectively. That’s no where near sufficient to replace resource revenue in the budget. Even if we assume the goal is simply to cover average resource revenue ($9.3 over the past 10 years) annual earnings from the Heritage Fund would be insufficient to replace resource revenue.

Put simply, even after 10 years of committed spending restraint and consistent savings, the Heritage Fund would be insufficient to eliminate Alberta’s reliance on resource revenue in the budget. (If actual Heritage Fund earnings had been retained, it would have resulted in a higher Heritage Fund balance, but it would not change the overall takeaway—contributions must be maintained over the long term.)

Clearly, Albertans need a long-term commitment if the goal of building up the Heritage Fund and eliminating reliance on resource revenues is to be achieved. Unfortunately, Alberta governments have a history of committing (and recommitting) to the Heritage Fund, but failing over the long-term. Indeed, when the Alberta government first created the Heritage Fund in 1976/77, the government of the day required that 30 per cent of resource revenue be saved annually. That quickly fell to 15 per cent by 1982/83, and the requirement was eliminated entirely in 1987/87. Successive governments have committed to renewing deposits in the Heritage Fund, which were also short lived if fulfilled at all.

The main issue is that any rules around the fund—including mandatory contributions—have been statutory, which means that the government or a subsequent one can disregard, change or eliminate these rules when they’re no longer convenient. This time, the Smith government should learn from past experience and ensure new rules around the fund are constitutional, which means they will be more difficult to change in the future.

Clearly, any commitment to the Heritage Fund must be over the long term. Indeed, if Alberta has any hope of building the fund to a size where annual earnings can replace resource revenue in the budget, it needs successive governments to make consistent contributions. Given Alberta’s history, that’s an unlikely feat without robust fiscal rules.

Author:

Tegan Hill

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