Norway’s sovereign wealth fund just hit a grand total of US $1 trillion dollars.
Just in case you’re wondering, 12 zeroes looks like this: $1,000,000,000,000
The number is 2.5 times Norway’s annual GDP and serves as the largest sovereign wealth fund in the world. It has also somewhat predictably triggered a new round of consternation among Albertans, mourning the state of their own fund currently worth a measly $17.2 billion.
But Andrew Leach, associate professor at the University of Alberta’s business school and chair of the province’s completed Climate Change Advisory Panel, said it’s important to read past the headlines when it comes to the Norway vs. Alberta comparison.
“If I said ‘wouldn’t it be great if Alberta had a trillion dollar sovereign fund?’ You’d say ‘yeah absolutely.’ But the better question is would it have been worth the tradeoffs that would have had to been made at the time to accumulate that fund,” Leach said in an interview.
Yet we’re still faced with the reality that Norway — a country with roughly the same population size as Alberta — now has a savings fund roughly 60 times the size of Alberta’s.
What the heck is up?
Alberta Would Have Over $163 Billion Had it Gone Norway’s Way
In 2015, the Calgary Chamber of Commerce calculated that Alberta’s sovereign wealth fund would be worth $40.9 billion if it followed Alaska’s model of taxation and $163.7 billion in the case of Norway.
That same year, Mitchell Anderson of The Tyee calculated much of that difference has to do with a difference in collected royalties.
“Norway realized revenues of $87.69 per barrel in 2013. Alaska managed $38.54. And Alberta? Just $4.38 — one-twentieth what our Norwegian cousins managed to rake in,” Anderson wrote.
But it comes down to more than how royalties are collected and has to do with funds being saved or spent.
Every dollar that’s invested in a sovereign wealth fund is a dollar that can’t be spent on healthcare, education, social services or infrastructure projects — all things Alberta funds through oil revenues.
Simply put, Alberta’s savings are so low because the province choses to spend the money on iminent, rather than future, needs.
“It’s not like there was money that was only available to Alberta had they decided to save it,” Leach said.
But surely Norway had social and infrastructure costs too? So why didn’t the Scandinavian paradise end up in a situation similar to Alberta?
There are a few ways of answering this question.
Norway Favours Publicly Managed Investments. Alaska, Dividends
First, there’s the Norwegian way.
The Government Pension Fund Global was established in 1990, partially based on Alberta’s example.
Since then, Norway has diverted a full 100 per cent of resource revenue into the fund — a number especially significant since the rebound of global oil prices in the late 1990s, and since taxation rates on oil production in Norway are considerably high.
Norway has a 51 per cent tax on petroleum-related income, on top of the 27 per cent income tax. That amounts to a whopping 78 per cent total tax rate.
Compare that to Alberta’s incredibly complex royalty framework, which varies based on product (conventional oil, unconventional oil or gas), per-barrel price and stage of production.
In the case of oilsands production, Alberta takes around 10 per cent of gross revenue via royalties, and administers a 12 per cent provincial corporate income tax.
Norway’s rules are very strict about actual use of the money by the government. Until recently, only four per cent of the fund could be withdrawn per year — effectively skimming off the interest without touching the principal. It’s since been cut to three per cent.
Such a restriction helps ensure savings for future generations in an era of decarbonization while also preventing an overheating of the economy due to a sudden spiking in government spending.
Some 65 per cent of investments are in equities, with the remainder residing in real estate and fixed income. There’s actually an ongoing concern in Norway that having so much money in the volatile stock market could lead to financial catastrophe if there’s a repeat of 2008 (that’s a key reason why the diversified fund is invested in some 9,000 companies).
In addition, there are ethical guidelines that prevent investments in industries such as coal, nuclear weapons and tobacco. Canadian companies including Barrick Gold and the Potash Corporation of Saskatchewan have been blacklisted from investments.
Main holdings include Royal Dutch Shell, Apple, Nestle and Microsoft.
Then there’s the Alaska example. Every year, the Alaska Permanent Fund — established in 1976 via a referendum — disperses cheques to each resident without a recent criminal record. The dividend usually amounts to between $1,000 and $2,000 per person.
Alberta Operates With a ‘De-Facto Dividend System’
One might assume that Alberta tends towards the Norway model, despite the low amount in the province’s actual reserve.
But Alberta’s system is actually more like a “de-facto dividend system” via reduced taxes according to Geoff Salomons, PhD candidate at the University of Alberta focusing on intergenerational natural resource wealth governance.
“But people don’t realize it,” Salomons said.
In other words, instead of saving money in a Norway-like publicly managed fund, Alberta has chosen to buffer the gap between low taxes and high spending levels with oil and gas revenues.
Using oil revenues to fill provincial coffers lies at the root of what is known as the “Alberta advantage” — perpetually low income, corporate and sales taxes.
But those advantages come at high cost and with a high risk: the province is beholden to the historically volatile price of crude oil.
Price crashes throughout the decades, most recently in 2014, have resulted in huge deficits for Alberta.
Between 2014 and 2015 Alberta collected $8.9 billion in royalties. That fell to $2.8 billion 2015 to 2016. Over the last year the province added $10.3 billion to its deficit, with a provincial debt of over $33 billion.*
Alberta could choose to increase sales taxes to alleviate the reliance on natural resource revenues, as Saskatchewan recently did, but a political distaste for taxes makes that unlikely.
Salomons suggested the current system has actually resulted in a ‘baked-in’ subsidy that primarily favours high-income earners.
That’s because rich Albertans haven’t had to pay as much in income taxes over the years as they would in a less oil-rich jurisdiction. Since both the province’s previous flat tax framework and marginal tax rate system exempted very low-income earners, the poorest segment of society didn’t receive any benefit from the oil subsidies.
“The more you pay in taxes, the more you benefit, essentially,” Salomons said in an interview.
“When you start thinking about it in those terms, it’s a system that actually exacerbates inequality.”
Expectations of Oil Price Decline Shaped Alberta’s Spending
A key distinction between Norway and Alberta is fundamental assumptions about when oil and gas revenues will actually begin to decline.
Leach said that offshore oil and gas resources in Norway have always been viewed as ones with relatively short-term life and value, leading to an expectation that future Norwegians will have fewer resources than current Norwegians.
That contrasts with Alberta’s vision of developing oil and gas resources, especially the oilsands, over the period of many decades.
However, when the Alberta Heritage Trust Fund was founded in the early 1970s by then-premier Peter Lougheed, there was an expectation that conventional oil resources would be depleted within a decade.
The expectation helped justify Alberta’s push to spend money now, rather than later, helping to suppress tax rates and attract new business. Almost all the investments in the Alberta Heritage Savings Trust Fund were made prior to the mid-1980s.
Leach said, “I don’t look at my students today and say ‘you should really save your money now for the times in the future when you have a job.’ ”
“It completely doesn’t make sense.”
Alberta Approach Subject to Boom and Bust
The Alberta approach doesn’t specify what is happening with revenue: residents don’t receive a specific amount of money in the form of a cheque like in Alaska, or long-term public savings like in Norway.
Instead, money is channeled into the province’s general revenue, effectively made invisible to the public until a major price drop and subsequent deficit occurs.
“The challenge is that makes government highly dependent on the fluctuations of the resource wealth coming in,” Salomons said.
“That’s the story of Alberta’s fiscal policy over the past 50 years: the boom and bust of the oil prices and what that’s done for our fiscal position.”
There’s also the issue of a boom and bust population.
Many Norwegians are multi-generational, with families having lengthy commitments the country. Conversely, Alberta often works to attract people who stay short-term for the work.
That creates a spend-now kind of ethos.
As Leach puts it: “You expect Peter Lougheed or early Klein to say Albertans should make some sacrifices today to save for some redheaded kid in Ontario, the son of two people from New Brunswick, who’s going to move here in 2006?”
Savings Don’t Sell In Austerity Situations
While Norway has the freedom to revisit its investment policy and Alaska can alter the amount of money it distributes to residents, Alberta’s left with little wiggle room.
Alberta’s finance minister Joe Ceci has previously stated “with the drop in oil prices, it will take some time for our government to reverse the damage” the Alberta’s Heritage Fund.
“We are committed to appropriately investing resource revenues for future generations and are working on a fiscal plan to that end,” he said.
The province’s short-term Contingency Account — previously known as the Sustainability Fund — has been significantly depleted in recent years due to the provincial deficit.
But here’s the thing: even if oil prices do bounce back, Leach isn’t sure that reinvesting in the Heritage Fund will necessarily be the best approach.
“If oil goes back to $70 or $80 a barrel and say we’re still going to make all the big cuts that people are talking about — education and healthcare and all those things — and put that money in a savings fund that’s going to invest in infrastructure in say New Zealand…I don’t know that people are going to be thrilled about that,” he said.
* This article has been updated to reflect to the fact that Alberta’s debt, not deficit, is $33 billion.