Newfoundland and Labrador’s ‘Future Fund’ turns one—here’s how it can be better

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Appeared in the St. John's Telegram, November 10, 2023
Newfoundland and Labrador’s ‘Future Fund’ turns one—here’s how it can be better

Newfoundland and Labrador’s “Future Fund,” which was introduced by the Furey government in 2022 to help manage volatile oil and gas revenues, recently had its one-year anniversary. While the overall concept of the fund is good policy, the one-year anniversary provides an opportunity to look at ways it could be improved.

The government has committed to making yearly contributions to the fund from its operating budget, calculated based on a percentage of the province’s non-renewable resource revenues (primarily from the oil and gas sector), and any sale of provincial assets greater than $5 million. Last year’s contribution was $157 million, with a further $127 million budgeted this year.

Prior to the establishment of the fund, the province funnelled all royalties from the oil and gas sector into the yearly budget. This inflow of cash led to an expansion of the budget, such that the province has had the highest per-person spending levels in Canada almost every year since offshore oil production began in 1997.

Increased government spending gives rise to a problem—when the inevitable boom-and-bust cycle of the oil and gas industry strikes and royalties fall, with high spending levels the province immediately falls into deficit and provincial debt rises.

The Future Fund helps avoid future deficits—and thus, debt accumulation—by funnelling a percentage of yearly royalties into a fund separated from the yearly budget, which alleviates the pressure to increase spending to unsustainable levels during times of relatively high resource revenue. In addition to better budget management, this allows for the creation of long-term benefits from the one-time extraction of a non-renewable resource.

If contributions continue, the fund could grow substantially in coming years. While many variables will affect the total amount contributed, the province’s oil and gas sector continues to produce a significant amount of revenue for the provincial government and has the potential for continued expansion in the years ahead. This underscores the need to maximize the long-term benefit of the Future Fund. Here are three ways the province can improve the Future Fund.

First, as explained previously, the fund needs stronger fiscal rules. For instance, as it stands, funds can be withdrawn for debt reduction, “extraordinary circumstances” as determined by the minister, or after 10 years, for “strategic priorities”—again, as determined by the minister. The history of similar funds in other jurisdictions (Alberta, for example) shows that without strong restrictions on withdrawals, the fund will inevitably be depleted by future governments when times get tough. Creating constitutional laws governing the fund and narrowing the range of possible uses for the fund’s principal would be two important steps forward.

Second, to help ensure continued growth of the fund, the provincial government should distribute a share of the fund’s earnings to residents via dividend cheques. This model, which has worked successfully in Alaska, would allow Newfoundlanders and Labradorians to share in the fund’s success, creating direct interest among residents in the fund, how it’s used, and how it’s maintained.

Lastly, the province should proceed with the sale of its non-core assets, such as the NLC and Marble Mountain, as recommended by the Greene report. The Future Fund legislation specifically states that the fund should grow not only through natural resource royalties, but also from the sale of government assets. Selling off these assets is a win-win—government removes itself from a line of business best left to the private sector while at the same time growing the principal of the Future Fund.

Introduced one year ago, Newfoundland and Labrador’s Future Fund is an important tool for dealing with the province’s fiscal challenges. It also presents an opportunity to ensure residents enjoy long-term benefits from the economic output of the oil and gas sector and the sale of provincial assets. However, changes must be made to maximize the fund’s long-term benefits.

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