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Debating the uses of resource royalties

Aerial shot of Athabasca tar sands. Photo: Shell/Flickr

In an interesting and well-argued column in the Calgary Herald recently, Mark Milke from the Fraser Institute took issue with my last post here. I can't resist replying to one of his points.

Mr. Milke paraphrases me this way: "Brian Topp wants sovereign resource funds to invest in uneconomic projects too expensive for the private sector -- this instead of shipping 'raw unprocessed resources to Texas and to China.' Topp mentions Norway's resource fund as an example."

I don't know about "uneconomic" but otherwise so far, so good. Mr. Milke then argues this is a "bad suggestion." Why?

"Topp may be unaware that Alberta's Heritage fund was once used to support uneconomic projects. The result was a costly misallocation of money belonging to Albertans. Back in the 1980s (and this started under Lougheed), the Heritage Fund and government itself began to loan and to guarantee loans to all sorts of risky business ventures, all in the name of diversification and job creation. When many companies went belly up by the early 1990s, Alberta lost $2.3 billion in financial fiascos on everything from high-tech startups to meat-packing plants. No government should repeat that corporate welfare boondoggle."

Actually, I'm quite aware of that. And I'm also aware of the approximately $1 billion in other regrettable investments, some to Conservative party insiders, that were simultaneously made by the neighbouring government of Grant Devine in Saskatchewan at the same time. It took the succeeding Romanow NDP government many years to work out of those deals -- I remember them well.

Does this really mean that no publicly owned fund must ever again be allowed to invest capital?

If so, Mr. Milke presumably wants to dismantle the Canada Pension Plan. That publicly-owned fund has been built up to $161.6 billion (check out the results here) but presumably the fund must have invested in some dogs at some point -- so its investment work, good and bad, must never been repeated. And this must also be true of the Caisse in Quebec -- about the same size. And the Teachers' Fund in Ontario.

But let's not stop there.

If it is true that having any history of any kind of "financial fiascos" means that an economic player must never, ever be permitted to repeat its sins again, then we have a much bigger wrong-doer to deal with. Consider the trillions of public dollars spent to bail out private-sector banks throughout the industrialized world in recent years. Should the financial services industry itself be abolished, never to be permitted to operate again?

Perhaps that is Mr. Milke's view. Personally, I'm a more forgiving sort.

I hold to my view that pretending we have low taxes while spending the family silver is irresponsible. One-time resource royalty revenue is capital, and should be invested, not used to pay for real corporate welfare boondoggles -- like corporate tax cuts for the Fraser Institute's funders.

This article was first published in the Globe and Mail.

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