subscribe to the RSS Feed

Friday, October 31, 2014

A Saving Government?

Posted by Tim Stobbs on November 13, 2013

So the Saskatchewan Provincial government has realized something important…it is addicted to non-renewable resources revenue.  How addicted?  Well in the last provincial budget a whopping 30% of the money used to keep the government running came from non-renewable sources.  So needless to say there is a huge risk for anyone basing almost a third of their spending on commodity prices like oil and gas or potash.

I give the government credit for at least realizing they have a spending problem.  So they are rolling around the idea of creating a sovereign wealth fund where money will go in, but they won’t take the principle back out …ever. Similar to what Norway has done to build their 760 billion dollar fund. Of course Saskatchewan does plan to spend the interest income which is typical.  The only problem is they don’t appear to be considering taking any big steps towards solving the issue…at least based on their consultant’s report which merely recommends capping their current spending of resource revenue to…wait for it…26% of their annual spending.  Then splitting that mere 4% between paying down debt and saving it.   Ugh, it’s like rewarding yourself and having a press conference for deciding to not spend a coffee today…it’s a drop in the bucket.

Then it occurs to me that perhaps our government officials aren’t familiar with how to save.  After all taking on debt is much more their style.  So perhaps they need a little motivation…so might I offer the following goal: a zero tax provincial government…no income tax, no business tax and certainly no sales tax. None, nil, nothing for tax.

How the hell is that possible?  Well you just use the same math on how a person can save for financial independence.   You see if you saving 5% of your income (all income here, not just resource based) and get a nice 5% return (after inflation) which you re-invest, with compound interest in 66 years you won’t need to tax anyone ever again.  Your investment portfolio will be producing enough income that you should be able to run your current budget without taxes. Oh wait it gets better, if you pull off saving 10% of the government income and reinvest the interest  you can be a zero tax province in a mere 51 years.  In a generation, you can alter the very way people think about government.

In effect with a bit of will power and a long term plan you can actually have a government that lives in its means and actually saves instead of taking on debt for everything.  I fully understand the odds of this occurring isn’t that good, but I thought I would at least point out the option exits.  After all when you spend your entire life using credit cards and having a mortgage being debt free is largely incomprehensible.

Comments

5 Responses to “A Saving Government?”
  1. Elizabeth says:

    That is a great way to run a government . . . unfortunately most politicians want to see an effect for their actions during their careers in order to reap the benefits. But who knows? Maybe we’ll catch a good one.

  2. jon says:

    It’s called the “Tragedy of the Commons“. If politicians and governments didn’t act the way they do it would be odd and unexpected.

  3. Ben Shideler says:

    It appears that the Saskatchewan government is in the position that Alberta was in the mid ’90s. We established the Heritage fund with the same purpose, as a rainy day fund. Problem is, when the market tanked they had to dip hard into the fund to fuel their overspending.

  4. That would be great! Unfortunately I don’t see it ever happening.. People are greedy and want to use the money now, not in the next few generations.

  5. To begin with, I agree that a “sovereign” wealth fund for a resource producer is a good policy. The government is effectively taxing foreign consumers of a finite resource.

    But in general, I would not recommend analysing a government like a person. For example, they do not retire. If a government “saves”, it is running a surplus – it is taxing too much relative to its spending. It is taking away excess resources from individuals and firms, slowing down their possibility of retiring.

    Why should the government buy equity in a business? They already have first dibs on the profits in the form of corporate taxes. If the government starts actively investing in industries it regulates, the conflicts of interest are obvious.

    And while Saskatchewan could get away with it, if Canadian governments in aggregate ran continued surpluses, both government debt and the monetary base would disappear. The private sector needs risk free assets for liquidity purposes, and so it would crash if surpluses were sustained for a period of time.

home | top