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By Alex Whalen
In its first legislative session, the Wakeham government has proposed changes to Newfoundland and Labrador’s Future Fund, which would largely gut the concept, to the detriment of Newfoundlanders and Labradorians.
For those who may be unfamiliar, the Furey government established the fund in 2022 to save a portion of resource royalties from the province’s oil and gas sector. The concept is simple and makes sense: oil and gas extraction takes place on a onetime basis, so the government should save a portion of those revenues to generate long-term benefits for residents. Since its implementation, the Future Fund has grown to $524 million.
Similar funds exist in jurisdictions around the world. Consider the tiny country of Norway, which started a fund in 1990 that has grown to hold assets equal to US$2.2 trillion. Alaska, which has a population and oil production similar to Newfoundland and Labrador, has a fund worth US$86 billion that delivers annual dividend cheques to residents of nearly US$1,500 (on average, over the last decade), something residents of Newfoundland and Labrador would surely welcome.
Unfortunately, the Wakeham government’s proposed changes would effectively end the fund, at least for the time being.
First, the government wants to make annual contributions voluntary, not mandatory. Since 2022, the government has been mandated to make annual payments, with amounts varying based on that year’s level of resource revenue royalties. Specifically, the proposed changes forbid contributions when the government is in a deficit position, and weakly says the government “may” contribute when in a surplus position. Finance Minister Craig Pardy has admitted this means that any contribution to the fund over the next five years is unlikely.
Second, the government wants the ability to raid the fund to pay down debt. According to current rules, the government can’t touch the fund until at least 2033. While the government certainly has a debt problem, the fund is so new and the balance so small that it hasn’t had a chance to grow to a point where it will make a meaningful dent in the debt. In fact, if the Wakeham government raids the entire fund, it would pay down less than 3 per cent of provincial debt. And of course, in other jurisdictions with similar funds, they are left to grow over time to generate long-term benefits, not raided to pay down debt.
On this point, Pardy said it makes no sense to save money while the government is mired in debt. But here’s why that view is misguided. To date, the fund’s investments have yielded an annual return of 7.36 per cent, nearly double what the government pays in debt interest (3.8 per cent). It’s reasonable to expect this would continue, given that the fund’s long-term rates of return generally exceed debt interest costs. Therefore, removing the fund’s principal to pay down debt would represent a net loss to the government.
Moreover, successful funds around the world generally make contributions during good times and bad (though the amounts may vary). While Pardy is correct—his government has a serious deficit and debt problem—the solution is to rein in spending, not to raid the fund.
In reality, the government’s proposed changes may actually worsen provincial finances by funnelling all volatile resource revenue back into the provincial budget rather than saving it. This approach is why the province’s resource boom has so far largely led to bigger government rather than long-term wealth for Newfoundlanders and Labradorians. The Wakeham government’s proposed changes (which still must pass in the legislature) to the Future Fund are a mistake.
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