Surplus exposes lack of debt reduction strategy

Province needs to establish sovereign wealth fund now,

The government of Saskatchewan seems deeply unserious when it comes to debt reduction.

That may sound counterintuitive given that Saskatchewan has committed $1.5 billion to debt reduction this year, but that surplus is largely due to higher than expected resource revenue, forecast at $4.6 billion.

Relying on surplus budget years while the province remains on a revenue roller-coaster is not a stable or realistic strategy for debt reduction.

Over the past year, WTI oil has ranged from $112 per barrel to a recent low of $68 per barrel. Potash prices have been equally volatile, peaking at US$1,202 per tonne last year, before steadily declining to a low of US$372.5 per tonne this May.

For years, governments in Saskatchewan have mused about eventually establishing a sovereign wealth fund to save resource revenue surpluses, so that those revenues would not have to be as heavily relied upon in future.

Yet even when Saskatchewan had its own heritage fund, the returns of the fund went to general revenue, hindering the growth in the size of the fund.

Former premier Brad Wall commissioned then-president of the University of Saskatchewan Peter Mackinnon to conduct an investigation into the concept of a sovereign wealth fund in Saskatchewan, which is in essence an investment trust portfolio for the government.

Despite Mackinnon's report concluding strongly in favour of a sovereign wealth fund that would have seen annual contributions of 26 per cent of non-renewable resource revenues, premier Wall's government opted not to establish the fund due to a drastic collapse in resource revenues at the time.

Yet even in preparing for resource revenues to return to their median, former finance minister Kevin Doherty stated that the premier's campaign promise was to “manage within the revenues available to us at $75 (per barrel) and save the rest or pay down debt” — emphasis on the “or” as seven years have passed and Saskatchewan still does not have a sovereign wealth fund.

Perhaps the reason for this lack of commitment is that Saskatchewan is looking at the purpose of a sovereign wealth fund wrong. Instead of seeking long-term basic returns to use as general revenue, a wealth fund in Saskatchewan could be purposed toward debt reduction.

Debt could be reduced surprisingly fast, because the long-term return goals of a debt-reduction fund would facilitate the acceptance of higher risk returns. Most sovereign wealth funds mix fixed-interest investments and bonds with equities to reduce the risk of their equity investments.

Yet looking at Alberta's Heritage Savings Investment Trust, equity investments averaged more than 10 per cent in the last 10 years, and despite ongoing uncertainty with the war in Ukraine, equity returned 18 per cent in the last annual report of the trust.

Instead of making one-time resource revenue surplus debt reduction payments, Saskatchewan could use its surpluses, and the 26 per cent resource revenue allocations recommended by Mackinnon, to establish a wealth fund capable of the inevitable elimination of provincial debt.

At 10 per cent annual returns and 40 per cent return contributions to debt reduction, the fund could even outpace and pay down debt if the province ran $1-billion deficits every year.

So if Saskatchewan were serious about paying down provincial debt while simultaneously getting off of the resource revenue roller-coaster, a sovereign wealth fund is the best and only answer.