Government Revenue Stabilization Funds — Do They Make Us Better Off?

New WP from Alberta: Alberta government resource revenues are highly volatile. Adjustment of government  pending to shifts in revenues imposes social and economic costs. To limit the impact of revenue volatility, many jurisdictions have established revenue stabilization funds. There is little empirical evidence on whether these funds improve welfare or whether some fund designs increase welfare by more than others. We provide a quantitative welfare comparison of several different types of rule-based government resource revenue stabilization funds using data for Alberta. Our results show that, relative to the historical path of expenditures, some stabilization funds would have increased welfare. The best performing fund from a welfare perspective requires 50 percent of natural resource revenues to be deposited in the fund each year, and 25 percent of the assets withdrawn. This fund cuts expenditure volatility by almost 30 percent. Stabilization funds that accumulate large asset stocks and, thus, generate low levels of current government services, generally yield low welfare. Funds that depend on an equally-weighted moving average of past revenues have the worst welfare performance of the funds considered. While this study employs data for Alberta, the results are relevant to other resource producing jurisdictions with volatile revenues.