29 November 2010

Spending unsustainably will empty the Petroleum Fund

The Government’s documents proposing the 2011 State Budget illustrate a fundamental flaw in financial planning -- a failure to realize that if the state spends more money from the Petroleum Fund in the short term, less will be available for the future.
Budget Book 1 includes chapters on Revenues and Expenditure. In the Revenue chapter, future balances in the Petroleum Fund and the Estimated Sustainable Income are projected assuming that the Government will only withdraw the ESI amount every year. This is shown in the graph above, with the dashed single red line (right-hand axis) indicating the amount withdrawn from the Fund every year, and the solid single red line showing the balance in the Petroleum Fund. (Like every line in this graph, these reflect the Government’s very optimistic assumption that Petroleum Fund investments will earn 4% higher than inflation, much more than they have to date.)

However, the Expenditure chapter explains that the Government plans to withdraw $418-$526 million more than ESI from the Fund every year starting in 2012 (dashed double green line, right axis), settling down to a 3.5% annual increase in expenditures after the 2012 election. In this case, the balance in the Fund (solid double green line) starts to decline in 2024, and the Fund will be used up by 2035 if no new oil or gas projects come on-line.

For the 2011 budget, the Government has assumed that future oil prices well be about 50% higher than were assumed for the 2010 budget, which La’o Hamutuk believes violates the Petroleum Fund Law’s requirement that "all assumptions made shall be prudent.” The higher price assumptions are used in the two scenarios discussed above. If one re-calculates the data based on the oil prices assumed for the 2010 budget, with the level of expenditures in the 2011 budget, the balance in the Petroleum Fund (triple purple line) will be entirely exhausted by 2030.

Click here for more documents and information about the 2011 State Budget, including the calendar of Parliamentary hearings and plenary discussions.

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