The Economic and Fiscal Impacts of Declining Petroleum Revenues

Abstract

The Prospect of declining petroleum revenues means that in future years, significantly less money will be available to fund government programs than we currently have. Because state spending has in recent years become the main driving force behind the growth of the economy, a decline in state spending will have economic effects beyond the reduction of certain government services. Tables 1 and 2 provide a rough estimate of the importance of state spending for the economy. For example, at least one job in six (33,000 employees working directly for state government or working for local government but funded through state transfers) in the Alaskan economy is directly funded by petroleum revenues.

The Recently passed spending limit law will not prevent the revenue decline from translating into a significant spending decline. If spending occurs from translating into a significant spending decline. If spending occurs up to the limit when revenues are available and spending equals revenues when revenue growth is slower that the limit ceiling, the future pattern of spending would be as illustrated in Figure 1. Liquidation of the general and permanent funds closes the revenue gap for only a short time. Reestablishment of the income tax (dashed line) also has only a marginal impact. Alternative resource development cannot produce a tax base to replace the depleting petroleum base. Indicators for 1979 (tables 3 and 4) show that no other resource or manufacturing activity is significant in the Alaskan economy in comparison to petroleum.

If adoption of the spending limit means significant reductions in state spending in future years, a logical alternative spending strategy would be one where the level of spending never fell. A sustainable spending level is based upon sustainable revenues from recurring plus nonrecurring revenues. For nonrecurring revenues, the equivalent recurring value is calculated as the annual real earning of the total value of the nonrecurring revenue viewed as an asset. In table 5 the sustainable revenue flow is estimated at $1.4 Billion (1982 $) based on $800 Million of sustainable revenues and $600 million of investment earnings. The latter is the 2 percent return annually received on state asset holdings of $30 billion (the state share of oil in the ground). Adoption of such a spending program would require very significant set-asides of current revenues into an investment program generating real positive monetary returns to the state treasury. Figure 2 shows the proportion of revenues annually invested to produce a level of investment earnings sufficient to sustain $1.4 billion of spending (including a two-year phase-in period).

The level of spending under this strategy is contrasted with the spending limit strategy in Figure 3. Any variant between the two is possible, indicated by the hashed lines. The figure clearly shows the present-future trade. If in any year more than $1.4 billion of spending (including a two-year phase-in period).

The level of spending under this strategy is contrasted with the spending limit strategy in Figure 3. Any variant between the two is possible, indicated by the hashed lines. The figure clearly shows the present-future trade. If in any year more than $1.4 billion is spent, there must be a year when correspondingly less than $1.4 billion is spent.