Barnett, S. and Ossowski, R. (2003) ‘Operational aspects of fiscal policy in oil- producing countries'

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Precept 7 states that resource revenues must foster continued high levels of domestic investment if those revenues are to promote sustainable and inclusive economic growth. This introduces the question of how those resource revenues ought to be used and consequently, also which generation has a right to those revenues. The paper by Barnet and Ossowski provides a number of general principles, which guide government in finding an answer.

 The paper begins with the recognition that in oil producing countries, oil revenue is exhaustible, volatile, uncertain and primarily derived from abroad. This in turn poses a unique challenge in fiscal management for these countries. The paper seeks to address these challenges and outlines a number of general principles which are important in the formulation and assessment of fiscal policy. These are:

  • - Decoupling the overall balance into an oil and non-oil balance is essential in understanding fiscal policy developments, evaluating sustainability and determining the macroeconomic impact of fiscal policy. As such “non-oil balance should feature prominently in the formulation of fiscal policy” (p. 3).
  • - As large fluctuations in fiscal policy have a destabilising effect upon aggregate demand, create macroeconomic volatility and foster uncertainty, “the non-oil balance, especially expenditure, should generally be adjusted gradually” (p. 3).
  • - Government ought to attempt to accumulate substantial financial assets during oil production. Oil wealth should be transformed into financial wealth, thus it ought to be viewed as a portfolio transaction with the objective of accumulating assets during production which are able to sustain fiscal policy in the post-oil period.

   In addition, the paper makes a number of general observations regarding the desirability of non-oil deficits.

  • - It is noted with precaution that oil-producing countries can in fact run sizable non-oil deficits, but decisions should be determined by an assessment of government wealth and not merely oil income.
  • - In the government’s fiscal policy support needs to be given to the broader macroeconomic objectives such as growth and stability.
  • - Due to pro-cyclical fiscal policies and recurrent fiscal deficits, oil producing countries should focus on fiscal strategies which “break pro-cyclical fiscal responses to volatile oil prices, targeting prudent non-oil fiscal balances, and reducing the non-oil fiscal deficits over time” (p. 4).

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