Congratulations, Canada! On Monday, our nation joined an exclusive club: countries with sovereign wealth funds. Norway, Kuwait and other resource-rich nations have long tapped royalties and budget surpluses to fund investment vehicles. In this era of geopolitical uncertainty and an erratic neighbour, Prime Minister Mark Carney thinks it is time Canada does the same.
Debt-Funded Scheme
The problem is that we are tapping debt, not revenue. When asked where the fund's initial $25 billion will come from, Finance Minister Francois Philippe Champagne admitted that it will be borrowed. But that is okay, because we will get great rates. "I would say there are only two countries in the G7 which have a AAA credit rating; Canada can borrow on the international market at some of the lowest rates that you can see," Champagne crowed.
Provincial Precedents
Canada already has sovereign wealth funds at the provincial level, with a very mixed track record. Alberta set up its Heritage Trust in 1976 to stabilize the boom-and-bust cycles of its resource-based economy. It has woefully underperformed, in part because in 1982 then-premier Peter Lougheed diverted more than $850 million to shore up farms and businesses during a recession. The fund also did not follow the diversified model of funds like Norway's, despite advice to do so.
Quebec also has a resource-based fund, the Fond des Generations. Created in 2006 to pay down the province's debt, it is financed largely through hydroelectric royalties from Hydro-Quebec. Overseen by the Caisse de Depot, revenues are invested in financial markets; the fund is now worth nearly $17 billion, which is used to offset Quebec's provincial debt.
The Fonds Solidaire Model
But there is another fund in Quebec that is closer to what Carney is envisioning: the Fonds Solidaire, established in 1983 by the Fonds des Travailleurs du Quebec (FTQ), Quebec's largest labour union. The fund's mission is to boost employment and regional development in the province. Like Carney's Canada Strong Fund, it invests solely in domestic businesses. Investors get a 30 per cent tax credit on top of their regular RRSP tax credit, split equally between the province and Ottawa, on a maximum annual contribution of $5,000. The tax credit is necessary to attract investors because the fund does not perform as well as more diversified funds, but buying into it is seen as a patriotic gesture and a means for ordinary people to invest in the province.
Canada Strong Fund Details
There are shades of this in the Canada Strong Fund. Carney claims that the fund will permit Canadians with "a bit of extra money" to buy it directly by launching a retail investment product like a mutual fund or pension scheme where Canadians can buy into the fund and earn a dividend. To mitigate risk, investors' capital will be government-protected. In other words, if investments lose money, the government (aka the taxpayer) will cover the loss.
This is not a sovereign wealth fund in the traditional sense; it is a vehicle for corporate welfare, funded by debt and guaranteed by taxpayers. While other nations use surplus revenues to build intergenerational wealth, Canada is borrowing to invest in domestic businesses, with the promise of protecting investors from losses. This approach risks repeating the mistakes of Alberta's Heritage Trust, where political interference and lack of diversification led to underperformance.
Carney's fund may sound appealing, but it is a risky venture that could burden future generations with debt while providing limited returns. Instead of a true sovereign wealth fund, Canadians are getting a costly experiment in corporate welfare.
