This paper discusses challenges and approaches in managing resource revenues at the subnational level. Subnational resource-rich governments face distinct challenges in managing revenues from volatile, exhaustible resources. These include: unpredictable and discretionary resource revenue transfers between national and subnational governments, which can undermine development planning; resource revenue volatility which can lead to wasteful spending, poor quality investments; over the longer term, the finite nature of oil, gas and mineral revenues can lead to a long period of economic growth followed by a depression; and difficulty in scaling up public investment efficiently when experiencing a revenue windfall.
To address revenue volatility, subnational governments can “smooth” expenditures by delinking revenues from expenditures. When revenues are unexpectedly high, governments can run a surplus, to be saved or used to pay down public debt. When revenues are unexpectedly low, they can draw on those savings or borrow. To prevent long-term booms and busts, governments can also save a portion of resource revenues for future generations, as well as invest in the local economy to generate future growth. Fiscal rules can underpin these policies, constraining government spending decisions and compelling government bodies to adopt a long-term perspective on public finances.
Development planning can help prepare resource-rich regions for life after their oil, gas or minerals have been depleted. Planning helps prevent shortsighted reactions to temporary ebbs and flows in oil or mineral revenues, helps define the role of the resource sector in development, and lays the groundwork for a thriving post-extractive economy.