Terry McDonald: Riding the boom and bust cycle

The headline of the Financial Times tolls the bell of economic doom:"Oil rout would have wrecked anindependent Scotland's finances."

• Terry McDonald: The dream is dead; long live the Scottish dream

The massive drop in oil prices has flipped the economies of oil-producing regions on their heads, and this new normal appears to be settling in for an extended stay.

This, of course, applies to Newfoundland and Labrador as well. Budgets forecasts based uponoptimistic oilrevenues are being torn asunder, with massive deficits and austerity talk in their wake. It is the fate ofthe single-resource-dependent economyto ride the cycle of boom and bust, feast and famine on themarket's whim.

It is known as The Curse of Oil, and it is hardly a new phenomenon. One of the manifestations it took inCanada was that of "Dutch Disease". High oil revenues drive currency values upward, and this undercutsthe competitiveness of other industries, making the economy further dependent upon the vagaries ofthe petroleum market.

There is only one way offthe revenue roller-coaster that oil wealth provides, but it is a politicallydifficult path of restraint and counter-cyclical finances.

When prices are high and coffers are fillingquickly, this is not the time for tax cuts and spending sprees it is a time for saving and thediversification of investments. That way, when the bottom falls out of the market, there is money thathas been set aside for counter-cyclical spending,to head off a recession.

It is not just fanciful talk, either. Norway has managed to perform in this regard to an astonishingdegree. Norway's investment fund reached the staggering mark of five trillion Kroner for five millioncitizens,thus "We are all millionaires now".

There is even a movement afoot in the Norwegianparliament to mandate that the fund entirely divests itself of fossil fuels further insulating Norwegiansociety from oil-price dependence while following the lead of other major funds toward climate-responsible investments.

Of course, such a move would be easier for Newfoundland and Labrador were the windfalls associatedwith high oil prices not clawed-back from federal equalization formulae. The $11billionthatNewfoundland and Labrador lost out on through a broken Harper pledge would go a long way towardsestablishing such an investment fund in the name of half a million people.

The province cannot invest ina counter-cyclical way if it loses the benefit of the high points of the cycle.

It is this line of thinking that has propelled new momentum into the Scottish independence movementin the face of lower oil revenues.The Scottish National Party has seen a surge in membership since thefailed referendum (more than double) and is dominating in the polls.

Arguing that Westminster hassquandered the revenues accrued, Scots seem willing to face the curse of oil on their own.

Newfoundland and Labrador is no innocent here. Despite the giant renege from Harper, Manning, andcompany, the province still saw record revenue, and, yet, has not seen to insulating itself from oil pricedependence.

Nonetheless, despite the PC profligacy here at home, our budget situation would look agreat deal rosier if the federal Conservatives had honoured their end of the deal.

But hey, I've beensaying that for years.

Follow Terry McDonald on Twitter:@Terry_McD