Last month, Prime Minister Mark Carney announced the creation of the Canada Strong Fund, a new federal investment vehicle that would invest in domestic projects and companies.

It has been pitched as a sovereign wealth fund (SWF) by the government, and this claim has been echoed in the media. Despite this, the Canada Strong Fund is not, by any standard definition of the term, a SWF. So, this raises a straightforward question: what is it, exactly? And if it is not a SWF, what purpose does it serve instead?

What is a sovereign wealth fund?

A SWF is a government investment fund that deploys existing wealth, such as resource windfalls and current account surpluses, into diversified, usually foreign assets for macroeconomic adjustment. In other words, a SWF may be characterized as a kind of government savings account.

The state, through various streams, takes capital out of the domestic economy and invests it into medium-to-high yield assets to generate future returns. This has an intended effect of raising aggregate national savings, reducing present consumption in favour of assets that compound over time.

The Canada Strong Fund will be initially financed through government-deficit spending, meaning there are no savings to be found. The federal government is borrowing money to invest elsewhere — the opposite of what a SWF traditionally does. 

This bet might pay off if the returns on these investments are higher than their cost, but that is not certain. More importantly, borrowing to invest would raise the national debt without reducing present consumption, diminishing overall savings.

To be fair, a SWF does not require a fiscal surplus by the central government. That is not what is meant by national savings here, and such a condition would disqualify any SWF by a country that ran a temporary deficit.

China, for example, maintains the US$1.37 trillion China Investment Corporation (CIC), despite a deteriorating fiscal situation. But China nonetheless funded its endeavour through bond purchases of its foreign exchange reserves, accumulated through decades of current account surpluses. In practice, China was reorganizing wealth its economy had already.

Canada has no equivalent reserve pool, and no........

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