By Janice Plumstead

March 17, 2015

 

Saskatchewan will be the second province after British Columbia to launch its budget this Spring. Similar to British Columbia, the Saskatchewan government intends to announce a balanced budget for the 2015-16 fiscal year. A third-quarter fiscal report released in November suggested the government will report a budget surplus for 2014-15 fiscal year of $70.9 million.

Whether the Saskatchewan government can deliver on its promise to balance the budget remains to be seen. Saskatchewan Premier Brad Wall has been clear that the current drop in oil prices will mean a $600 to $800 million holein provincial revenues. In his recent address to the Saskatchewan Association of Rural Municipalities, the premier said that while the government will continue its strategy of infrastructure investment and maintaining a low tax environment, it will likely introduce spending cuts and other policy tools to make the budget work.

Meanwhile, the further deterioration in the price of oil over the last two quarters to around US$50 a barrel will reduce expectations for revenue from that source.  A breakdown of non-renewable resource revenue for the province shows that royalties from oil make up 54 per cent of the total, with potash contributing 14 per cent, as shown in the chart below.

Source: Saskatchewan Provincial Budget, Canada West Foundation.

As a result of lower oil prices, economists are beginning to revise their growth projections. For provinces with a concentration of oil and gas operations, the projection is for decreased economic growth for 2015 and 2016. Fortunately for Saskatchewan, in addition to potash, exports of agricultural products and increased manufacturing exports which should result from the weaker Canadian dollar will lessen the effects of lower oil prices and keep the economy moving. Saskatchewan is a major exporter of goods and was the largest exporter per capita in Canada in 2014.

RBC released its March projections which indicate forecast growth for Saskatchewan in 2015 and 2016 is expected to be 2.1 per cent both years. This is a slight change from previous projections, which had forecast growth at 2.2 per cent for 2015 and 2.1 per cent for 2016.

 

Source: RBC Economics Research, March 2015

Compared to other Canadian provinces, Saskatchewan ranks in the middle of the pack in terms of growth. Provinces benefitting from increased exports because of the weak Canadian dollar will see the strongest growth, including Ontario, British Columbia and Manitoba.

Source: Source: RBC Economics Research, March 2015

While Saskatchewan will feel some of Alberta’s pain resulting from cutbacks in capital investment and layoffs in the energy sector, the province has a more diversified economy and will benefit from increased production and exports of potash and agriculture.  The overall outlook for potash has improved with the expectation of continuing demand for food globally though prices remain around US$300 per tonne range. Confidence in Saskatchewan’s potash industry continues. On March 9, Mosaic announced the company would be expanding its K3 mine in Esterhazy with an investment of $1.7 billion.

Debt management

The Saskatchewan government has indicated it will maintain its disciplined approach to budgeting this year. Saskatchewan’s debt management policies are directed by the Growth and Financial Security Act, which requires the preparation of an annual four-year debt management plan, rules for the transfer to or from the Growth and Financial Security Fund and management of the Debt Retirement Fund. Following these policies has served the government well as Saskatchewan has one of the lowest debt-to-GDP ratios in Canada. In the March 18 budget announcement, we expect to see a continuation of this approach.

Source: RBC Economics Research, March 2015

Spending management

The government announced in February a wage freeze for all senior government officials including cabinet ministers and non-unionized health region employees. This freeze is expected to generate $15 million in savings and carry through the 2015-16 fiscal year for executive government and 2015 fiscal year for Crown corporations. The government is also asking MLA’s, school divisions and post-secondary institutions to undertake a similar freeze on wages.

Although somewhat controversial, the government had hired consultants to implement LEAN principles in its $5 billion health department. Preliminary estimates suggest savings to date are $125 million. As the principles are more fully integrated into the department, additional savings should be realized.

Policies that may be introduced when the budget is announced include:

1. Roll-back or limit on the PST revenue-sharing model with municipalities (although if this creates reduced infrastructure spending at the municipal level and increased property taxes, it may be considered counter-productive and not included).2. Increase education property taxes to reduce the provincial share of costs of new teachers and schools to 60 percent from 67 per cent.


Business competitiveness

One of the pillars outlined in Saskatchewan’s Plan for Growth is for the government to increase the province’s competitiveness. To that end, the government has introduced various tax reductions over the last few budget cycles, including cuts to personal income taxes and education property taxes. The premier has suggested there may be new tax incentives to encourage investment in corporate office presence, manufacturing and agricultural processing.

One tax policy which has been recommended in the Plan for Growth is to reduce the corporate tax rate to 10 per cent from 12 per cent. Implementing this recommendation was postponed in the 2014-15 budget and although favoured by the business community, will likely again be put on hold until the province is able to stabilize its revenues.

Saskatchewan is one of the provincial hold-outs, along with British Columbia and Manitoba, continuing to administer a provincial sales tax separate from the federal GST. If Saskatchewan harmonized its sales taxes, it would reduce the cost of business inputs and improve its marginal effective tax rate (MERT). A University of Calgary study looking at MERT across multiple jurisdictions points out that in 2014, Saskatchewan was ranked with other high tax jurisdictions such as Germany and the UK. Harmonization of the sales tax and reduction of the corporate income tax would improve Saskatchewan’s tax competitiveness resulting in the MERT being more in line with Ontario and Alberta.¹

Economic vision

In 2012, the government launched the Saskatchewan Plan for Growth setting out its vision for a province of 1.2 million people by 2020. Key goals include investing in infrastructure and supporting increased economic activity in all sectors. The premier has been clear in various news releases that spending for infrastructure will not be cut in the upcoming budget. Under the Plan for Growth, the commitment was to invest $2.5 billion over three years. The current challenge for the government is to determine how to finance the pending infrastructure projects. One option is a possible roll-back or limit on the PST revenue-sharing model, although municipalities suggest that if this happens, some projects may be put on hold or they may have to increase property taxes to cover the shortfall. Also under consideration is the continuation and expansion of public-private partnerships to move infrastructure projects forward.

As signaled by the premier, the budget is likely to include new incentives intended to increase investment in manufacturing, agriculture processing and corporate office presence aimed at strengthening the diversity of the economy. New business investment will help to ensure the government can reduce its reliance on any one industry or commodity.

Conclusion: Potential budget initiatives

Initiatives that may show up in the 2015-16 budget could include some of the following:

1.  Revise the PST revenue-sharing model with municipalities, although if this creates reduced infrastructure spending at the municipal level and increased property taxes, it may not be introduced as it would be counter-productive to the province’s overall goals.2. Increase education property taxes to reduce the provincial share of costs of new teachers and schools to 60 per cent from 67 per cent.

3. Introduce incentives to encourage new business investment in manufacturing, processing and corporate office presence that will increase jobs in Saskatchewan.

4. Reduce the corporate tax rate from 12 per cent to 10 per cent, in line with Alberta and as outlined as a priority in the Plan for Growth.

¹The 2014 global tax competitiveness report: a proposed business tax reform agenda, Duanjie Chen and Jack M. Mintz, The School of Public Policy, University of Calgary, Vol 8, Issue 4, February 2015