THE 2008 SASKATCHEWAN BUDGET

Released on March 19, 2008

HIGHLIGHTS

• $347 million surplus for FY 07-08
• 15th straight surplus ($250 million) projected for FY 08-09
• Centrepiece initiative is a $1 billion fund for infrastructure

Saskatchewan finances are coming off a great year in fiscal 2007-08, with the government expected to record its 14th straight budget surplus. The surplus for the General Revenue Fund (GRF) for the current fiscal year (ending this month) is estimated at $347 million, significantly better than the $75 million projected at the time of last year’s budget. For fiscal 2008-09, a $250 million surplus is forecast after a $10 million transfer to a new consolidated fund called the ‘Growth and Financial Security Fund (GFSF)’, a combination of the existing Fiscal Stabilization Fund (FSF) and the Infrastructure Fund (SIF) with a $1.3 billion balance. But whereas tax reductions were the focus of last year’s budget, infrastructure spending worth a total of $1 billion took centre stage this year.

Economic and revenue outlook for FY 2008-09

TD Economics has slated Saskatchewan to be fastest growing province in 2008 at 3%. In contrast, Canada as a whole is set to grow by a mere 1.1%, mostly due to the impact of a U.S. recession. The government’s forecast growth of 2.9% comes in just a shade under our outlook for the province, but prudently below the average private sector forecast of 3.4% at the time of pre-budget consultations. While oil & gas resource royalties poured into government coffers this year, the government has taken a cautious approach in its revenue forecast, assuming that some of the bloom comes off from currently very high resource prices – notably crude oil – in the year ahead. Federal transfers are also expected to be lower. The impact of past tax cuts are also filtering through to lower revenues. On the flip side, royalties from other commodities such as potash, uranium, and coal are expected to increase as are consumption tax revenues and crown corporation dividends. All said, total government revenue is expected to contract by 0.3%, which is similar in percentage terms to what other provinces have slated so far for fiscal 2008-09.

Revenue initiatives took a back seat in this year’s budget. Still of note, however, is a re-instatement of the 10% mineral exploration tax credit. Furthermore, as previously announced, the government confirmed the following two measures to take effect on July 1, 2008: first, a reduction in the corporate income tax rate from 13% to 12% and second, the elimination of capital taxes for all businesses except financial institutions and crown corporations. The small business income threshold will also be raised by $50,000 on the same date to $500,000, which, along with Ontario, will be the highest threshold in the country. Furthermore, the threshold for large financial institutions with regard to capital tax treatment will be raised to $1.5 billion from $1.0 billion effective October 31, 2008. Lastly, the announced elimination of the provincial sales tax on used light vehicles will also take place.

Spending initiatives for FY 2008-09

On the spending side of the ledger, government expenditure will increase by 4.7% in fiscal 2008-09 to reach a total $9.1 billion. The lion’s share of the increased spending is allocated to infrastructure, health, and education. The centerpiece in this year’s budget is a ‘ready for growth initiative’ worth $1 billion to fund capital and infrastructure spending for schools ($160 million), hospitals ($200 million), road and highways ($400 million).

Alberta is all too familiar with the infrastructure spending pressures that accompany an economic boom. Saskatchewan is feeling some of the same growing pains. Finance Minister Rob Gantefoer spoke of how he looked to Alberta on how to handle some of the pressures. Last year, Saskatchewan’s population grew for the first time in more than a decade, largely because its net interprovincial migration turned positive. Regina and Saskatoon’s housing markets are currently Canada’s hottest, with the latest figures (February) showing home appreciating around 50% on a year-over-year basis. It is also the sole province where we forecast housing starts to increase on an annual basis.

Today’s budget reinforces Saskatchewan’s spending priorities, while maintaining the province’s fiscal health, highlighted by a relatively low and falling debt-to-GDP ratio. And while the province plans to rely on its GFSF in the years ahead (2009 through 2011) to cover shortfalls, we see some potential for revenues to come in better than planned.

Saskatchewan’s new government took advantage of a booming provincial economy, bringing down a provincial budget that will pour funding into roads and highways, schools and hospitals. Looking ahead, we urge the government to supplement this approach of addressing vulnerabilities on the spending side with tackling unfinished business on the tax front. In particular, there is growing momentum among provinces to lower corporate income tax rates and improve the investment climate. While Saskatchewan has been making progress in this area, it must be mindful of the risk of being leapfrogged by other jurisdictions – for more on this issue, see our report, “Loosening the Tax Noose on Business Investment – Making Progress” available on our website.

Pascal Gauthier, Economist
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