April 06, 2021 | 18:36
Deficit Winds Blow Stronger
The Province of Saskatchewan is projecting a $2.6 billion deficit in FY21/22, notably deeper than the $1.9 billion shortfall now expected in FY20/21. The deterioration comes as spending ramps up sharply this fiscal year in response to COVID, offset partly by improved revenues. That marks a record high deficit for the Province, but it's still manageable at roughly 3.2% of GDP. As a reminder, deficits pushed 7% of GDP in the early 1990s, when the fiscal situation was severely stressed, and neighboring Alberta is currently facing a shortfall that weighs in at 5.4% of GDP.
The longer-term fiscal outlook has deteriorated significantly versus last year's plan, with a $770 million deficit persisting by FY24/25—that year was previously expected to mark a return to a balanced budget (that target is now FY26/27).
Summary of Major Policy Measures
Total revenue is projected to rise 2.7% to $14.5 billion in FY21/22, with resource revenues and income taxes expected to post solid gains. The former will rise a solid $232 million on the back of an assumed 28% jump in WTI prices. The Province is assuming that WTI averages $54.33 in FY21/22, which is about $5 below the market level on budget day. The light-heavy differential is expected to widen modestly, while the loonie is pegged at just over 79 US cents. All of these assumptions look reasonable.
Note: A $1 increase in oil prices would lift revenues by $14 million; a $10 increase in potash would add $43 million; and a 1 cent increase in the value of the Canadian dollar would cut $20 million.
The revenue outlook is also based on generally conservative economic growth assumptions. Real GDP is projected to rebound 3.4% in 2021 and grow 3.2% next year. Our call is for a much stronger recovery of 5.4% this year, albeit from a slightly deeper recession in 2020 (-4.5% vs. the government's estimate of -4.2%). Regardless, the key message here is that economy is well into recovery mode this year following the deep hole caused by COVID-19 and the decline in oil prices.
Total spending is projected to jump just over 7% in FY21/22, to $17.1 billion, as the government continues to spend on COVID-related support. The Province outlines $1.5 billion in direct support measures in FY21/22, which is down only slightly from last fiscal year. That said, the bulk of spending this year will fall under economic support rather than health-related spending.
Notably, capital plan spending will continue to run at a steady clip, totalling $3.1 billion in FY21/22, as the Province aims to invest $30 billion by 2030.
With the higher deficit and sturdy capital plan, total borrowing requirements will rise slightly to $4.7 billion in FY21/22 from an already-elevated $4.5 billion last fiscal year. They then dip to $4.3 billion in FY22/23. That will lift net debt to 21.7% of GDP from 19% in FY20/21. While the ratio is marching higher, keep in mind that Saskatchewan now holds the lowest net debt-to-GDP ratio in Canada (pending confirmation from British Columbia's upcoming budget).
The Bottom Line: Saskatchewan is posting a larger deficit as it continues to roll out pandemic-related support, though the support is now geared more toward the economy rather than direct health care. While the path toward balance looks long and slow, the Province still sits in a relatively favourable position versus its peers.