June 15, 2020 | 21:52
Assessing the Fallout
The Province of Saskatchewan is projecting a $2.4 billion deficit in FY20/21, versus a $319 million shortfall now expected in FY19/20. Resources revenues have been hit hard by the decline in oil prices, while spending has jumped alongside COVID-related support measures. That marks a record high deficit for the Province, but it's still manageable a just under 3% of GDP—for reference, deficits pushed 7% of GDP in the early-1990s, when the fiscal situation was severely stressed. There is no plan presented beyond FY20/21.
Notably, this is among the first looks at provincial finances since the pandemic broke out and, while there is still plenty of uncertainty, the deficit forecast is in-line with our expectations—we'll see if the same theme holds as more Provinces update their projections.
Summary of Major Policy Measures
Total revenue is projected to fall 8.3% to $13.6 billion in FY20/21, with resource revenues and income taxes falling. The former looks to be down significantly amid the drop in oil prices, falling $750 million from FY19/20. WTI oil is expected to average $30 this year, down from $54.80 last fiscal year, while the loonie is pegged at 71 US cents.
Note: A $1 increase in oil prices would lift revenues by $11 million; a $10 increase in potash would add $64 million; and a 1 cent increase in the value of the Canadian dollar would cut $22 million.
The revenue outlook is also based on reasonable economic growth assumptions. Real GDP is projected to fall 6.3% in 2020 before rebounding 4.6% next year. Our call is similar at -6.2% this year, but a bit stronger at +5.3% in 2021. Regardless, the key message here is that economy has fallen into a deep hole caused by COVID-19 and the decline in oil prices, but should be well into recovery mode next year.
Total spending is projected to jump 5.7% in FY20/21, to $16.1 billion.Recall that the Province laid out the spedning side of the budget in early March (but held back on a revenue forecast because of deep uncertainty). The current spending plan is running $502 million above the March edition.
Notably, capital plan spending will jump to $3.1 billion this year as part of a two-year, $7.5 billion program. This marks an upward turn after capital plan spending fell in two consecutive years. Hospitals, schools and transportation infrastructure will be priority areas.
With the higher deficit and ramped-up capital plan, total borrowing requirements will jump to $4.5 billion in FY20/21 from $2.1 billion last fiscal year. That will lift net debt to almost 18% of GDP from 15.1% in FY19/20. It's been a steady march higher in the net debt-to-GDP ratio since the oil shock, but the level remains comfortably below its peers in Central and Atlantic Canada.
The Bottom Line: No big surprises in this more complete budget update, as oil prices and the COVID shock took a chunk out of Saskatchewan's bottom line. About nine other provinces are soon to follow...