Back in black and aiming to stay there By Catherine Maltais / Warren Lovely March 20, 2019 Highlights The summary deficit for the year ending March 31 is now estimated at $380 million (0.5% of GDP), a $15 million deterioration from Budget 2018. This $380 million deficit likewise represents a deterioration compared to the more recent mid-year projection ($348 million deficit). This extra red ink can be traced to lower revenues (off $51 million) which exceeded a lower-than-expected expense tally (-$20 million). The fresh fiscal plan sees a $34 million surplus in the coming fiscal year. That s a non-trivial year-over-year improvement, with the budget balance improving by some 0.5%-pts of GDP from one year to the next. This $34 million 2019-20 surplus is to be followed by a string of budget black ink, with incremental larger surpluses each and every year out to 2022-23. The budget assumes 4.8% top-line revenue growth in 2019-20. You ll find most of the year-on-year revenue growth tied to taxation, natural resources royalties and improved results at a couple GBEs (after a tough prior year). While there are no new taxes or tax increases, a resource credit is being nuked and a new tax credit for volunteer firefighters and volunteer emergency first responders was introduced. The budget assumes a US$221/KCl tonne price for 2019-20, up nearly 5% year-on-year. Sensitivities suggest that a US$10/KCl tonne change in the average potash price is worth $54 million, all else equal. Oil and natural gas royalties are expected to hold relatively steady in the fiscal year ahead, as a narrower differential [24.8% of WTI] is offset by a lower WTI price [US$49.75/bbl] and declining production levels. Again, referencing official sensitivities, each US$1/bbl change in WTI looks to be worth $15 million in royalties, ceteris paribus. On its own, a stronger Canadian dollar tends to curtail the resource royalty outlook, owing to translational impact of converting US$ sales into fewer loonies. As a so-called have province (i.e., not eligible for Equalization), federal transfers comprise a below-average share of revenue in Saskatchewan, about 16% in 2019-20. And even though cash entitlements via health and social transfers are growing, Saskatchewan expects to receive fewer federal transfers overall, as some infrastructure envelops and disaster assistance payments wind down. On the spending side of the ledger, the budget assumes total spending will be held to less than 2% in the coming fiscal year. Priority investments were focused on health care, seniors, families and classrooms. The budget outlines a total capital investment in excess of $2.7 billion in 2019-20, including $1.6 billion for Crowns and $1.1 billion for the Saskatchewan Builds Capital Plan. This latter amount is for infrastructure expenditures, including new/continued investments in health, education, highways, and municipalities. Investments via the Saskatchewan Builds Capital Plan are expected at $1 billion in 2020-21, $982 million in 2021-22 and $958 million in 2022-23. Real GDP is estimated to have grown by 1.0% in 2018. Crop production was up 1.5%, making for the third-largest crop in history. The volume of potash sales is also estimated to have increased by 13.3%, while manufacturing sales shot some 11% higher. Employment grew by 2.4K last year, with further gains on tap for 2019 (+3.5K) and 2020 (+4.3K). The outlook for 2019 remains generally constructive, despite some ongoing challenges in the oil sector. Agriculture and potash industries remain strong, supporting a real GDP growth projection of 1.2% for 2019. Real GDP growth is expected to gather some steam in 2020, running at 2.4%, spurred by higher anticipated oil production and investment resulting from higher oil prices. Further out, growth is expected to enjoy a roughly 2% average annual clip. Public debt (net of sinking funds) is estimated at $21.7 billion in Budget 2019, up $1.7 billion from Budget 2018 and $1.8 billion higher than the latest available update. The public debt-to-gdp ratio, which currently resides at 25.8%, is expected to gradually increase to 27.6% in 2023. Total borrowing requirements are estimated at $2.3 billion in 2019-20, down from $3.2 billion in 2018-19. More specifically, capital market borrowings through Canadian Debentures are projected at $1.95 billion, down from $2.75 billion in 2018-19.
Closing out fiscal 2018-19 The summary deficit for the year ending March 31 is now estimated at $380 million (0.5% of GDP), a $15 million deterioration from Budget 2018. There was an $87 million increase in revenues (+0.6%), notably coming from non-renewable resources, federal government transfers, and other own-source, partly offset by lower revenues from taxation and government business enterprises (GBEs). Expenses, on the other hand, were up $101 million vs Budget 2018 (+0.7%), primarily for education and health. Debt charges are now expected to be $21 million lower than projected at the time of Budget 2018. This $380 million deficit now projected for 2018-19 likewise represents a deterioration compared to the more recent midyear projection ($348 million deficit). This extra red ink can be traced to lower revenues (off $51 million, largely attributable to lower net income from GBEs, partly counterbalanced by higher non-renewable resources), which exceeded a lower-thanexpected expense tally (-$20 million, including a $10 million diminution in debt charges). Back in black in 2019-20 Staying true to a prior fiscal commitment, Saskatchewan is delivering a balanced budget for 2019-20. Specifically, the fresh fiscal plan sees a $34 million surplus in the coming fiscal year. That s a non-trivial year-over-year improvement, with the budget balance improving by some 0.5%-pts of GDP from one year to the next. What will it take to make this coming year s fiscal plan come true? Well, the budget assumes 4.8% top-line revenue growth in 2019-20. While there are no new taxes or tax increases, a resource credit is being nuked (read on). A new tax credit for volunteer firefighters and volunteer emergency first responders was introduced. Digging below the surface you ll find most of the year-on-year revenue growth tied to taxation, natural resources royalties and improved results at a couple GBEs (after a tough prior year). Looking at each of these in turn, the lift in tax revenue captures a negative prior-year income tax adjustment that is dropping out (i.e., there was a hit to 2018-19 that is not expected to repeat). Sales tax revenue is also seen supported by a generalized strengthening in the domestic economy. Refer to our related commentary on the economic outlook further on. When it comes to natural resource revenue, Saskatchewan has always had a little more diversity than some of its commoditylevered provincial peers. The $1.83 billion of resource revenue projected for 2019-20 amounts to 12% of total provincial revenue significant sure, but hardly the only thing providing fiscal traction in this province. In the coming fiscal year, potash royalties get a lift from the elimination of the Saskatchewan Resource Credit, starting April 1. That marks a change to a resource royalty regime that s been in place since 1990 and is being defended as a means of better ensuring that the people of Saskatchewan receive a fair and balanced return for their potash. Also contributing to the incremental potash royalty take is an assumed increase in the average mine netback price and rising sales volumes. The budget assumes a US$221/KCl tonne price for 2019-20, up nearly 5% year-on-year. Sensitivities suggest that a US$10/KCl tonne change in the average potash price is worth $54 million, all else equal. Oil and natural gas royalties are expected to hold relatively steady in the fiscal year ahead, as a narrower differential [24.8% of WTI] is offset by a lower WTI price [US$49.75/bbl] and declining production levels. Again, referencing official sensitivities, each US$1/bbl change in WTI looks to be worth $15 million in royalties, ceteris paribus. On its own, a stronger Canadian dollar tends to curtail the resource royalty outlook, owing to translational impact of converting US$ sales into fewer loonies. Turning to GBEs, the $171 million or 17% surge flagged for 2019-20 is really about the basis of comparison, as the Workers Compensation Board and Auto Fund bounce back after onetime investment losses. There s also a nice assist from SaskPower due to higher electricity sales/exports, including to Alberta (call that a welcome example of interprovincial trade). As a so-called have province (i.e., not eligible for Equalization), federal transfers comprise a below-average share of revenue in Saskatchewan, about 16% in 2019-20. And even though cash entitlements via health and social transfers are growing, Saskatchewan expects to receive fewer federal transfers overall, as some infrastructure envelops and disaster assistance payments wind down. On the spending side of the ledger, the budget assumes total spending will be held to less than 2% in the coming fiscal year. Priority investments were focused on health care, seniors, families and classrooms. That included new money for mental health and addictions, funding for a new long-term care facility, an increased student loan program and incremental disability supports. On safety, the budget earmarked multi-year funding to improve safety features at roadway intersections, among other things. Glancing at the spending pie, you ll see nearly 40% of annual outlays going to health and a further 22% funneled into education. The budget outlines a total capital investment in excess of $2.7 billion in 2019-20, including $1.6 billion for Crowns and $1.1 billion for the Saskatchewan Builds Capital Plan. This latter amount is for infrastructure expenditures, including new/continued investments in health, education, highways, and municipalities. Investments via the Saskatchewan Builds Capital Plan are expected at $1 billion in 2020-21, $982 million in 2021-22 and $958 million in 2022-23. A look at the medium term fiscal plan Once the budget is officially balanced, Saskatchewan plans to keep it that way. The modest 2019-20 surplus is to be followed by 2
a string of budget black ink, with incremental larger surpluses each and every year out to 2022-23. Refer to the fiscal table on page 4. Top-line revenue is expected to grow at an average annual rate of 2.1% in the final three years of the fiscal plan, with expenses advancing at just a slightly slower rate (2%) over that same timeframe. In other words, staying in balance isn t predicated on sustained explosive revenue growth, but would nonetheless imply a fair degree of ongoing spending restraint (i.e., expenditures that are declining in real per capita terms). As it stands, Saskatchewan s accumulated deficit is set to close out 2018-19 at ~$155 million, equivalent to a very skinny 0.2% of GDP. Based on the surpluses telegraphed here, the accumulated deficit would be wiped out by 2021-22 (i.e., in three years time). Note that the accumulated deficit is a narrower deficit of debt, and we explore the outlook for net debt and borrowing on page 3. Underlying economic assumptions Real GDP is estimated to have grown by 1.0% in 2018. Crop production was up 1.5%, making for the third-largest crop in the province s history. The volume of potash sales is also estimated to have increased by 13.3%, while manufacturing sales shot some 11% higher, building on 2017 gains and the second strongest growth among provinces. Employment grew by 2.4K last year, with further gains on tap for 2019 (+3.5K) and 2020 (+4.3K). That should be good enough to keep the unemployment rate running at around 6%. Overall, the outlook for 2019 remains generally constructive, despite some ongoing challenges in the oil sector. Agriculture and potash industries remain strong, supporting a real GDP growth projection of 1.2% for 2019. Real GDP growth is expected to gather some steam in 2020, running at 2.4%, spurred by higher anticipated oil production and investment resulting from higher oil prices. Further out, growth is expected to enjoy a roughly 2% average annual clip. burden but sizeable deficits there have meant fairly rapid debt accumulation in recent years. In general, Saskatchewan s relatively modest deficits/commitment to return balance and less rapid debt accumulation has helped protect its credit ratings. Debt is clearly affordable, with interest charges consuming less than 5% of annual revenues. Total borrowing requirements are estimated at $2.3 billion in 2019-20, down from $3.2 billion in 2018-19. More specifically, capital market borrowings through Canadian Debentures are projected at $1.95 billion, down from $2.75 billion in 2018-19. Reflecting on the $2.75 billion of domestic bonds issued in 2018-19, that tally included $1 billion in the 10-year sector (building the 3.05% Dec-28 benchmark up to respectable size). But given the nature of the borrowing requirement (much of it linked to capital projects at its large Crowns), the province continued to skew more of its paper out the curve. That saw Saskatchewan tap and then close out the 3.3% Jun-48s, establish a new 30-year benchmark (3.1% Jun-50s, with currently $600 million o/s), alongside issuance of the even longer 2.95% Jun-58s ($550 million o/s). All told, Saskatchewan has presented a multi-year fiscal plan of modest budget surpluses and controlled increases in net debt. It places Saskatchewan on the more fiscally sustainable side of the provincial scorecard. And it s a fiscal posture, combined with relatively modest net new borrowing requirements, that warrants superior credit ratings and tighter spreads vs much of the provincial government universe. Call it credit positive. Debt and borrowing Public debt (net of sinking funds) is estimated at $21.7 billion in Budget 2019, up $1.7 billion from Budget 2018 and $1.8 billion higher than the latest available update. This $1.8 billion increase mostly stems from $1.2 billion in new debt to enable financing of infrastructure assets to the General Revenue Fund (GRF) under the Saskatchewan Builds Capital Plan. A further $650 million increase in public debt is related to the utility Crown corporations. The public debt-to-gdp ratio, which currently resides at 25.8%, is expected to gradually increase to 27.6% in 2023. By way of an interprovincial comparison, Saskatchewan is in relatively strong company when it comes to net debt-to-gdp. As at March 2019, the province s net debt burden was largely in-line with British Columbia. Technically, Alberta has a lower debt 3
Saskatchewan Budget Forecast Budget Plan $000 000 2018-19 2018-19 2019-20 2020-21 2021-22 2022-23 Consolidated Budget Total revenues 14,243.5 14,330.3 15,025.1 15,339.0 15,668.0 15,992.0 Taxes 7,214.9 7,169.9 7,588.5 of which provincial sales tax 2,155.0 2,230.0 2,304.7 Non-renewable resources 1,482.1 1,705.6 1,826.8 Net income from Government Business Enterprises 1,078.0 909.4 1,080.5 Other revenue 2,006.5 2,042.7 2,062.1 Transfers from the Government of Canada 2,462.0 2,502.7 2,467.2 Total spending 14,608.8 14,710.2 14,990.7 15,290.0 15,596.0 15,908.0 Program expenditure 13,954.2 14,076.1 14,296.3 As of Health 5,765.3 5,807.7 5,888.2 As of Education 3,263.3 3,325.8 3,282.5 As of Other 4,925.6 4,942.6 5,125.6 Debt servicing 654.6 634.1 694.4 Surplus (deficit) * (365.3) (379.9) 34.4 49.0 72.0 84.0 Public debt (end of year - net of sinking funds) General Revenue Fund and Gov. Service organizations 10,775.1 10,776.4 11,934.1 13,000.0 14,100.0 15,000.0 Government Business Enterprises 9,259.8 9,107.4 9,757.8 10,100.0 10,500.0 11,000.0 Total: Public Debt 20,034.9 19,883.8 21,691.9 23,100.0 24,600.0 26,000.0 As a % of GDP 24.4% 24.1% 25.8% 26.5% 27.3% 27.8% Net Debt Beginning of year 11,774.6 11,239.6 12,131.5 12,362.1 Summary deficit (surplus) 365.3 379.9 (34.4) (49.0) (72.0) (84.0) Acquisition of Government Service Organization Capital Assets 1,118.0 1,113.7 920.3 Amorization, disposal and adjustments (610.1) (601.7) (655.3) End of year 12,647.8 12,131.5 12,362.1 Borrowing requirements 3,206.1 3,211.8 2,264.7 For Crown Corporations 731.1 736.8 858.2 For Government - operating 975.0 975.0 106.5 For Government - Capital Plan 1,500.0 1,500.0 1,300.0 Pension liabilities Beginning of year 7,695.5 7,658.9 7,318.2 Adjustment to account for pension costs on an accrual basis (393.2) (340.7) (448.7) End of year 7,302.3 7,318.2 6,869.5 Source: Budget documents, Saskatchewan Ministry of Finance. 4
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