DBRS Comments on Saskatchewan’s 2017 Budget: A Determined Plan to Return to Balance

DBRS Limited (DBRS) has today commented on the Province of Saskatchewan’s (Saskatchewan or the Province; rated AA with a Stable trend by DBRS) 2017 Budget released on March 22, 2017. The budget provides a three-year plan to return to balance through a series of immediate tax increases and aggressive expense management, including the rationalization or elimination of specific programs and the aim to negotiate a reduction in compensation costs. While the plan is not without risk, it does suggest that the DBRS-adjusted debt burden should stabilize below 23.0% of gross domestic product (GDP) over the medium term – only a modest increase from current levels and consistent with the existing ratings.

In presenting this plan, the Province has acknowledged the longer-term consequences of lower commodity prices and has demonstrated its willingness to make difficult, but necessary, decisions to address the deteriorating budget outlook. The plan introduces modest pro-growth tax reform, rationalizes government services and maintains a focus on core government priories such as health care, education and social services. While DBRS recognizes that the plan is ambitious and savings may not accrue as quickly as expected, DBRS does view the plan as credible because of the extent and immediacy of the proposed measures.

Following an estimated $1.3 billion shortfall in 2016-17, the Province forecasts the deficit to decline to $685 million in 2017-18 (including a $300 million contingency). On a DBRS-adjusted basis, which recognizes capital spending as incurred and includes non-cash pension accrual, this equates to a $1.6 billion deficit, or 2.0% of GDP. Over the medium term, the DBRS-adjusted deficit is expected to decline to about 0.6% of GDP by 2019-20.

Total revenue is projected to rise 3.4% with modest growth in resource revenue and tax measures offsetting the impact of significant one-time federal transfers in the prior year. The budget proposes extensive tax increases as well as a modest rebalancing of the tax system. The Province will seek to increase its reliance on consumption taxation through rate increases and a broadening of the tax bases as well as to reduce its reliance on the income tax system by lowering rates for individuals and businesses. The Province will also reduce or eliminate a number of preferential tax measures and credits and temporarily suspend indexation of the personal income tax system. On a net basis, the tax changes are expected to generate $900 million in incremental revenue in 2017-18 and should enhance the Province’s business and investment tax competitiveness over the medium term.

The plan to reduce spending appears to be ambitious with total expense budgeted to decline by more than $400 million, or 1.2% (excluding the $300 million contingency and capital spending), with outright decreases in health and education. DBRS believes that the Province will be challenged to meet its 2017-18 expense target and will likely require the contingency to absorb in-year spending pressures. The Province’s core program areas continue to face persistent spending pressures with relatively strong population growth, which have necessitated in-year increases in the past. In addition, the plan relies on the achievement of $250 million (3.5%) in negotiated compensation savings, an approach that has not been seen in recent years among provinces. There also remains the potential for unforeseen events (e.g., wildfires in 2015, poor harvest conditions in 2016, etc.).

Declining budget deficits and the Province’s plan to reduce capital investment will help to contain debt over the planning horizon. The DBRS-adjusted debt burden is estimated to be about 22.0% of GDP in 2016-17 and, based on the plan, will rise modestly higher before stabilizing below 23.0% of GDP over the medium term.

The Province expects a gradual economic recovery to take place in the coming years. After contracting in each of the last two years, the economy is now expected to post modest growth of 0.8% in 2017 and average annual growth of 1.9% thereafter. DBRS notes that the outlook for 2017 is notably lower than that projected by the private consensus tracked by DBRS. The Province has assumed modest increases in commodity production and price forecasts appear to be consistent with the private-sector outlook.

This commentary reflects a preliminary assessment of the Province’s budget. DBRS will conduct a formal in-depth review of the Province in the coming weeks and will publish a report at the conclusion.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is Rating Canadian Provincial Governments, which can be found on dbrs.com under Methodologies.

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