The Saskatchewan Party government pulled out all the stops this week to report an ostensibly balanced budget, quite possibly the last one before next spring's provincial election.
The drop in oil prices is a huge fiscal blow to Saskatchewan, and one of the ways the government projects continued balanced budgets is by assuming a rebound in oil prices. Perhaps more significantly, it assumes no corresponding rebound in the Canada-U.S. exchange rate this coming fiscal year:
Source: Provincial Budget, page 50.
Historically, there has been a very close correlation between oil prices and the exchange rate. Yet the Saskatchewan government is assuming that, by 2018-19, the price of oil will recover three-quarters of the way to $100 per barrel while the exchange rate will recover only about one-quarter of the way to parity.
The budget notes (on page 47) that every US$1 increase in the price of oil boosts provincial royalty revenue by $23 million. However, every one-cent increase in the exchange rate reduces provincial royalty revenue by $38 million.
The exchange rate is so important to provincial finances because commodity prices are denominated in U.S. dollars. A higher exchange rate lowers the Canadian-dollar value not only of oil revenue, but also of potash and uranium revenues.
The Saskatchewan government projects the fiscal benefits of rising commodity prices without the fiscal costs of a rising exchange rate.
Beyond optimistic assumptions, this week's budget included some policy changes to collect more revenue. In particular, with oil down, the provincial government looked to potash companies for additional revenue.
Some of us thought that our province should have been collecting a better return from potash even when oil prices were high. In 2012, I proposed closing four specific loopholes in the Potash Production Tax:
- The ongoing holiday for sales in excess of the 2001 and 2002 average.
- The deduction of Crown royalties against the Production Tax.
- The Saskatchewan Resource Credit.
- The 120 per cent write-off of investment in calculating the Production Tax.
Budget 2013 reduced the Saskatchewan Resource Credit from 1 per cent to 0.75 per cent of sales. I would have eliminated it altogether, but reducing it was certainly a step in the right direction.
The budget begins to address the 120 per cent write-off. On the one hand, it extends the write-off from investment in excess of 2002 levels to all investment. On the other hand, it stops companies from deducting the whole 120 per cent right away and makes them spread it out over a few years.
Largely as a result of this policy change, potash revenues are projected to jump by $233 million between the current fiscal year and the upcoming one (page 78). PotashCorp, which comprises about half of the industry, complains that the change will reduce its 2015 profit by $100 million.
In one sense, the government is just borrowing against future potash revenues -- collecting more money now by pushing a slightly larger write-off out into the future. To quote the budget (page 56), "This change will provide the Province with an immediate temporary increase in revenue from the potash industry by deferring deductions for current capital spending to future years."
But this move calls attention to the magnitude of the write-off and the potential to collect more revenue from potash. The budget also promises a broader review of the Potash Production Tax. I say, "Bring it on!"
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