Opinion: Forecasts show Sask. economic strategy is failing

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Saskatchewan’s lagging economy can be traced to its ongoing maintenance of one of the most inefficient and distortionary tax regimes in the country.

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Between 2015 and 2023, provincial GDP grew by less than 0.7 per cent per year, second last in Canada, and last in the west.

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Former longtime bureaucrat Ron Styles, who broke neutrality to advise Saskatchewan’s NDP in the recent election, wrote last October that, if Saskatchewan’s economy continues to lag other regions, the province could return to have-not status. 

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Despite that warning, the mid-year fiscal update confirms that Saskatchewan’s laggard record will continue. GDP growth is projected to be fourth place in 2024, and sixth in 2025, and Saskatchewan will still be second last since 2015. 

On top of that, Saskatchewan’s fiscal house continues to operate in the red. Agriculture expenses that everyone but the government seemed to anticipate have driven the provincial deficit from $273.2 million to $743.5 million.

Financing charges are projected to cost taxpayers $950.2 million, worth nearly a third of the provincial sales tax. 

Saskatchewan has these problems because it maintains one of the most inefficient and distortionary tax regimes in the country. Addressing inefficiencies is the key to balancing the books and attracting new investment. 

The marginal effective tax rate (METR) measures tax costs for investors. A higher METR means less tax competitiveness, discouraging investment.

According to economist Jack Mintz, Saskatchewan has the third highest METR in Canada, 4.5 points above the national average, because of the PST. Unlike the HST, Saskatchewan’s PST applies to several upstream capital purchases. 

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To illustrate the difference in tax bases, to levy the same PST revenue with an HST base, the tax rate would be 9.5 per cent. Thus, although adopting an HST would provide a lasting boost to provincial economic growth, the perception of a tax hike acts as a barrier to action. 

To overcome this obstacle, the government can look to efficiencies in other areas. 

Saskatchewan’s potash royalty is the most inefficient tax regime in the world. Its complexity and irrational restrictions collect little revenue for the high investor costs and risks involved.

Jack Mintz and Duanje Chen found in 2013 that, with an HST, the province could levy a 70 per cent tax on potash profits net of capital expenditures while slightly lowering the investor tax cost. 

Natural Resources Canada projects that potash capital expenditures in 2024 will be $4.7 billion, but only $2.76 billion is relevant for revenue today, given BHP’s ongoing investment in the Jansen mine.

Using this figure, historical averages for gross profits, extrapolated sales, and accounting for corporate taxes, this system would add $176.3 million in 2024.

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In 2022, when potash profits soared and capital expenditures were low, the same model would have added $4.2 billion, with annual interest savings on provincial debt of $184.9 million. 

Mintz and Chen later wrote that a 45 per cent profit tax, even without an HST, would bring the investor tax burden below the international average, when New Brunswick, which no longer produces potash, had the world’s lowest rate.

This policy would reduce revenues by $87.3 million this year, given heightened capital expenditures, but still would have added $1.9 billion in 2022.

On top of royalty reform, Saskatchewan is the second most subsidized province per-taxpayer in the country. Excluding agriculture, the province spent $435 million on subsidies in 2023.

This economic philosophy of winner-picking by government likely shrinks the economy, and stagnant growth since 2015 suggests that such has been the case.

Add in industrial carbon pricing revenues stowed away in unused funds, and Saskatchewan could balance the budget in 2024 with $324.3 million left for tax cuts. 

In any case, Saskatchewan’s present economic strategy isn’t working. Inefficiencies throughout the provincial tax system cost Saskatchewan billions in public revenue and private investment.

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Saskatchewan people were promised a brighter future by this government. It’s time the province took action on tax reform to deliver on that promise. 

Ty Thiessen is a University of Saskatchewan student researching methods of government finance and debt reduction.

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