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Saskatchewan Budget 2012: The Good, the Bad, and the Neutral

Posted: 03/24/2012 7:21 am

Saskatchewan is in an enviable fiscal position. With an unemployment rate of 5.3 per cent, a GDP growth rate of 4.2 per cent, and a balanced budget, the province is the envy of the nation. Tuesday's budget is reflective of the current state of the province. The 4.7 per cent growth in spending is high, but the government managed to submit a balanced budget without increasing taxes.

However, it is important not to become complacent during good times. While some consider this a "bad news" budget, it still contains many of the types of spending programs we'd see in a "good news" budget. Though the government is generally staying the course, the various commitments can broadly be broken down into the good, the bad, and the neutral.

Let's start out with the neutral, since it composes the vast majority of spending. It should be pointed out that provincial governments have little room for flexibility on the majority of spending areas. For reasons beyond the control of provincial governments, healthcare expenditures are rising dramatically.

Healthcare spending comprises 41.8 per cent of the budget, so the 4.9 per cent increase in health spending was a major factor in driving up spending. Education spending, which accounts for 14.3 per cent of the budget (including teachers pensions and benefits), increased by 11.4 per cent. In the absence of fundamental reforms to the education system, and with an influx of young families, this isn't terribly surprising either. The two spending areas accounted for roughly 71 per cent of operating expense growth. Infrastructure spending also increased by 4.5 per cent. Given the backlog of infrastructure spending required in the province, this is also hard to fault the government for. Improving 1200 kilometres of highway isn't cheap.

Now for the bad. The Saskatchewan Party, like the federal Conservative Party, has a love affair with tax credits. The budged allocated an additional $3 million to the Active Family Benefit Program (which already cost $5.5 in 2009), as well as $6.6 million for a first time home buyer's tax credit. While small, these types of tax expenditures are unfairly selective and the benefits they bring are unclear (in the case of the home buyer's tax credit, likely negative). Tax credits are actually worse than direct program spending, since they complicate the tax code, and only benefit people who fit into categories like home owner or hockey mom. Broad-based tax reductions would be more helpful to most than targeted tax credits.

Another spending initiative is a $2000 credit toward tuition for Saskatchewan students who attend post-secondary institutions in the province. This simply amounts to a transfer from those who opt for post-secondary education from those who don't. Again, the benefit is unclear. Besides, $2000 is a drop in the bucket when it comes to the full cost of education. Increasing housing affordability would do more for students than paying part of their tuition.

On the housing affordability front, they also allocated $10.2 million more to the Saskatchewan Housing Corporation. Unfortunately, as history has proven time and again, direct government intervention into housing construction doesn't work out as intended. A better use would simply be to reduce the costs of and barriers to constructing new units.

And now the good news. Fortunately, in addition to the ill-advised housing initiatives above, the government introduced one very good measure. Recognizing that the cost of construction and tax levels on rental income are holding back construction of rental units, the government introduced a 10 per cent reduction in the corporate income tax rate on earned income for new multi-residential units. It will help to bring down the dangerously low vacancy rate, and reduce upwards pressure on rental costs. It will also likely be a net gain to the treasury, since it will help stimulate the construction sector. More importantly, it will help avert a sharp housing crisis.

The government also plans to reduce public sector employment by 500, largely through attrition. Trimming the size of the public sector is a smart long term move to ensure we don't end up having to make tougher decisions during bad times.

Two smaller, yet symbolically important measures, were the elimination of the film tax credit, and funding for the Enterprise Region Program. Both of these moves indicate that the government understands that the cost of targeted economic development programs generally outweighs the benefits. This is an important recognition, even if the saving will only be $7 million annually ($12 million after existing film credits are honoured).

Perhaps the most controversial aspect of the budget was the decision to increases various medical fees. These include an increase in the co-payment for seniors' and children's prescription drugs of $5, an increase of $250 for the cost of ambulance trips under the Senior Citizens' Ambulance Assistance Plan, and a $20 monthly fee for hygienic supplies for residents of special care homes.

There are good reasons to be concerned about these policies taken on their own. However, with rare exceptions, charging user fees is preferable to subsidizing services through general tax revenue. As a rule, if poverty is an issue, it is better to deal with the actual poverty than to mask it through subsidies.

Lastly, increasing the share of the PST given to municipalities to one per cent of the PST was a step in the right direction. Though many municipal politicians were also hoping for greater direct provincial spending in municipal infrastructure, downloading more of the PST is preferable. The less direct involvement the province has in municipal affairs, the better.

Ultimately, the budget delivered yesterday won't break the bank -- assuming the government's fiscal projections are correct. It included modest improvements, and modest drawbacks. Given the state of every other province, it's hard to feel too worked up about the deficiencies.

Nevertheless, good economic times are not a time for complacency. The more efficient our government operates in good times, the less painful bad times will be. This budget nudges the province in the right direction. But it leaves something to be desired.

 

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