Saskatchewan’s Incredible Shrinking Government

During the sixteen years that the NDP governed Saskatchewan, provincial expenditures fell from just over 30% to just over 20% of Gross Domestic Product (GDP). This accomplishment is dubious for a political party committed to using government as a vehicle to redistribute wealth and finance important public programs. Why did the proportion of Saskatchewan’s economy available for these purposes decline so much?

The following table examines the three sources of provincial spending: borrowing, federal transfers, and provincial revenues. The last full fiscal year of Conservative government was 1990/91. (Both the deficit and provincial spending jumped temporarily in 1991/92, possibly because it was an election year.) The last full fiscal year of NDP government, and the most recent year for which Statistics Canada data exists, is 2006/07.

Government of Saskatchewan Finances

(figures as shares of GDP)

The hallmark of Roy Romanow’s government was austerity to balance the provincial budget. The Saskatchewan NDP has always believed in balanced budgets. Even Keynesian economists, who might argue that Saskatchewan should have been running deficits in the early 1990s, would advocate surpluses in today’s economic boom.

However, the ultimate transition from deficits to surpluses did not greatly reduce the size of Saskatchewan’s government. Other things being equal, it lowered provincial spending by 1.5% of GDP.

Of course, other things were not equal. Since Saskatchewan’s economy and “fiscal capacity” grew faster than other provinces, it became ineligible for Equalization payments while the NDP was in power. In total, federal transfers to Saskatchewan fell by 3.7% of GDP. Equalization’s goal of roughly comparable public services in all provinces implies higher spending relative to GDP in poor provinces than in rich provinces.

However, most provincial spending is financed by own-source revenue. Even as New Democrats mocked the Saskatchewan Party for presenting tax cuts as the ubiquitous remedy for the province’s ailments, the NDP implemented the largest tax cuts in Saskatchewan’s history. Provincial revenues dropped by 3.6% of GDP, which equalled about $1.7 billion in 2006.

Saskatchewan’s NDP government cannot be faulted for balancing the provincial budget or for federal policy.  But its decision to give up so much of the fiscal capacity that could have financed a social-democratic agenda must be questioned.

Indeed, the above figures almost certainly understate the cost of tax cuts. Had tax rates remained at 1990/91 levels, provincial revenues would have increased as share of GDP. As real incomes rise, people graduate into higher tax brackets (even if these brackets are indexed to inflation). As the economy grows, corporate profits grow faster and tax-deductible losses are exhausted, so corporate taxes rise more than GDP. Since most natural resources are Crown-owned, rising commodity prices should expand provincial royalties faster than the rest of the economy.

In other words, the appropriate benchmark is higher than the 22.5% of GDP collected in 1990/91. The tax cuts implemented through 2006/07 cost more than 3.6% of GDP.

However, many of the NDP government’s tax cuts were not fully implemented by 2006/07. The decline of provincial revenue to 18.9% of GDP mainly reflects the huge income-tax cuts introduced in Saskatchewan’s 2000 budget and periodic resource-royalty reductions.

The 2006 budget’s schedule of deep corporate-tax cuts continues through mid-2008. Similarly, the provincial sales-tax rate was lowered from 7% to 5% midway through the 2006/07 fiscal year. Figures for 2007/08 will reveal the full annual cost of this cut. In other words, even if the Saskatchewan Party does not cut taxes much further, the NDP’s tax cuts will continue reducing provincial revenue as a share of GDP.

Premier Romanow (1991-2001) was explicitly committed to combining progressive social policy with free-enterprise economic policy, an approach that became known as the Third Way. The challenge, of course, is that progressive social policy costs money. Low royalties made balancing the budget more difficult and subsequent surpluses (and deficits) financed income-tax cuts rather than a social democratic agenda.

Premier Lorne Calvert (2001-2007) seemed genuinely committed to the notion that government should do good things for people, but lacked a fiscal plan to consistently finance such an agenda. He accepted the tax cuts enacted by Romanow and introduced a massive array of further tax cuts.

In the recent election, the main criticism of Calvert’s universal pharmacare program was its potential cost. The promise would have been far more credible if combined with a revenue-raising strategy to pay for it. The Conservative governments of Newfoundland and Alberta created ample political (and economic) space for Saskatchewan’s NDP government to propose higher resources royalties, but it chose not to.

It is disappointing not that the NDP lost an election after 16 years in power, but that relatively little progressive policy was implemented during those 16 years. This statement is particularly true compared to the previous Saskatchewan NDP governments of Tommy Douglas, Woodrow Lloyd, and Allan Blakeney. Indeed, academic analysis of the Blakeney government identifies expanding provincial revenues as an essential ingredient to policy innovation.

The good news is that, despite a low share of the popular vote, the NDP hung onto enough seats to make a serious effort to regain power in the next provincial election, scheduled for November 2011. The party will engage in some sort of renewal process between now and then. This renewal should include a firm commitment to more progressive taxation and to collecting a fair return on the exploitation of Saskatchewan’s nonrenewable resources. Otherwise, the province’s next NDP government will lack the funds needed to finance its social priorities.

This assessment is not entirely retrospective. I made essentially the same points four years ago in The Commonwealth, journal of the Saskatchewan NDP (see my article beginning on page #32, which is page 34 of 52 in the PDF).