Budget Fails to Address Saskatchewan's Economic Challenges

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posted April 5, 2004

Economic prosperity is clearly not a priority. That was the central message from Wednesday’s provincial budget and precisely the reason young, educated, and skilled, Saskatchewanians continue to leave the province. Instead of focusing on economic growth with rising incomes, employment growth, and increased investment, the government chose to make Saskatchewan even more uncompetitive by raising taxes.

Genuine reform must be undertaken to deal with the province’s core problems, namely a punitive business tax regime, a rigid and underperforming labour market, and an anachronistic Crown Corporation sector, if Saskatchewan is to move towards an opportunities-based economy.

Between 1996 and 2001, some 25,000 Saskatchewanians, representing 2.7 percent of the province’s population migrated to other provinces, principally Alberta and Ontario. This is a stark deterioration from the previous five-year period when 20,000 citizens, representing 2.1 percent of the population left Saskatchewan. In fact, over the last ten-year period Saskatchewan has recorded the second highest rate of out-migration in the country, behind only Newfoundland.

The reason the young and educated are leaving is clear: there are few opportunities to be had in Saskatchewan. For example, total employment grew at an average of 0.5 percent between 1998 and 2002, the lowest among the Canadian provinces. Saskatchewan’s job creation record is even more disturbing when compared with bordering US states. Poor labour market performance results in part from Saskatchewan’s rigid labour relations laws, high unionization rates, and a large public sector.

Another significant impediment is Saskatchewan’s dismal performance in attracting business investment. Between 1990 and 2002, Saskatchewan recorded the second lowest level of total real per person business investment. Specifically, Saskatchewanians received $8,552 in per capita business investment (total) compared with the national average of $19,705. Put differently, Saskatchewan recorded 43.4 percent total per capita business investment compared with the national average.

The lack of business investment should come as no surprise given Saskatchewan’s punitive business tax regime. Saskatchewan maintains the highest effective business tax rates, calculated to include business income taxes, corporate capital taxes, and sales taxes on business inputs. Saskatchewan has the highest rate in 6 of 9 industrial categories and ranks second highest in two of the remaining three categories.

Overall, Saskatchewan’s effective tax rate on capital is the highest in the country at 36.6 percent; compares poorly with BC (30.1 percent), AB (24.6 percent), and ON (32.7 percent). Interestingly, Saskatchewan’s effective tax rate on capital is quite close to Manitoba’s 35.1 percent and both provinces experience similar problems: out-migration, low business investment levels, and sub-par income growth.

Research overwhelmingly indicates that uncompetitive and punitive taxation of business leads to reduced levels of investment, which in turn lead to lower levels of productivity, which in turn lead to lower levels of income. The increase in the provincial sales tax announced in Wednesday’s budget will only further deteriorate Saskatchewan’s competitiveness as the province continues to charge sales tax on business inputs.

To firmly place Saskatchewan on the path to prosperity, reforms similar to those enacted in Alberta and Ontario must be undertaken. Saskatchewan must open its doors to business and to restore the incentives for investment, risk-taking, and entrepreneurial activities. To that end, Saskatchewan must embark on a fiscal austerity program, including both tax and spending reductions, and adjust the rules and structure of its labour market.

Most importantly, the taxation of capital must be reduced. Specifically, Saskatchewan must eliminate capital taxes; reduce corporate income tax rates from 17.0 percent to 8.0 percent in the short-term, and reform the province’s sales tax to exclude business inputs.

In addition, the province must build on the personal income tax reductions enacted in 2000. The top statutory personal income tax rate in Saskatchewan is still 50 percent higher than Alberta. Eliminating the top rate altogether and further reducing the lower and middle rates would improve the incentives for hard work, savings, and risk taking.

The path to prosperity for Saskatchewan is clear and has been travelled by other Canadian provinces and once laggard countries around the world. Imagine a prosperous Saskatchewan; a province where the young, skilled, and educated wish to stay; where business prefers to invest and opportunities are plentiful. Unfortunately, Wednesday’s budget signalled that the current government does understand, or is unwilling to do, what it takes to get there.

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