The nightmare for Finance Minister

A stunning reversal of fortune is one way of describing the predicament Finance Minister Rod Gantefoer finds himself in halfway through the fiscal year that began with so much promise.

Even Gantefoer admitted that the elephant in the room -- the finance ministry's projected potash revenue of $1.9 billion -- was something that he worried about from Day One.

"I said when I tabled the budget that the one thing that was going to keep me awake was potash," Gantefoer told reporters. "I didn't think it would end up turning into a bit of a nightmare."

A nightmare is another way of describing the sickening feeling of seeing $1.9 billion in projected revenues plummet by two-thirds to $638 million in the first quarter, then plunge another 83 per cent to $109 million by mid-term.

A sickening slide also describes what happened to the finance ministry's projected potash production, which fell 62 per cent to 4.4 million tonnes, the lowest level in 37 years.

The ministry's miscalculation on potash shaved two percentage points off the province's projected economic growth of 2.1 per cent in the 2009-10 budget. Economic growth is now expected to come in at negative 2.9 per cent -- a full five-percentage-point drop from the budget projection.

For its part, the NDP Opposition called Gantefoer's gaffe "the biggest example of fiscal incompetence in the history of Saskatchewan.'' In absolute dollar terms, it may be.

From a projected deficit of $25 million (on a summary basis, which includes Crown corporations), the ministry is now forecasting a deficit of $1.05 billion in 2009-10 -- an unbudgeted $1-billlion shortfall.

NDP finance critic Trent Wotherspoon lays the blame for the province's current fiscal and economic problems clearly at the feet of Gantefoer and the Saskatchewan Party government. "This is a problem of the Wall government's own making,'' Wotherspoon said, citing "irresponsible revenue projections,'' equity stripping in the Crowns and "out of-control'' government spending.

So are Gantefoer and the Sask. Party government entirely to blame for the mess they find themselves in? With the benefit of hindsight, it goes without saying that the budget's economic and fiscal projections were far too rosy.

The more important question is: Were there signs that those projections were too optimistic even before the budget went to the printers?

Certainly, private economic forecasters were already signalling that the budget's economic projections were unrealistic.

According to the budget, the average of eight private sector forecasts was one-per-cent economic growth in 2009. And two of those forecasts had since been lowered (RBC from 2.8 per cent in January to 0.9 per cent and Scotiabank 0.6 per cent zero per cent, which would have lowered the average to 0.66 per cent).

Yet, contrary to previous practice, the finance ministry projected economic growth of 2.1 per cent -- more than twice the average of the private sector forecasts.

That's largely because they believed that potash prices and production would remain on par or higher than 2008 levels.

For example, the budget projected potash prices to average $550 US per tonne in 2009, $100 US higher than 2008, while potash production was projected to remain unchanged at 10 million tonnes. Instead, potash prices came in about $100 US per tonne lower than last year and production about 60-per-cent lower.

At the time, then-NDP finance critic Harry Van Mulligen warned production cuts announced by potash companies could easily derail the budget's revenue and economic projections.

"Bottom line,'' Van Mulligen said, "shaky economic and revenue assumptions, plus runaway spending, equals a potential fiscal trainwreck.''

As it turns out, Van Mulligen was remarkably prescient, unlike his counterpart in the government benches.

While Gantefoer can be excused for not forecasting the unprecedented cutbacks in potash production, he stands guilty as charged for failing to moderate his overly optimistic budget projections, despite the mounting evidence to the contrary.

Source: leaderpost.com