After a long period of denial, the Saskatchewan Party government has finally accepted the fact that the provincial economy is in recession and the provincial treasury is in the red.

Even in the second week of November 2009, Finance Minister Rod Gantefoer was still clinging to the hope that the economy was “slightly positive’’ and “not technically in recession.’’ But those slim hopes were dashed a week later, when Gantefoer released his mid-term financial report, which marks the halfway point of the fiscal year that runs from April 1, 2009, to March 31, 2010.

The report projected that the provincial economy will contract by 2.9% in 2009 — a far cry from the 2.1% growth forecast in the spring budget. And not only will the economy be in recession, the report confirmed that the provincial government will also be running a significant deficit.

The budget will appear to be balanced because the government will dip into its rainy-day Growth and Financial Security Fund — to the tune of about $564 million. (The GFSF allows the government to spread “windfall” resources revenue over a four-year period.)

In addition, the government will pay itself a “special dividend” of $555 million from Crown Investments Corp., the province’s holding company. (The dividend represents the proceeds from the sale of its stake in the former SaskFerco Products Inc. nitrogen fertilizer plant, which was sold for $1.6 billion last year.)

However, the painful truth is that the Saskatchewan Party government is spending considerably more money than it is taking in. Indeed, the provincial deficit is projected to balloon to more than $1 billion by the end of the current fiscal year.

The reason behind this dramatic reversal of fortune is not hard to find -— potash.

The pink-coloured mineral, one of three essential ingredients in fertilizer, was supposed to fill provincial coffers to overflowing in 2009. Perhaps that’s not surprising. Saskatchewan’s potash industry, which produces one-third of the world’s supply, was coming off a banner year in 2008. Potash prices soared to an astronomical US$1,000 per tonne, and Potash Corp. of Saskatchewan Inc. posted profits of US$3.5 billion in 2008 — the fifth consecutive year of record earnings. The spring budget had forecast potash revenue of $1.9 billion, which is roughly 20% of the province’s annual $10 billion in revenue.

That was before the global recession knocked the wind out of the economies of developing countries, such as China and India, whose farmers balked at paying record-high prices for potash, even though prices have tumbled to US$500 per tonne this year.

The potash companies responded by cutting production and laying off workers in hopes of propping up prices by matching supply with demand. The stalemate has lasted most of the year and the economic damage will be substantial — an estimated two-percentage-point drop in Saskatchewan’s gross domestic product this year. Potash revenue has seen an even sharper drop: from $1.9 billion in the spring 2009 budget to $638 million after the first quarter, then to $109 million at mid-term in November.

If potash production doesn’t resume within the next few months (sales are currently the lowest since 1972), the province could see almost zero in potash revenue this fiscal year. That will require some fancy footwork by the finance minister, whose government has increased spending by 24% since coming to office in 2007 and made the biggest income tax cut — more than $300 million a year — in the province’s history last year.

It’s a 180-degree turn for a minister who once joked about having too much money to spend. Gantefoer isn’t laughing now. IE