Canada’s New Liberal Government: Economic Impact

October 22nd, 2015
in contributors

Investing Daily Article of the Week

by Deon Vernoody

It is unlikely that the election of the Liberal Party as the new Canadian Government will have any major impact on the financial markets in the immediate future. The prospects for a considerable portion of the major listed companies are mainly influenced by global growth and commodity prices, rather than domestic events. So we don't expect an immediate impact on Canadian Edge holdings.

Follow up:

Engineering and construction companies could see a short term boost, although actual improved results as a result of the promised increased infrastructure spending, will be a distant prospect.

With the Liberal Party dominating Monday's Federal Elections, let's review some of its key campaign promises and the possible impact on financial markets.

But first, a quick review of Canadian politics: The Liberals have been the traditional governing party in Canada, with a former leader and prime minister, Pierre Trudeau, the father of the current leader Justin Trudeau. The party's policies lean to the left of the ruling Conservative Party, and to the right of the New Democratic Party. In the last federal election, held in 2011, the Liberals captured only 11% of the total parliamentary seats which was their worst performance ever. Justin Trudeau, a former schoolteacher, was elected leader of the Liberals in April 2013 and has done a remarkable job in turning the fortunes of the party around.

From the long list of promises provided by the Liberal Party in the run-up to the election, the key economic policy is budget deficits to finance infrastructure projects.

Budget deficits reached 9% of gross domestic product at the time when Pierre Trudeau left office in 1984, and government debt that increased from 26% of GDP in 1968 when he took office to 46% of GDP by 1984. (It currently sits about 86%.) So this promise should be taken seriously. It also has to be pointed out that other Liberal leaders who followed Pierre Trudeau, such as Jean Chretien and Paul Martin did run more fiscally restrained policies.

During the election campaign, the Liberal Party indicated that they would increase new spending on roads, bridges, transit and other projects by $60 billion over the next 10 years of which $18 billion would be spent over the next four years. For each of the next two fiscal years, the plan is to double current federal infrastructure investment to $10 billion per year from $5 billion. According to a publication from the Broadbent Institute published last month, this additional spending will add around 0.3% annually to the gross domestic product of the country.

Canada currently runs a modest budget deficit of around 2% of GDP, which compares favourably with the 4% deficit of the U.S. and 5% of the U.K. indicating that Canada has room for additional fiscal spending.

Other prominent undertakings by the Liberal Party during the campaign included:

  • Increased taxes for the highest income group and reduced taxes for the middle class.
  • National targets for lower greenhouse gas emissions through cooperation with provinces.
  • Support for Keystone XL with a stricter environmental review process.
  • $20 billion over 10 years for "greener infrastructure."
  • Take in 25,000 Syrian refugees and spend $100 million for refugee processing and settlement.
  • Negotiate a new health accord with the provinces to guarantee long-term funding, including a national plan for lower prescription drug prices.
  • Invest $3 billion over the next four years to improve services for home-care patients, and another $190-million to give paid time off to Canadians who look after seriously ill family members.

As long as the suggested budget deficits remain well contained, it should not become a major factor in the direction of the currency or interest rates.

With high hopes for the popular next generation Trudeau as Prime Minister (and for the Toronto Blue Jays), Canadians seems to have regained some zest despite the current economic woes of the country.









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