Liberal win seen as a victory for Canada's economic stability
October 20, 2015 | Posted by: Patrick Mulhern
federal election 2015
Liberal win seen as a victory for Canada’s economic stability
Canada is headed for an economic course change under the Liberals, who ran on a promise of running deficits to kick-start growth and shifting more of the tax burden to the wealthy.
The election of a more interventionist government in Ottawa, coupled with the rejection of the Conservatives’ mix of budget prudence and targeted tax breaks risks unnerving investors, at least in the short term.
Bank of Montreal chief economist Douglas Porter said a Liberal win would provide a short-term lift for the economy next year and reduce the likelihood of another interest rate cut by the Bank of Canada.
But he said investors may be “less than thrilled” that fiscal stimulus will come mainly as a result of new spending. The big story is infrastructure spending, which Mr. Porter said will dwarf any tax hikes for wealthier Canadians.
“The biggest news for the markets, of course, is that at the very least we have four years of certainty,” Mr. Porter said.
Other analysts aren’t so sure.
“Regime change … may initially garner a negative financial market reaction,” Citibank economist Dana Peterson said in a research note, issued before Monday’s voting.
And yet Ms. Peterson pointed out that the prospect of more government spending by the Liberals could take the pressure off the Bank of Canada to cut interest rates again in the coming months and “hasten Canada’s adjustment to a more balanced economy.”
The centrepiece of Liberal Leader Justin Trudeau’s economic plan is to boost infrastructure spending by up to $5-billion a year by running budget deficits over the next three years. A Liberal government would borrow more money to pay for such things as roads, bridges, seniors’ homes and flood control.
Mr. Trudeau has also promised to tilt the tax system in favour of the middle class by forcing wealthier Canadians to pay a greater share. The Liberal plan calls for raising taxes on the top 1 per cent of income earners and cancelling two Conservative tax breaks popular with wealthier Canadians – income splitting for families and this year’s increase to $10,000 from $5,500 in annual contribution limits to tax-free savings accounts.
In spite of all that, a Liberal win may prove to be less destabilizing to the economy than one of the alternatives – a minority Conservative government unable to hold on to power. Before the election, Nomura economists Charles St-Arnaud and Sam Bonney have called a Liberal minority “the most positive outcome” because it’s most likely to yield a stable government.
The central bank, which has already cut its key rate twice this year to spur the stalled economy, is due to announce its next interest rate decision Wednesday.
The Liberals want to expand the Canada Pension Plan, maintain the eligibility age at 65 for Old Age Security, spend more on infrastructure and take a more aggressive tack on climate change.
Mr. Trudeau is likely to endorse one of the Conservatives’ signature initiatives – the recently negotiated Trans-Pacific Partnership, a sweeping 12-country Pacific Rim trade deal. Mr. Trudeau supports the agreement.
In many other areas, there isn’t much daylight between Liberal and Conservative economic policies.
And Mr. Trudeau’s promise to run deficits of nearly $10-billion in the first two years to fund his infrastructure plan is relatively modest, given the size of the government. While the extra spending would add to the federal debt load, Mr. Trudeau has insisted that a growing economy will keep the debt-to-GDP ratio – a key measure of the government’s ability to manage debt – on a downward tilt.
Most economists agree that Ottawa can afford to borrow and spend more, at least in the short-term, without jeopardizing its credit worthiness. A deficit of roughly $10-billion represents just 3 per cent of the federal budget and 0.5 per cent of GDP.
But critics worry that much of the new infrastructure money would be wasted on poorly conceived projects. Others also worry that deficits could become chronic, making future tax relief for Canadians less likely.
The most significant change under a Liberal government is likely to be in tax policy. The party platform calls for raising roughly $3-billion a year by raising the federal tax rate on income over $200,000 to 33 per cent from 29 per cent. That means the wealthiest Canadians will now face a combined federal and provincial tax rate of more than 50 per cent.
The Liberals have earmarked revenue raised by taxing the rich and cancelling key Conservative tax breaks, to help pay for a tax cut for Canadians earning roughly $45,000 to 90,000 a year.
There are a number of question marks surrounding the rest of the Liberal economic platform. And much will depend on tricky and unpredictable negotiations with the provinces. For example, the party is promising an enhanced CPP, but has offered scant details. Ontario Premier Kathleen Wynne now says she would drop her own for an expanded public pension, slated to begin in 2017, if Ottawa pursues a national plan.