Canada’s 44th federal election has come and gone, and little has changed. The Liberal party won 158 seats (170 seats were needed for a majority), and another minority mandate. In order to pass any legislation, a majority vote in the House of Commons is required; thus, the Liberals require buy-in from one of the Bloc, the NDP, or the Conservatives. Based on the respective parties’ campaign platforms, the NDP is the likeliest party to step up and deal. Here is a high-level look at the post-election economic landscape.
The Federal Budget: The Liberal and NDP platforms overlapped around extending pandemic programs such as rent and wage subsidies. Both parties prioritized taxing the upper end of the income spectrum, as well as corporations. Subsidized child-care and housing-related policy are also areas of common ground.
Fiscal Policy & Taxes: Short-term, we can expect increased spending which gradually reduces over the next few years. Longer-term, a balanced budget is not a priority (another Liberal and NDP area of overlap). The fiscal anchor appears to be stabilizing the Debt-to-GDP ratio at this time.
The Liberal platform calls for ~$4 billion of net tax increase / revenue collection by FY 2022-23 and rising to ~$8 billion by FY 2025-26. Larger-ticket items include taxes on large financial institutions, while smaller-ticket items include a minimum tax on higher-income earners and a house-flipping tax.
The NDP proposed increased taxes on higher earners & corporations and increasing the capital gains inclusion rate (currently 50%). You may recall that increasing the capital gains inclusion rate was considered for Budget 2021, so this is one item to keep an eye on.
Housing Affordability: More common ground for the Liberals and NDP. Non-resident buyers will be targeted, with a vacancy tax, an outright ban on purchases and/or a transaction taxes all in possible.
Other measures intended to improve affordability on the demand side, such as the Liberals’ “tax-free savings account for first-time buyers”, could end up having the opposite effect of fueling demand and driving prices upward.
In the long-term, all parties focused on the supply side of the housing equation; however, it should be noted that provincial and municipal governments have a great deal of influence around setting the pace of new housing starts.
Overall Economic Growth: The Liberal platform calls for continued stimulus for longer, so there is no change to the pre-election growth outlook. The delta variant and supply side factors – both materials and labour – remain factors.
Interest Rates & the Canadian Dollar: The interest rate outlook is unchanged. The Bank of Canada is expected to taper asset purchases as 2021 draws to a close, with the potential of interest rate increases later in 2022.
The election campaign had minimal impact on the loonie; global factors exerted a greater influence on the loonie. Softening global growth forecasts and a reduced global risk appetite moved the loonie downward during the campaign, and oil remained mostly steady. If interest rates begin to move upward in late-2022, we can expect the CAD to move accordingly upward.
Equities: The Liberals pledged to raise corporate income taxes on banks and insurance companies earning more than $1 billion per year, plus a second temporary levy on these companies – a net negative for these companies. The NDP will be on board with this change.
Tied to the housing affordability issue, the Liberals promised to increase taxes on corporate owners of residential property. This would adversely affect some REITs. It should be noted that details on this point were vague.
A Liberal / NDP faction is a net negative for the energy sector, compared to a Conservative minority or majority government. In the immediate term, both the Liberals and NDP will likely aim to minimize or outright eliminate subsidies to the oil & gas sector.
Bottom Line: The largest development, economically-speaking, during the election was a tilt toward increased fiscal spending proposed by all parties. While there is plenty of horse-trading to be done yet, a Liberal / NDP faction seems most likely. The increased spending will not overly change the growth outlook but it will keep inflation pressure firm – again, because economic constraints are mostly on the supply side, rather than the demand side.
Sources: BMO Capital Markets