POST-VOTE ANALYSIS

Looser fiscal policy anticipated

Canadians, it seems, have voted for the status quo, returning Prime Minister Justin Trudeau's Liberal party to a minority government, but the lasting impact of the election may be the more permissive attitude toward looser fiscal policy.

“The most significant development from an economic perspective during the election campaign was the broad tilt to increased fiscal spending proposed by almost all major parties,” wrote BMO Financial Group chief economist Douglas Porter in a Tuesday note to clients.

All three major parties campaigned on running continued deficits for the next five years and introducing billions of dollars in new spending.

The Liberals promised to spend $78 billion between 2021 and 2026 on health care, subsidized child care and climate commitments, among other promises, which would be partially offset by an increase in revenues of $25 billion.

The party promised to reduce the deficit from $156.9 billion in fiscal year 2021-22 to $32.1 billion by fiscal year 2025-26.

The Parliamentary Budget Officer had upgraded its projections of Canada's GDP growth in August, and also adjusted the baseline to a $138.2-billion shortfall for 2021-22.

The Liberals revised the deficit back up due to new campaign priorities.

“Looking at the big picture, this election could be a sign that loose fiscal policy is here to stay,” wrote Capital Economics senior Canadian economist Stephen Brown.

The Liberals will need to lean on other parties to get legislation passed, Porter said, and the NDP — which proposed $200 billion in new spending in its costed platform — is the “most likely dance partner,” given the two parties' common cause on several issues.

Indeed, said TD Economics economists Sri Thanabalasingam and Rishi Sondhi in a note to clients, “the minority government's overall agenda could be shaped to attract opposition support.

This dynamic could generate greater spending and deficit outcomes relative to the Liberal status-quo platform proposal.”

The economists expect housing to be a key area of policy development for the incoming government, given the cross-party support for addressing housing affordability.

Thanabalasingam and Sondhi also flagged continued COVID-19 supports, employment insurance reform and health-care funding as areas likely to benefit from greater policy action.

While the Liberals' promised spending could boost GDP growth in 2022 and 2023, the TD economists said there could be a “small fiscal drag” in 2024 as stimulus wanes.

The Canadian Federation of Independent Business president and chief executive Dan Kelly called for the federal government to extend the wage and rent subsidy “immediately,” return the maximum supports to 75 per cent, include businesses that opened after March 2020 in the supports, and move on the Liberal promise to extend the Canada Recovery Hiring Program through to the end of March 2022.

Kelly also called on the government to support small businesses that have to enforce proof of vaccination.

Part of the Liberals' promised $1-billion provincial vaccine passport launch fund should be put toward the staffing and technology small business owners will need, he said.

Canada's main stock index was on track for its best day in two months, trading 0.5 per cent higher amid a broader rebound in global markets.