Canada’s Federal Election 2019: Key Implications

In the wake of the 2019 Canadian federal election, our Chief Strategist John Johnston gives an overview of key implications and policy issues that are important for investors.

Overview

• The election has resulted in a Liberal minority government – likely with NDP support – that should be stable enough to last at least two years.
• Fiscal policy is expected to remain relatively prudent. More federal deficits lie ahead, but small enough to prevent the federal debt/GDP ratio from rising materially.
• The carbon tax will stay.
• Personal tax rates will fall slightly for middle and lower-income Canadians but rise for those at the top, including a possible increase in capital gains taxation.
• Corporate taxes will go up via closed loopholes and a tax on the “tech giants”, as well as a possible increase in the overall corporate tax rate to mollify the NDP.
• Government spending will rise more than planned to meet key NDP priorities (support for families, home buyers, pharmacare and dental care, and the environment).
• The USMCA (the new NAFTA agreement) will likely pass, but some quid pro quo might be needed for NDP (or possibly Conservative) support.
• Progress on the Trans Mountain pipeline is possible, even likely, but it will probably be slow in coming.

Key Implications

• Prospective policy changes will be supportive for lower and middle-income Canadians, but negative for wealthier citizens (some of whom may choose to relocate internationally).
• The expected housing initiatives will support home sales and mortgage financing.
• Corporations in general face potentially higher taxes, but particularly the big tech companies. Canada’s telephone and cable companies will be pressured by the push for lower household cell phone and internet bills. Subsidy cuts and further potential pipeline delays will be detrimental to the energy sector.
• There is little in any of the economic platforms presented in the election that will do anything to help Canada’s eroding international competitiveness. This is especially the case with the NDP’s platform.
• Overall, the prospective policy changes will pinch parts of Canada’s economy and its financial markets. However, trends in equity and commodity prices, and longer-term interest rates are heavily driven by global and U.S. trends, and as we highlighted in our latest Big Picture, those are showing signs of starting to turn positive.

Discussion 

1. Political Issues

• The October 21, 2019 federal election was not quite the cliff hanger that many feared. The Liberals, NDP, and Bloc Quebecois did well enough to generate a potentially durable Liberal minority government.
• We reiterate that Canada has had a history of success with minority governments, led by both the Liberals and Conservatives that were able to conduct the business of the nation rather than sinking into paralysis.
• Previous minority parliaments have lasted two years on average, with a range of one to three years. There are good reasons to expect this one to last two years at least. All parties need to rebuild their financial positions and some will reassess their leadership. Moreover, post-election comments by the Bloc’s leader hinted at a preference for a full four-year mandate. Finally, there is considerable overlap between the policy positions of the Liberals, NDP and the Bloc to keep them busy for a considerable period of time.
• In spite of similarities with the Bloc’s policy agenda, the likely outcome is an NDP-supported Liberal minority government.
• In contrast to 2015, the incoming minority government faces a number of Conservative provincial governments and a traditionally separatist party in Quebec. Regional divisions will be a challenge in the new parliament. However, reasonably conciliatory comments from the Conservative Premiers of Manitoba, New Brunswick and Ontario suggest room for compromise on nationally and regionally important issues. Similarly, the comment from the Bloc alluded to above, implies some room to find common ground.
• The Alberta and Saskatchewan governments remain hostile and are stoking separatist sentiment. This will likely be the tough spot for the new government given the positions of the NDP and Bloc on pipelines and the environment. A concerted Liberal effort to make progress on pipeline construction would be a constructive step on this front.
• The NDP has highlighted six “urgent priorities”: national pharmacare and dental care plans, affordable housing, ease the burden of student debt, tackle climate change, making cell phone and internet bills more affordable, and making the wealthy pay their fair share of taxes. The Liberals will need to address these in exchange for NDP support.

2. Government Budget Balance

• The Liberals, Bloc and NDP proposed steady but small deficits. Their projected deficits are small enough to keep the federal debt declining as a share of gross domestic product (GDP).
• However, the compromises required in a minority parliament will likely increase the budget deficit and could cause the debt/GDP ratio to rise instead of declining slightly, as we previously thought. Even so, Canadian government finances will remain in a favourable position relative to the U.S. and other major industrial nations.

3. Spending Initiatives

• Key items on the spending side are the NDP’s proposal for national pharmacare and dental care plans. The Liberals want to move slowly toward a pharmacare program, but that is likely to be accelerated considerably.
• Also, the NDP (as well as the Greens and Bloc) want to cut subsidies to fossil fuel companies. The Liberals want to end “inefficient” fossil fuel subsidies. Whatever the definition of “inefficient”, subsidies are likely to get cut.
• Both the Liberals and the NDP have promised action to make it easier for first-time buyers and others to buy a home, and to reduce student debt burdens.
• The Liberals have proposed an increase in the Canada Child Benefit by up to $1,000 per year for parents with children under one year of age, and a small increase (up to $729 per year) in Old Age Security for people 75 and over.
• The costs of the pharmacare and dental care plans and other initiatives that are not in the Liberals platform could run as high as $14 billion per year.

4. Taxes

• Carbon tax: The carbon tax is here to stay. The Liberals propose a $20/tonne tax that will rise to $50/tonne by 2022. The NDP supports this but wants a higher rate for industrial emitters.
• Corporate tax: The Liberals did not propose any changes in tax rates, but want to close down loopholes that allow firms to excessively use debt to reduce their tax burden. The NDP wants the Federal corporate tax rate increased from 15% to 18%. Both parties propose a tax on the “tech giants” plus actions to cut cell phone and internet costs for consumers (an NDP priority).
• Personal Income tax: The Liberals proposed boosting the basic personal exemption from $13,000 to $15,000 over four years, though the tax break would start being clawed back as income rises above $150,605 and would be fully eliminated at $214,557. They also propose making maternity and parental benefits tax-free. The Liberals have proposed a 10% tax on luxury vehicles – cars, boats and planes – that cost more than $100,000. The NDP wants the rich to pay more: Increase the federal tax rate on income over $210,000 to 35% from 33%, increase the capital gains inclusion rate to 75% from 50%, and introduce a 1% tax on wealth above $20 million. Minority government politics suggest that the rich will pay more, though the difficulty of administering the wealth tax suggests a higher top tax rate and/or a change in capital gains taxes is more likely.

5. International Trade Policy

• The Liberals favour an open trade policy and will push to pass the USMCA agreement it reached with the U.S. and Mexico. The NDP have been critical, but it is not one of its six key priorities. Also, the Liberals may be able to count on Conservative support to pass it.

6. Industrial/Regulatory Policy

• Pipelines are the key issue. The Liberals favour the Trans Mountain pipeline, while the NDP are opposed. However, at the moment the NDP has not made canceling the pipeline a condition for its support for the Liberals. If the NDP ends up opposing Trans Mountain, the Liberals could try to strike a deal with the Conservatives. It is likely that progress will be made on Trans Mountain, but it will be slow in coming. This is the most important policy issue for Alberta and Saskatchewan, as well as being important for Canada’s economy and government revenues. We believe it would be a grave error for the Federal government not to attempt to make progress on this file, though it is likely to be packaged up with other more environmentally-friendly policy initiatives.