The incoming Liberal red tide that swept across the country in the October 19 federal election did more than rearrange the political furniture in Ottawa.
Justin Trudeau’s surprising leap from celebrity politician’s son to leader of a majority Liberal government signalled a major change in the country’s economic game plan.
The potential risks and rewards of that plan abound, especially in today’s volatile global economic climate.
For example, not all entrepreneurs and economists will share Trudeau’s “sunny ways” when it comes to shifting from the Conservative focus on debt reduction and balanced budgets to running annual deficits of at least $10 billion.
The Liberal game plan here is focused in part on stimulating the country’s economy through strategic infrastructure spending.
Doug Porter, BMO Financial Group’s chief economist, sees the swing from paying down debt to doling out government stimulus as a mixed bag for business.
But he said that with Canada facing rising unemployment and a global marketplace of significantly lower commodity prices, “this is the kind of environment where it makes sense to loosen the reins a bit to support growth.”
Porter added that he’s OK with running annual $10 billion deficits in the short term because it’s “enough to matter without putting the country’s finances in any kind of risk … enough to give a slight nudge to the economy and at least partly offset the weakness we see in commodity prices.”
But he warned that with an outlook of continuing anemic commodities prices, annual deficits could become much larger if the Liberal government adheres to its social-spending wish list.
Porter added that business will also miss the Stephen Harper Conservative mantra of keeping taxes as low as possible.
The new Liberals also see income disparity as a serious issue in Canada. They have consequently raised taxes for Canadians with annual incomes of more than $200,000, while cutting taxes for lower tax brackets.
Porter said he had concerns that decision “might send a signal to the rest of the world that Canada is raising its taxes or treating high-income earners less well.”
To realize the projected increase in government revenue from raising taxes on the rich, the federal government will have to continue to look at tax system reform, said Kevin Milligan, a University of British Columbia economics professor, because many legal loopholes remain that allow the wealthy to shield their money from taxation.
He added that there’s another important reason to tackle income inequality, which over the past 30 years has risen across developed economies.
“When people don’t think they have a stake in economic growth, we’re going to start choosing policies that don’t grow the economy,” Milligan said, referring to B.C.’s failed harmonized sales tax referendum as an example of people acting against their own best economic interests.
Milligan, a past economic adviser to the federal Liberal party but not a party member, said he will be watching closely to see whether the Liberals continue to address tax reform as they have promised.
Change is mandatory for a resource-based economy now staring at the dead end of a global commodities supercycle driven by Asia.
“We have to learn to live with lower commodity prices,” said Glen Hodgson, Conference Board of Canada chief economist.
So the new Liberal game plan of using active fiscal policy – more government spending – could help cushion the economy from the rougher edges of that new reality.
Hodgson said Liberal stimulus spending could raise Canada’s economic performance by a quarter of a per cent.
The Trudeau “sunny ways” strategy, wherein government activism is seen as a force for making things better, is also championing sectors like green and renewable energy, technology and innovation.
However, said Hodgson, “every government talks about innovation, but converting theory into action is very hard.
"We don’t really have a national innovation strategy. If I look at the Liberal campaign platform, it’s hard to identify what their innovation strategy would be.”
Support for clean energy and technology is welcome for B.C., where those sectors are already well developed, said Jon Garson, president and CEO of the BC Chamber of Commerce.
But there are concerns about how the new federal government will handle natural resource projects, especially liquefied natural gas.
The Liberals’ opposition to the controversial Northern Gateway pipeline and Ottawa’s ban on oil tanker traffic along B.C.’s northwest coast have caused “nervousness” among businesses in the province, Garson said. The chamber will also be closely monitoring the government’s plan to overhaul the National Energy Board.
The more diversified approach contrasts with the Harper government’s staunch support of all pipelines and championing of the oilsands – a focus some have criticized as being too narrow.
Oil and gas and mining make up 26% of Alberta's GDP, compared to just 4.6% in B.C. British Columbia's more diversified economy has fared better during a severe slump in oil prices
“As battered as the oil and gas sector has been, it’s important to remember that it makes up a relatively small part of Canada’s GDP,” said Trevor Tombe, a professor of economics at the University of Calgary. “Even in Alberta, the sector directly employs just 7% of the province’s workers.”
A key challenge for the Liberals’ green energy focus in the wake of the Paris pact on climate change, according to Hodgson, is how the country co-ordinates a national strategy around carbon emissions, climate change and carbon pricing. The Liberals’ plan to let provinces develop their own emissions reductions policies to meet national targets.
He added that other major issues for the Trudeau Liberal government and the country include Canada’s aging population, which will slow labour-force growth and “have a deadening impact on our economy,” and the relationship between the federal government, the provinces and the country’s major cities, which Hodgson said has eroded under a series of governments.
Tombe added that concluding the Trans-Pacific Partnership trade deal will be another important task for the Liberals.
Despite the Conservatives’ positioning as the party of business, B.C. business groups are feeling optimistic about the new government, which they say is sending markedly different signals than its predecessor.
“The government’s setting a tone and a style for how they’re going to govern,” said Greg D’Avignon, president and CEO of the Business Council of British Columbia. “They’re going to be more transparent, more consultative and more open, and I think that bodes well for B.C. on issues like trade.”
Added Garson, “There is generally a sense of optimism and a high sense of expectation. We’ll be making sure that the economy is front and centre.”