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Canada’s Election Upset Signals an End to Austerity

The decisive victory over the long-ruling Conservatives by Justin Trudeau’s Liberals will probably bring more economic stability than turmoil.

Unlike so many things Canadian, last week’s federal election was anything but quiet and ho-hum. The Liberal Party of Canada’s landslide win over the Conservatives was a massive upset, a sign that voters wanted change on several fronts, including Canada’s stance on refugees, the environment, international diplomacy and — most significant — austerity economics.

On October 19 the Liberals claimed 184 of 338 seats in Parliament, wresting power from the Conservative Party of Canada and its leader, Stephen Harper, a former oil company employee who has been the prime minister for nine years. The result represented a stunning comeback for the Liberals, who came in third in the previous federal vote, in 2011, trailing the New Democratic Party, which tacks further to the left.

The Liberals’ resurgent popularity owes largely to Justin Trudeau, the 43-year-old prime minister–designate who will take over on November 4 after becoming the party’s leader only two years ago. The onetime high school teacher knows Ottawa politics intimately: He’s a son of the late Pierre Trudeau, of Trudeaumania fame, the charismatic and divisive Liberal leader who served as PM from 1968 to 1979 and again in the early 1980s.

The junior Trudeau campaigned on pledges that won support from moderate and left-leaning voters. He promised to accept 25,000 refugees from Syria and Iraq, work with the rest of the world on climate change initiatives, address environmental concerns around the proposed Keystone XL oil pipeline to the U.S. and legalize marijuana.

Trudeau also announced plans to run modest deficits, limited to C$10 billion ($7.6 billion), or 0.5 percent of gross domestic product, a year over the next three years. The Liberals also vowed to spend C$60 billion on infrastructure over the next decade.

This daring deficit pronouncement, made midway through an unusually long campaign for Canadians — 11 weeks, rather than the typical 36 days — represented a turning point in the race. The economy technically went into recession in the second quarter as output declined for two consecutive quarters, making Trudeau’s pitch for deficit spending more attractive as the other two major parties continued to talk up the need for balanced budgets.

Since the election, analysts from global banks have predicted that the stimulus will provide a slight boost to the Canadian economy. Douglas Porter, Toronto-based chief economist for BMO Financial Group, says he expects to see a short-term GDP boost of 0.5 percentage points if the Liberals implement their proposed economic measures. By BMO’s estimate, that would generate an economic expansion of 2.5 percent in 2016, up from 1.2 percent this year.

Porter’s view had been that with Harper in charge, “fiscal stimulus was too tight, monetary policy was too loose.” This year the Bank of Canada has lowered interest rates from 1 percent to 0.5 percent.

The real test will be in getting spending under control again in Year Four, as pledged, Porter says: “It’s easy to start spending money, and much tougher to bring it back in.”

The Liberals have also vowed to introduce a more progressive tax policy, one that favors middle-income earners over the wealthiest 1 percent. Their campaign platform called for reducing the federal income tax rate from 22.5 to 20 percent for people earning between C$44,000 and C$89,000, while also creating a new tax category for those earning more than C$200,000. Those highest earners would pay a rate of 33 percent, 4 percent more than the highest marginal tax rate under the current plan.

There would be no adjustment for individuals earning between C$89,000 and C$139,000, who now pay 26 percent, or for those earning C$139,000 to C$200,000, who pay 29 percent.

Provincial tax rates in half of the country, including Ontario and Quebec, will push the combined rate above 50 percent for the highest earners. This past May in a speech to the well-heeled members of the Canadian Club of Toronto, Trudeau contended that reducing income inequality would be good business for the country.

The Liberals are widely expected to support the recently announced Trans-Pacific Partnership trade deal, though they were noncommittal — or lukewarm at best, Porter says — during their campaign. Trudeau said only that his party and all Canadians needed detailed information about the deal, which the Harper administration had not made available.

And although the Conservative Party is closely linked to the province of Alberta, Trudeau is not considered “anti–oil sands,” Porter explains. The new prime minister has called Alberta’s vast oil reserves an important part of the economy for “years to come.”

The world can expect Trudeau to balance any efforts to support oil patch development with progressive policies on the environment, though. As Geoff Dembecki has observed in Foreign Policy, Canada and Australia — where Harper admirer Tony Abbott was recently ousted as PM by his own party — have until now been the “climate villains the world has loved to hate.” Harper saw efforts to reduce the country’s emissions or dependence on fossil fuels as job killers. His successor’s views are much more in line with those of other developed nations.

Although the Canadian dollar initially dropped on news of the Liberal win, it rallied along with stocks the day after the election. The Standard & Poor’s/TSX Composite index made its biggest gain in almost two weeks and has since climbed again on news of efforts to stimulate growth by the European Union and China. The loonie slipped once more after the Bank of Canada released a pessimistic economic growth forecast of about 2 percent for 2016, because of sustained low prices for oil and other commodities. The Canadian currency was trading at roughly 76 cents U.S. as of October 27.

Stephen Saideman, a professor at Carleton University’s Paterson School of International Affairs in Ottawa, doesn’t think the Liberal win will be earth-shaking for foreign policy — at least not in practical terms.

Although Trudeau has vowed to pull Canadian fighter planes out of bombing missions against the Islamic militant group ISIS in Iraq and Syria, the impact of that decision shouldn’t be significant, says Saideman, because Canada hasn’t flown many of the sorties by the U.S.-led coalition. The Liberals have indicated that Canada will maintain support of a training mission for the Kurdish Regional Government in northern Iraq.

In general, what will change is tone. Trudeau is expected to emphasize humanitarian and peacekeeping efforts, as had been customary in pre-Harper Canada. The anti-Muslim rhetoric of the Harper government will disappear, says Saideman, and Canada will probably accept more refugees more quickly.

But the country will keep showing up at nearly every operation by the North Atlantic Treaty Organization, he reckons. Overall, Saideman sees “more stability than instability” in the longer-term forecast.

Notice that he didn’t use the word “boring.”

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