Impacts Of The New Liberal Government On The Economy And On The Interest Rates

The liberal win in Canada has been seen as an economic milestone for the country. The liberal party makes up majority of the government led by Justin Trudeau. By implementing their electoral platform they intend to bring in billions of dollars in infrastructure as well as in cuts in taxes that are targeted at the middle class families and citizens. Various economists have raised their views on the issue citing that the win will help in lifting Canada’s economy even if in the short term. This may also help to reduce need by the Bank of Canada to implement another cut in the interest rates. The main effect of the liberal win is that the economic policy of Canada will be rebalanced as the monetary policies and fiscal policies are realigned. By opting to focus on increasing additional infrastructure, the new government promises to increase government spending which eventually leads to increases in the economic growth of the country.

The effects of the policies to be implemented by the new government may affect different key areas;

1. The currency

The currency has already started to be affected by the elections as happens in most countries. Before the elections in the lead towards the election night the Canadian dollar has weakened up to 0.8% but was able to rise up to 0.2 % after the elections once the victory was announced. However the currency may have to suffer some weakness in the coming period as the winning team settles in government. This is often referred to as the period of uncertainty. The period of weakness may also be extended to become long-term if the new government fulfills its policy of running on a deficit. As they promise to run on a deficit for the next 3 years which is aimed at spurring economic growth for the country they are bound to cause the Canadian dollar to be weakened in the said years before the growth can be felt. Since this means that the government will incur more debt, interest payments will increasingly become the main portion of the budget for the government.

2. The economy of Canada

In order to sustain the plan he has for upgrading major infrastructure systems in Canada Tradeau intends to use about $5 billion each year. This spending will have increased as compared to the spending that was involved with the previous government. The increased spending each year will be worth about 0.2 percent of the country’s GDP. The spending is predicted to boost the growth of the economy. However, since Tradeau intend to continue with the increased spending for three years it may cause the economic growth of the country to start dragging for a while when it is withdrawn. The problem would thus arise after the increased spending has been withdrawn once the three years are over as various economists cite challenges in balancing the budget in the fourth year. This is so because it is often easy to start a spending culture for a country but always a bit hard to restrain it. The spending culture is thus expected as its main economic impact to spur economic growth in the country. This will be so if the extra spending is focused on key infrastructure areas such as improving the transportation channels.

3. Government Bonds

After the elections there was a widening or a spread between the Canadian ten year bonds and the US ten year bonds. By running on a deficit of about ten billion each year the spread can be estimated to continue widening. The budget deficit may result in increases in the basis points up to 10 to 15 basis points. Since the deficit proposed by the liberal government may not serve to crowd out other borrowers from the market it is unlikely that there will be any large moves in the yields by bonds in the long term. The deficits experienced by the government will thus not be large enough to cause the bonds value to escalate or reduce rapidly. However, if more bonds are issued by the government in order to pay for the expenditure and the increases in spending there may be an effect on the rates of mortgages in the country. This is so because once the investors realize that the supply of bonds will be higher than before the subsequent effect will be on the mortgage rates that will be constant or increase subsequently in the following year. This however is a variable reaction that will depend on the marginal increase to be estimated for the bond yields. The effects to be seen on the housing market and the mortgage rates may be a negligible one or may not translate at all into the housing and the mortgage industry.

As part of the infrastructure upgrade agenda for the liberal government is the renewable energy agenda s they also aim to put their focus in it. The green spending, as planned for by the liberal government will amount to about $6 billion in a span of four years. Other than that they intend to incorporate into federal contracting, a climate impact analysis that means that more money will be going into green spending. The previous government was seen to mainly focus on gas and oil and this may come as a great relief for renewable energy producing companies. The liberal government’s win however may have no effect on the credit ratings in the country. The credit6 ratings in Canada often base their rating on the prices of commodities, economic activity in the country and the fiscal discipline in the country. Since the new policies do not seem to threaten the fiscal health of the country, it is unlikely that the credit ratings will be affected. The liberal government’s plan to increase spending will help alleviate need by the Bank of Canada to further lower the rates of interest that were already too low in order to spur the economy of Canada that has been sluggish.