2025 Canadian Election

Canada's 2025 federal election is now complete, and at least as of this recording, the Liberal Party has won a fourth consecutive election and a third straight minority victory. Mark Carney will remain the country's prime minister. The Canadian dollar for the moment is little changed, as are other markets, and that reflects the fact that this was the most likely election outcome.

There been a chance of a Liberal majority and this, of course, is the Liberal minority. But other than that, this aligned pretty closely to expectations and so it doesn't constitute much of a surprise to markets.

Entering 2025, the election theme had initially been expected to be one of disruption. But it morphed into really seeking the safest set of hands after the White House levied tariffs on Canada and threatened Canada's sovereignty.

And so, in turn, the Conservative Party went from leading in the polls by quite a wide margin – by more than 20 points at the start of the year – to ultimately losing the election. And for its part, the Liberal Party managed another of its chameleon-like transformations, selecting a new leader who is seemingly well-suited for the crisis at hand and pivoting with policy priorities that are quite different than those of the party led by former Prime Minister Trudeau just a few months ago.

Relative to the prior election, the increase in Liberal support and the party's pick-up in seats is fairly modest. It’s more to do with the decline in support for the NDP, decline in support for the Bloc  Québécois, than in any kind of decline for the opposition Conservative Party. In fact, the Conservative Party is on track to win more seats than in the last election.

The fact the Liberals have failed to capture a majority government could prove quite consequential in all of this. And so, to be sure, should a crisis occur, should the conflict with the U.S. intensify, I suspect other parties will provide the support necessary to do the necessary thing and provide a fiscal rescue or other urgent action. So I think that scope for action does exist even in a minority parliament.

But, short of that, this could be a less stable and possibly even a less functional minority government than those of the past two political terms.

One reason is that the NDP are just less of an obvious dance partner for the Liberals than before, because the Liberal Party is now focused on economy-enhancing policies rather than social policies. And there is a more centrist-leaning as opposed to a more left-leaning orientation under the new Liberal prime minister.

A second reason is that the two parties together barely clear the 172-seat threshold for holding the majority of parliamentary seats. The present projection that I'm seeing is 175 seats between the two of them. That’s only a three-seat buffer, which is quite small.

The Bloc Québécois actually has the third most seats after the Conservatives. It has occasionally supported minority governments in the past, but that's generally on an issue-by-issue basis as opposed to a matter of consistent policy.

You can perhaps squint your eyes and argue that there's scope for the Liberals to work with the Conservative Party on some issues, given a very similar set of policy priorities that I'll get into in a moment. But that would be quite unusual. And so, in turn, if one has to imagine, it will be perhaps harder to implement policy going forward.

Perhaps this could be a government that is shorter-lived as well. And if the Carney honeymoon gradually fades, if the NDP popularity revives at all from current very low levels, the NDP might be considerably less inclined to continue supporting the Liberals at that point, again rendering this possibly a shorter-lived government. Obviously, though, the NDP will first need to select a new leader and revive its party finances, which will take some time.

The Conservative Party, at least at this reading also has to figure out what to do about the fact that its own leader is projected to have lost his seat in Parliament, and what the consequences of that are.

Let's talk about policy, though, and indeed economic policy specifically. And so I'll just start by saying, regardless of which of the two leading political parties had won the election, a significant shift in policy was already preordained.

Whereas the Trudeau era had focused on social policies, on environmental policies, on redistributive policies, the next government was always going to be somewhat more focused on economic policy and just increasing growth and increasing productivity and getting that economy working again. Some of that pivot is just a reflection of the times we're living in given tariff threats, given a weak economy, given the urgent need to revive productivity.

Some of the pivot, though, also reflects the fact that both party leaders are just ideologically to the right of Trudeau. Substantially so in the case of Poilievre, even moderately to the right in the case of Carney.

At the headline level, you can say that the Liberal and Conservative parties had both promised a remarkably similar set of policies. Again, at least at the headline level, both were talking tax cuts, both talking deregulation, both anticipating and planning for more infrastructure spending, more resource investment, more military spending, more housing; conversely, less immigration, fewer interprovincial barriers, and, of course, stick-handling through the trade war with the U.S.

The Liberal version of this is obviously now in a position to be implemented. I think it's fair to say that the Liberal positions are not as bold as the Conservative ones were on several fronts. It's relatively more muted tax cuts that are planned, canceling that proposed capital gains tax hike from a year ago, slightly lowering the lowest personal income tax bracket tax rate, a partial removal of the carbon tax (getting rid of the consumer facing portion, but not the industrial facing portion).

Perhaps more cautious streamlining of resource project approvals, though some increase there as well. Still, what remains is a pretty strong plan for nation-building infrastructure projects, including high-speed rail, including development of the port at Churchill, among other objectives. I think there's reason to be skeptical the new government will manage to more than double the rate of housing construction in the country, but some increase is likely.

And we were just as skeptical the Conservatives could increase housing as much as they were planning, which was a very similar, ultimate end-goal as the Liberals. It does appear that the government will become a lot more involved in residential construction going forward, though, under this Liberal government.

The Liberal stance on trade negotiations with the U.S. under both the current Prime Minister and the prior prime minister has been notably combative relative to international peers. That approach, perhaps, is starting to be tempered somewhat, and that may be an important pivot, just given the pivot from fiery campaign rhetoric to more cautious negotiating in an attempt to avoid the ire of the White House. So perhaps a more a more cautious approach there.

There’s still a focus on green initiatives. Less so, but still some focus. They're tilted now more toward carrots – incentive-based programs – rather than sticks like carbon taxes.

And then the Liberal platform makes no bones about continuing to run deficits. They're being articulated differently. And there's separating the operating budget from the capital budget. So I suppose the operating budget will be balanced. But if the capital budget is still in significant deficit, that is still a deficit, to my way of thinking.

And it constitutes additional fiscal support, and it constitutes, of course, also a fiscal negative to the extent that the public debt load is larger for it.

Both leading parties have proposed a pretty unrealistic amount of cost savings and productivity gains that were supposed to pay for their objectives. I think we can be skeptical about that.

So revenue targets are questionable. Nevertheless, there are very clearly additional fiscal outlays planned in some of the directions I just mentioned over the next four years, including:

• $C22 billion budgeted for middle class tax cuts
• $C13 billion to pay for canceled capital gains tax hikes
• $C18 billion for defense
• $C24 billion for housing
• $C12 billion for infrastructure spending as well.

And of course, it's worth keeping in mind that if anything, minority governments tend to be more fiscally expansive than majority governments, because, of course, you need to woo that that minority party – in this case, perhaps the NDP, as well. And the NDP will want some policy wins of its own, probably directed more toward social policies.

To conclude, the main issue in Canada for the immediate future, isn't broadly fiscal policy, it is tariffs. And unfortunately the path forward on that front has arguably more to do with decisions in the U.S. White House than in Canadian Parliament. Of course, there is some influence that can come from Canada there and if we pivot to the medium run, it is fair to say that the policy mix we're seeing right now does seem to position Canada reasonably well for perhaps more productivity growth and more economic growth over the medium run, if not immediately visible in the coming quarters.