Trudeau’s Election Gamble Suddenly Reverberates in C-Suites

(Bloomberg) — Canada’s top executives have been abruptly swept up in what had been a sleepy summer election campaign barely on their radar two weeks ago.

Businesses, from real estate mutual funds to banks and telecommunications companies, have been caught in the sights of politicians — of all parties — with last week’s policy debate tilting toward corporate taxation and regulation.

Prime Minister Justin Trudeau’s Liberals came out with new pledges to raise taxes on banks and crack down on housing speculators and the real estate sector. Trudeau’s main rival, conservative leader Erin O’Toole, announced plans to force federally regulated companies — about half of the country’s 20 largest companies — to place employees on boards of directors.

That comes on top of a tighter race that not only makes the prospect of a majority victory less likely, but could also tempt parties to take even more populist measures. The Canadian dollar underperformed despite a sharp recovery in oil prices — usually a tailwind for the currency.

“There were some new policy proposals this week that were — shall we say — somewhat surprising,” Doug Porter, chief economist at the Bank of Montreal, said by email. “While energy prices fully recovered lost ground, the Canadian dollar did not. Some of this mismatch may be due to election uncertainty.”

It’s all starting to take a disappointing turn for business, which has been working hard to prioritize growth and productivity in the run-up to the election campaign. Instead, the two major parties appear to be taking pages of the left-leaning New Democratic Party, which this week pledged to cut the family’s cell phone bills by C$1,000 ($792) a year.

Opinion polls suggest that the Conservatives and the Liberals are statistically equal, at just over 30% each. The NDP hovers around 20%, which would be considered a strong outcome for that party.

“What governments should really be obsessed with is making sure their citizens are well-educated, that they have access to universal health care and that they create the conditions for private capital to help everyone grow,” said Victor Dodig, chief executive. officer at Canadian Imperial Bank of Commerce, said during an earnings call on Thursday. “That’s where the world should be going.”

Trudeau may have made the biggest news.

On Wednesday, he promised a 3% surcharge on revenues at Canada’s major banks and insurers, along with another obscure tax, the Canada Recovery Dividend, policies expected to add up to at least C$2.5 billion a year for the state treasury. will yield.

His argument is that the government needs money to pay for the new housing measures of the VVD. After all, lenders were major beneficiaries of massive income support programs that kept many of their customers solvent during the pandemic.

‘wings’

But to some, the sudden need to fund spending sounds hollow to a government poised to run into budget deficits totaling more than C$700 billion between 2019 and 2025.

“To me, it looks like they’re just getting on with it,” said Martin Pelletier, director of Wellington-Altus Private Counsel in Calgary. “It seems like, well, everyone hates the banks because they charge so much, well, we’ll just tax the banks.”

There are also concerns that excluding one sector could disrupt the tax system and have other unintended consequences. Mark Roe, a professor of corporate law at Harvard University, told BNN Bloomberg that Trudeau’s proposal could give Canadian lenders an incentive to artificially lower taxes by financing their companies with debt rather than equity.

“We want banks to hold as much equity as possible in case something goes wrong,” Roe said Friday.

David Dietze, director and senior portfolio strategist for Peapack Private Wealth Management in New Jersey, warned Canadian banks may choose to move their businesses to other low-tax jurisdictions.

“They will probably move more operations to the US, which will not help anyone trying to get a mortgage in Canada,” Dietze told BNN in an interview on Wednesday.

There are also plenty of skeptics about O’Toole. He promotes an interventionist, pro-labor, big-spending program that the conservatives haven’t offered in decades. For example, he wants to not only put employees on boards of directors, but also change the labor law to make unions stronger and help them organize.

The left turn in policy was always expected in this campaign from a fiscal point of view. The Bank of Canada’s purchases of government debt are helping to mitigate the impact of deficit spending, allaying concerns that all of this spending will be an immediate problem.

“The fiscal dice have been thrown in the sense that the central banks are picking up the bill,” Ed Devlin, former head of Canadian portfolio management at Pacific Investment Management Company LLC and founder of Devlin Capital Inc, said by phone. “From a market-moving perspective, it will be difficult in the short term to move the markets when the central banks are willing to write the checks.”

That could change if parties start messing with the business results.

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