OTTAWA — Canada’s corporate sector and public both appear to be taking a close look at the New Democratic Party led by Jack Layton for the first time, and likely coming to different conclusions.
So far, the federal election campaign hasn’t had a perceptible impact on the dollar, or bond and equity markets.
But that may all change now that the NDP is threatening to put its stamp on Ottawa, with the most recent Ekos poll suggesting the party could win 100 seats next Tuesday, making the idea of Layton becoming prime minister, possibly as head of a coalition, at least within the realm of possible outcomes.
The reason Bay Street hasn’t been following the election closely so far, says Bank of Montreal deputy chief economist Douglas Porter, is that it was assumed until a few days ago that the May 2 election would not produce a dramatic change.
Few people had considered Layton as potential leader of the opposition, never mind as head of a coalition government.
“While that’s certainly an ‘interesting’ result, it’s not exactly market friendly.
“In other words, hang on to your hats!” Porter advised clients in a note Tuesday.
The immediate impact of the socialist NDP in the cat-bird seat would be to increase anxiety and uncertainty among business leaders and investors about what comes next.
Porter says he expects the Canadian dollar to come off its lofty perch, at least in the short term, and for bond yields to possibly rise.
The Canadian dollar has been above its U.S. counterpart practically all of 2011, bolstered by a combination of high world prices for commodities it exports as well as the American currency’s weakness.
The loonie closed above 105 cents US on Tuesday, up nearly one-third of a cent.
TD Bank chief economist Craig Alexander added that markets would likely react negatively to any change in Ottawa for the simple reason that investors don’t like uncertainty.
There are particular reasons for Canada’s corporate sector to dislike the NDP platform, however.
The party is calling for the corporate tax rate to be hiked back to 19.5 per cent, 4.5 percentage points higher than where the Tories would take it next year.
The Liberals, which have been the official Opposition party led by Michael Ignatieff, is also calling for the corporate tax rate to be increased but only to 18 per cent.
In contrast, the Conservatives led by Prime Minister Stephen Harper plan to reduce the corporate tax rate to 15 per cent on Jan. 1, 2012, down from the current rate of 16.5 per cent.
As well, the NDP says it would cut $2 billion in subsidies to the oilsands, cap credit card interest rates at five per cent above prime, and establish a cap-and-trade system to control greenhouse gases.
“When you look at the NDP, two things are quite worrisome,” says Jack Mintz of the University of Calgary, a leading economist on government tax policy.
“One is they want to raise taxes in a significant way and (there are) concerns about whether they would raise other taxes. And the other thing is there is a large hit on Western Canada.”
Mintz says his calculations suggest the federal coffers would only gain a fraction of the billions the NDP believes corporate taxes will generate, leaving Layton with a fiscal hole. Nor would he realize the estimated payoff of other measures he has announced, such as closing tax loopholes and the cap-and-trade system.
Markets would then be nervous about whether he would raise other taxes to make up for the difference, or curtail spending.
Labour economist Jim Stanford agrees corporate Canada would be worried, but it’s more to do with their self-interest than the economy’s.
The chief economist with the Canadian Auto Workers union disagrees with Mintz on the effectiveness of corporate tax cuts as a public policy tool to create investments and jobs. There’s no doubt an NDP-led government would hurt business interests, he says, but not necessarily the economy.
“Corporations won’t be happy to see their $6 billion in tax cuts cancelled,” Stanford says.
“But even if Jack Layton was prime minister on May 3, Canada is still a fantastically profitable and secure place for business to operate and that’s why our dollar is worth $1.05 and our stock market is high and corporate profits are so high. None of that is going to change.”
Even the oil patch will shrug off Layton’s cap-and-trade and removal of subsidies, he says, as long as oil is $100 a barrel.
Surprisingly, Mintz says Stanford has a point. The immediate market reaction would be nervousness; longer term, it will depend how the NDP in office behaves. He notes that some provincial NDP governments in Saskatchewan and Manitoba have been fiscally responsible.
But don’t underestimate the ability of governments to impact business decisions, he adds, even if in the margins. And at this point, the NDP does represent a wildcard.
“People who have studied economic growth rates across countries have found political uncertainty does have a negative impact. It’s not the only factor, but it is one of the factors.”