With financial markets in turmoil and economic forecasts tracking lower, some expected Stephen Harper’s government to face a rougher ride than the one it got in the polls yesterday. While the Conservatives return with a stronger minority, the Harper government doesn’t have a lot of fiscal room to move, analysts say.

The Conservatives won in 143 ridings, up from 124 in the last Parliament. The Liberals fell to 76 from 103, the NDP gained eight to 37, and the Bloc Quebecois lost one to 50.

“Defying the gathering economic storm clouds, Conservative Prime Minister Stephen Harper secured a decisive victory in yesterday’s general election, although he is still faced with the uncertainties of minority government,” notes Global Insight Inc.

“This is a sweet victory for Harper, who many originally believed was too prickly and right-wing for moderate voters’ tastes,” it says, adding that the results are a “heavy blow” for the Liberals, as they lost a large number of seats and saw their share of he popular vote decline.

“The election attracted less public attention than usual given the economic context, and it will be the latter that will dominate Harper’s agenda over coming months,” says Global Insight. It notes that Canada has not fared as badly as many of its peers so far during the crisis, but that the extent of the U.S. recession “will in large part dictate how much of a challenge Harper has on his hands. He has pledged not to endanger the country’s enviable fiscal position, and this will mean some significant belt-tightening. The scope for further tax cuts is also limited.”

Scotia Economics agrees that room to move is limited, noting, “Though the Conservatives’ election platform, totaling $8.7 billion over the five years to fiscal 2013, carried a far smaller price tag than the other parties’ proposals, even its implementation will be challenging, forcing tough trade-offs.”

“Specific targeted tax reduction promises, such as halving the federal excise tax for diesel and aviation fuel to 2¢/litre, abolishing tariffs on a wide range of imported machinery & equipment and edging up the threshold for the small business corporate income tax from $400,000 to $500,000 will likely be introduced in the near-term,” it predicts.

However, it warns that major tax relief is unlikely. “Potentially more influential for the rest of this decade will be the implementation of proposals without explicit price tags, such as updating the Investment Canada Act, implementing the consumer protection proposals, and ensuring that by 2010 interprovincial trade, investment and labour mobility barriers are substantially lowered.”

“With the Doha round of international trade talks indefinitely suspended, the Conservatives’ promise of aggressive action to expand Canada’s network of bilateral and regional free trade and economic agreements is expected to lead off with the anticipated announcement of free trade negotiations at the upcoming Canada-EU Summit,” it adds.

IE