Fiscal policy to ease, regardless of election results

“A more expansionary fiscal stance looks likely under almost any scenario,” it said.

On the bright side, the “economic jumping-off point is not bad,” the report said, as growth in 2024 was a bit stronger than expected.

While the current U.S. tariff threats would likely stall growth over the next two years, the resulting recession is expected to be less severe than the global financial crisis, the report said.

“It is not hard to imagine any range of deeper and darker scenarios but for now we consider the one for which the world is readying,” it said.

Against this backdrop, the report said that “policymakers could reasonably roll out a rescue package in the order of 2% of GDP,” which is about what the government did during the financial crisis.

That means larger federal deficits in the next few years, as “any government is very likely to actively support the economy” in the face of higher tariffs that push Canada into a recession in the short-term.

Indeed, even before any emergency fiscal measures, the deficit already stands to rise. New Prime Minister Mark Carney’s decision to cancel the planned increase in the capital gains tax and the elimination of the GST on first-time home purchases (measures that will cost about $32 billion through fiscal 2030) are factors, the report noted.

“We would pencil in an additional $25 billion through fiscal 2030 — for an incremental tally of $57 billion through fiscal 2030 relative to the Fall update — as the starting point while awaiting further policy clarity,” the report said.

Neither party is likely to campaign on promises of fiscal austerity and both are likely to pursue promises of middle-class income tax relief and increased military spending — which could amount to almost $50 billion, the report suggested.

Combining all of these measures “could bring the total five-year shortfall closer to $160 billion,” through fiscal 2030, relative to the latest fall update, it said.

And, while both the Liberals and the Conservatives are likely to promise savings from cuts to the public service payrolls, the report cautioned that this likely won’t do much to improve government finances, as employee compensation only represents 12% of government spending.

“Transfers to households and governments comprise a much larger 42% of total outlays and do not appear to be on the table. All this suggests there is no easy route to finding quick savings in the order of magnitude of potential spending pressures,” it said.

Indeed, in the face of a “generational trade war… the net effect is most likely a more fiscally expansive path ahead for federal finances,” the report said.

While the next government will have the fiscal capacity to face potential headwinds, it “cannot afford pandemic-era policy over-reaches, nor can it afford to miss the opportunity to front-run major investments to unlock greater productivity gains over the medium-term,” the report concluded. “These ultimately are the best insurance against the current uncertainty facing the country.”