With the federal Liberal Party returning for a third term, the government’s fiscal policy will remain aligned with a social agenda that should, in theory, support continued economic growth and, in turn, create opportunities for institutional investors, says Roshan Thiru, head of Canadian fixed income at Manulife Investment Management Ltd.

“The Liberal Party continue to tackle social issues through expansionary fiscal policies. The growth will be enhanced through subsidized childcare by increasing the participation of women in the labour force. All of this fiscal spending will be largely priced into the market.”

Read: Federal budget highlights national childcare system, extension of pandemic subsidies

Higher governmental spending is also likely in the near future, based on the Liberals’ two previous terms, notes Thiru. “With this government, higher growth drives higher spending, such as when the Parliamentary Budget Officer forecasted the current budget would reduce the deficit from $155 billion to $138 billion. After that, the government announced new spending measures for the extra room they had.

“For the moment, it’s a minority government and they’ll need support, likely coming from the [New Democratic Party]. To secure that support, there’s the possibility that the fiscal spending could expand from what they’ve already laid out. Fiscal markets will need to wait and see but, regardless, it will be a policy of expansion.”

Thiru says this spending will subsequently provide more flexibility for the Bank of Canada. “[Increased spending] will make it easier for the Bank of Canada to continue to taper and eventually normalize policy rates and we can expect that normalization to take place sometime next year. As fiscal expansion kicks in, you don’t need the same amount of monetary stimulus in the economy.”

Read: One year later: Institutional investors looking beyond pandemic

And the Liberals’ climate change policy will also have impacts for investors in the energy sector, as renewable power is likely to expand over time through increased regulation and incentives, he adds.

“There’s already significant movement toward the Paris [Agreement] from both government and industry, [such as] the carbon emission net-zero target that was passed into law as the last step toward implementing annual carbon price increases. Investors will view the election results positively as it keeps the momentum going and should lead to greater cooperation between government, industry and finance.

“Investors understand the need for expansionary fiscal policy during times like this. The big question is, ‘How will our fiscal policy evolve post-pandemic?’ That will largely be dictated by addressing these social issues while maintaining prudent government finances.”

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