The results of the federal election this month surprised most pundits, who has been expecting a minority government of one political stripe or another. Instead we got a Liberal majority government. From an investment standpoint, what does a Liberal win mean to investors in Canada?
Often in politics, the longer a government has been in power, the stronger the backlash against that government. We saw that with the Conservative party, which had formed the government from 1984 to 1993 with Brian Mulroney as Prime Minister. The party was reduced to just two seats in the 1993 election after voters decided that Mulroney and the Conservatives had outstayed their welcome. The pendulum swung again in 2006, when voters had had enough of the Liberals.
Stable government, positive markets
Whenever a party achieves a majority government, capital markets tend to be positive on the assumption that such governments possess stability without the worry of non-confidence votes and with time enough to follow through on the programs promised in their election platforms.
That is all good for investors going forward. A minority government this time around would have meant another election in a year or so, which is expensive and bad for business. It also typically leads to watered-down policies as the minority government tries to avoid non-confidence votes.
Conservative record
The Conservative government under Prime Minister Stephen Harper was generally a very good one investors and made some important changes that are very helpful to many Canadians. For example, they finally made changes to Registered Retirement Income Fund (RRIF) minimums, which were long overdue as Canadians’ lifespans increased steadily, even though many experts thought we had “hit a wall” after many decades of improvement. That was very positive for retirees, whose RRSPs and RRIFs play a major role in funding retirement. Outliving one’s money has become a larger concern as more people live past the old “unbreakable” 100-year threshold. Under the old rules RRIFs were expected to be pretty much depleted by age 100.
The TFSA conundrum
The Conservatives also increased limits for the Tax-Free Savings Account (TFSA) to $10,000, which is wonderful ifyou have an extra 10,000 to sock away after RRSP contributions and other life expenses. The Liberals may scale this back, which wouldn’t be a positive for those with the money to maximize their TFSA contributions.
In fact, the increased TFSA contribution limits are good for everyone, because you never know when you may receive an inheritance, get a raise, or have something else happen that would allow you to use the TFSA to a greater extent. A couple without a TFSA can now invest a total of $41,000 each to date, a considerable sum that is beginning to play an important role in many Canadians’ retirement planning. The TFSA has become an important financial and tax-planning tool both before and after retirement.
As you’ve read in commentaries in Fund Library and elsewhere, Prime Minister elect Justin Trudeau pledged during the election campaign to roll back the increased TFSA contribution limits.
Most new governments end up retracting or changing many campaign promises beyond recognition. It’s early days yet, and only time will tell how the Liberal government does.
Courtesy Fundata Canada Inc. © 2015. Bruce Loeppky is a financial advisor based in Surrey, B.C. This article is not intended as personalized advice.
