Canada’s fiscal plans may shift sharply after election, warns CIBC’s Shenfeld

Investing.com -- With Canada’s federal election looming on April 28, voters and markets are scrutinizing campaign platforms for signals on spending and deficits. But CIBC (TSX:CM) Chief Economist Avery Shenfeld says investors shouldn’t place too much weight on the fiscal projections offered by either major party.

“There could be quite a gap between what’s there in print... and what we might see on budget day,” Shenfeld wrote in a note to clients. Both the Liberals’ and Conservatives’ forecasts rely on projections from the Parliamentary Budget Office, which assume moderating trade risks and steady growth.

Those assumptions may already be out of date. Shenfeld highlights that the PBO’s baseline scenario doesn’t incorporate the direct hit of U.S. tariffs on key Canadian exports. “The campaign has put a laser focus on US tariffs,” he noted, but both parties are counting on revenues from Canada’s retaliatory tariffs, revenues that only materialize if the U.S. doesn’t escalate further.

He warns that neither party knows what economic conditions will look like in a few months, let alone fiscal year 2025–26. “We actually don’t want a Prime Minister to set fiscal policy in stone,” Shenfeld said, cautioning that the situation remains fluid and highly sensitive to global trade developments.

While both parties offer contrasting approaches to stimulus and restraint, Shenfeld argues that economic conditions will ultimately drive the fiscal balance. If growth accelerates and trade tensions ease, lower deficits make sense. But if “the trade war or other developments throw us into a recession,” larger deficits will be necessary.

That would not be unprecedented: past downturns under both Conservative and Liberal governments saw mid-year budget shifts and stimulus spending. Shenfeld pointed to deficit expansions under Stephen Harper during the 2008 financial crisis and Justin Trudeau during the COVID-19 pandemic.

For now, both parties aim to contain deficits within modest parameters. But Shenfeld stresses that policy flexibility will be critical as Ottawa confronts trade shocks and potentially higher unemployment.

He also noted that markets “might not yet be fully priced” for an increase in Canadian government bond issuance, especially on the long end of the curve. If economic risks mount, investors may begin to factor in a more aggressive fiscal response.

Ultimately, the election outcome won’t settle the fiscal outlook on its own. “We need to give our next prime minister... elbow room to adjust policy on the fly,” Shenfeld concluded.