How Does Geopolitics Affect Fiscal Policy and Growth? The Example of Trudeau and the ICRG Risk Series

Trudeau’s hold on power is further weakened as his finance minister, Chrystia Freeland, resigns just shortly before unveiling Canada’s economic update statement, which revealed a $60bn CAD deficit ($42bn USD), far surpassing Freeland’s $40bn CAD target.

In her publicly-shared resignation letter, Freeland said Canada needs to keep its “fiscal powder dry” to deal with the threat of sweeping tariffs from US President-elect Donald Trump, adding that it meant “eschewing costly political gimmicks” that Canada cannot afford – a clear shot at Trudeau’s proposed efforts to shore up popular support via $250 cheques to some Canadians and tax breaks on some essential items.

The government appears to be on the edge of collapse and an early election seems possible.  But a successful no confidence vote will require the support of the left-leaning NDP – among other items – who’s leader isn’t the most popular politician at the moment.

In any case, the moves by Trudeau are not without empirical support.

In a piece in the Canadian Journal of Economics, via a general equilibrium model of economic growth and optimally chosen fiscal policy, it was found that uncertainty about remaining in power leads to larger government shares in GDP, which in turn exert an adverse effect on the ICRG index measuring incentives and this is bad for growth.

There’s some good insights here:  (https://lnkd.in/eC2wJRY6)

Have a look if you have some time.

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