The Canadian dollar rose slightly after yesterdays vote on the budget, but unlike most economists, I don’t think the rise will be anything to write home about. The claims that the dollar will rise now that our national soap opera is over are too early, and don’t address the underlying causes of the loonie’s fall.
While the left is fine with the premise that all of the instability and uncertainty can be pinned on the Conservative Party, the reality is quite different. Mr. Martin has singlehandedly put off any substantial, if any, tax relief with the biggest spending spree in Canadian history. Any surplus he had to put towards debt reduction will now go to the provinces.
While many special interest groups would applaud this, the fact is that tax breaks stimulate the economy and generate further revenues for the government. This budget will severely limit any future surpluses, as the increase in spending will only slow the economy down in the long run. It invariably leads to higher taxation, and this is always a drag on our productivity.
As well, the American economy is picking up, thus lending strength to the American dollar, and this usually drives our dollar lower.
Time will tell what the markets think of the totally irresponsible federal budget, and the lack of a choice of any political party with a will to bear the brunt of public opinion in order to do the right thing fiscally. The future does not look too bright.