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New Democrats’ Surge in Polls Prompts Concern About Higher Canadian Taxes

The surging popularity of Canada’s New Democratic Party and the prospect it may gain a share of power has undercut the Canadian dollar and sparked economists’ concerns about higher taxes.

The pro-labor NDP has become the second-most popular political party, three polls show, and projections based on recent surveys suggest it may replace the Liberals as the main opposition party in the House of Commons after next week’ election.

Prime Minister Stephen Harper has raised the prospect that the opposition parties will combine and take power if his ruling Conservatives don’t win a majority of seats. Both the NDP and Liberals have said they will reverse past and planned reductions in corporate income taxes that benefit companies like Bank of Montreal (BMO) to help pay for new spending commitments.

“Uncertainty over the May 2nd Federal election is growing, with the small potential of an NDP-led minority government weighing on markets more than the potential of a conservative- led majority,” Camilla Sutton, chief currency strategist at the capital markets unit of Toronto-based Bank of Nova Scotia, wrote in an e-mail. Without the broad-based selling pressure that is hitting its U.S. counterpart, the Canadian dollar would likely have weakened to beyond 96 cents per U.S. dollar because of the election, she said.

The Canadian dollar was 0.1 percent stronger at 95.05 cents per U.S. dollar at 3:40 p.m. in Toronto, from 95.16 cents late yesterday. One Canadian dollar buys $1.05208.

Spending and Taxes

“A coalition government in general means more spending and higher taxes,” Sheryl King, head of Canada economics at Bank of America Merrill Lynch in Toronto, said in an e-mail. “I do not think the corporate tax hike will be sufficient. Higher taxes elsewhere will have to occur as well.”

The NDP has surged in voter support, led by gains in Quebec, since leader Jack Layton’s performance in two televised debates this month. The NDP is now the most popular party in the French-speaking province, according to the polls.

The increase in support has led Layton’s opponents to focus on his party’s platform, which promises C$68.9 billion ($72.4 billion) in new spending over four years to be financed by raising corporate taxes, cracking down on tax havens, ending subsidies for fossil-fuel exploration that benefit companies like Calgary-based Suncor Energy Inc. (SU), and revenue from a cap- and-trade system for carbon.

Unlikely ‘Relevant’

Still, the rising NDP support isn’t likely to be “relevant” for bond investors as long as they remain out of power, said Ed Devlin of Pacific Investment Management Co., which manages the world’s largest bond fund.

The two most likely outcomes of the election are a majority Conservative victory, or another minority Parliament with Harper returning to power, Devlin said. The Liberals probably won’t back a coalition led by the NDP to replace Harper, he said.

“The markets right now are probably pricing in another Conservative minority government,” Devlin said in a telephone interview. The rise of the NDP “makes great political theater, but from a markets perspective, while it could create some volatility, I can’t see a resurgent NDP being relevant,” he said.

Harper, speaking at a campaign rally in Waterloo, Ontario, again framed the election as a choice between a stable, majority government that focuses on the economy and a government consisting of smaller parties that will lead to higher taxes.

‘Clarifies the Choice’

“The fact that the NDP may be the leading opposition party, that I think actually clarifies the choice,” Harper told reporters today. The opposition parties “have economic policies that are simply not credible, policies that are designed for opposition rather than for actually governing.”

Layton defended his party’s platform at a campaign stop in Winnipeg, Manitoba. “We would be providing very stable and predictable conditions for business,” he said today, pointing to the fiscal record of NDP provincial governments in Manitoba and Nova Scotia. “Our economic approach would be step-by-step, affordable, and realistic. That’s what I think businesses are looking for.”

Tom Nakamura, a fixed-income portfolio manager for AGF Investments Inc. in Toronto, who helps oversee about C$6 billion, said international investors may not be comfortable with the idea of the NDP holding a share of power. “It would create uncertainty,” he said by telephone. “The global community isn’t used to thinking of a more left-leaning government,” adding it could delay Canada’s return to balanced budgets.

Still Nakamura said the NDP would likely be restrained by “other voices in Parliament.” The country has “a much better starting point in terms of fiscal health,” he said. “I don’t think it’s drastic.

Polls

The NDP has 30 percent support among decided voters, according to an Angus Reid Public Opinion poll, conducted for the Toronto Star and La Presse newspapers. The governing Conservative Party has 35 percent support, while the Liberals, who had the second-most seats in the House of Commons, have 22 percent. The online poll surveyed 2,040 Canadian adults on April 25 and 26. It carries a margin of error of 2.2 percent, 19 times out of 20.

The Angus Reid poll was supported by two other polls that showed the NDP in second place nationally and leading in Quebec. The latest CTV/Globe/Nanos tracking poll gives the NDP 28 percent support, 10 percentage points behind the Conservatives and five percentage points ahead of the Liberals. The telephone survey of 1,200 adults was conducted by Nanos Research April 23 to April 26 and has a margin of error of 2.8 percent.

A poll by Ekos Research taken for iPolitics.ca shows the New Democrats with 28 percent support, compared with 34 percent for the Conservatives and 24 percent for the Liberals. The telephone survey of 2,532 adults was taken April 23 to April 25 and has a margin of error of 2 percentage points.

In the 2008 election, the Conservatives won 143 seats with 38 percent of the vote, while the NDP won 37 seats with 18 percent. The Liberals took 77 seats with 26 percent of the vote.

To contact the reporters on this story: Greg Quinn in Winnipeg, Manitoba at gquinn1@bloomberg.net; Theophilos Argitis in Waterloo, Ontario at targitis@bloomberg.net.

To contact the editors responsible for this story: David Scanlan at dscanlan@bloomberg.net.

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