Jack Layton’s Death Makes Economy Biggest Hurdle for Canada’s Harper

The death of Canadian opposition leader Jack Layton means the biggest threat to Prime Minister Stephen Harper’s agenda of lower taxes and spending may come from a wobbly global economy, not his political rivals in Parliament.

Layton, who died Aug. 22 in Toronto at 61 after battling cancer, was to be Harper’s biggest rival when Canada’s parliament returned Sept. 19. Layton led his pro-labor New Democratic Party to the most number of seats in its 50-year history in May 2 elections, vaulting the NDP past the Liberal Party to become the country’s biggest opposition party.

The NDP plans a convention next year to select Layton’s permanent replacement, and Liberal lawmaker Bob Rae has been leading his party on an interim basis since former leader Michael Ignatieff quit following the Liberals’ worst-ever election showing. With the country’s biggest opposition parties likely preoccupied, the greatest constraint on Harper’s plans may be the risk of Canada being sideswiped by a global economic slowdown once again.

“For some it feels like 2008 all over again,” said Goldy Hyder, a general manager with lobbying firm Hill & Knowlton Canada who was an aide to former Conservative Prime Minister Joe Clark. “It opens a whole can of worms here of: Do you go down the road of another stimulus package?”

Tax Breaks

During the campaign, Harper promised tax breaks once the government eliminated its record deficit, including one that would let parents with children under 18 split their income to lower their taxes. A review of government spending would find C$4 billion ($4.04 billion) in annual savings, the Conservatives said, allowing a return to balanced budgets by the fiscal year beginning April 2014.

Economists have been shaving their forecasts for growth after reports over the past month showed Canada’s economy weakening from refinery shutdowns and supply disruptions related to natural disasters in Japan, giving Finance Minister Jim Flaherty less margin for error in his fiscal projections.

At an appearance before lawmakers on the House of Commons Finance Committee last week, Flaherty said his plans remain valid, adding he would “do what is needed” to protect jobs and the economy if the global economy deteriorated “in a dramatic way.” He also said opposition calls for major new spending would be “precisely the wrong direction” for Canada.

Hyder said the government will face pressure to deal with shorter-term economic worries, instead of tackling longer-term challenges such as Canada’s relatively low productivity performance and the increasing demands of an aging population.

Not ‘Thinking Big’

Canadians aren’t “thinking big,” Hyder said. “They’re thinking much more close to home -- ‘I need a job, I need to be able to afford a roof over my head.’”

“Those are the things on the minds of Canadians, and I think the government is in part reflecting the current thinking of the electorate,” Hyder said.

Canada has the lowest deficits among Group of Seven nations, and its currency has been the strongest in the G-7 since the end of 2008. Government bonds have returned 6.9 percent over the year to date through Aug. 22, according to Bank of America Merrill Lynch index data, compared with a 4.7 percent average for the G-7. Canada’s benchmark S&P/TSX Composite Index has declined 3.5 percent since June 16, compared with a 6.6 percent loss for the Dow Jones Industrial Average.

Set the Agenda

While the Conservatives won a majority of seats in the election and can pass legislation without the support of other parties, the opposition can still set the agenda in parliament’s question period, forcing the government to defend unpopular measures and highlighting alternatives.

Before this year’s election, Layton proposed measures that were adopted in part by the ruling Conservatives in their election platform, including a plan to give tax breaks for home owners who made their houses more energy efficient, and incentives for doctors to serve rural areas.

Layton, who took over as NDP leader in 2003, led the party to increased seat totals in elections in 2004, 2006 and 2008. The NDP’s effectiveness improved greatly under the charismatic Layton, said Richard Nimijean, a political scientist at Carleton University in Ottawa, who credited him for modernizing the party’s fundraising and vote-tracking capabilities.

“The NDP was in terrible shape when he took over,” Nimijean said in a phone interview. “For the party to go ahead, it’s about who can continue that connection that’s been made.”

Lying in State

Layton’s body arrived on Parliament Hill today, carried by a Royal Canadian Mounted Police honor guard, where it will lie in state outside the House of Commons. The body will return to Toronto tomorrow for further public visitation at city hall. A state funeral will take place Aug. 27 at Roy Thomson Hall, a concert hall in Toronto that seats more than 2,500. Canada’s ambassador to the U.S., Gary Doer, will be one of the pallbearers, the Globe and Mail newspaper reported, along with Alexa McDonough, who Layton succeeded as NDP leader in 2003.

Nycole Turmel, who was appointed interim NDP leader in July after Layton announced he was taking a medical leave of absence, will remain in that post until a leadership convention early in 2012. Deputy party leaders Thomas Mulcair of Quebec, who was once a former provincial cabinet minister, and Libby Davies of British Columbia have been mentioned in newspaper articles as potential successors.

While the NDP and Liberals both struggle to find new leaders, opposition lawmakers say they won’t let Harper have a free pass. Liberal Ralph Goodale said in an interview in Bloomberg’s Ottawa bureau that while Harper is “certainly in a powerful position,” that doesn’t mean the opposition parties are toothless.

Transition Period

“The country continues to need governance, and this is a period of transition undoubtedly, but that doesn’t mean the opposition abandons the field,” said Goodale, who served as finance minister between 2003 and 2006.

Bob Plamondon, who has written on the history of the conservative movement in Canada, said he doesn’t think Layton’s death will alter the government’s policy planning. Rather, it raises the odds that the two leaderless parties might join forces, providing a bigger challenge to the Conservatives at the next election, expected in 2015.

“If there is a worry for Harper it is that in the post- Layton era the possibility of a Liberal-NDP merger will get another look,” Plamondon said in an e-mail.

To contact the reporter on this story: Andrew Mayeda in Ottawa at amayeda@bloomberg.net.

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

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