Canada tilts right as inflation claims Trudeau as latest victim

As Justin Trudeau's resignation throws Canada into political turmoil, at least one thing seems certain: An economy centered on record immigration, expanded government spending and green ambitions is set for a dramatic reshaping.

The end of the prime minister's nine-year reign in large part reflects mounting discontent over the cost of living and weak economic growth. Now, as Canada prepares for the Donald Trump era, its Conservative Party is in prime position to take power and push the country away from the progressive policies that defined Trudeau's tenure.

It's a shift that has played out around the world as economic angst, fueled by inflation and higher interest rates, topples ruling parties both on the left and right. After expanding Canada's social safety net — and budget deficits — Trudeau ultimately couldn't overcome a collapse in popularity and disarray within his administration.

Inflation "is a government killer, and it doesn't pay any attention to the ideological bent of the government in power," said Gerald Butts, a political consultant at Eurasia Group who was principal secretary to Trudeau until 2019. "Like a lot of governments, they were slow to recognize both the fact of inflation and the remedies that were going to be required."

While Trudeau's Liberal Party will now pick Canada's new leader, the country is likely to face a national election almost immediately afterward. The Liberals are polling more than 20 points behind the Conservatives, according to some surveys, putting taxes, spending and environmental regulations on the chopping block in the world's fourth-largest oil-producing nation.

Conservative Leader Pierre Poilievre's signature policy is to cut Trudeau's carbon tax. He'd also ramp up production of raw materials.

"You'll find a more pro-business, pro-resource extraction, smaller government, smaller spending, tougher-on-crime kind of a government" if the Conservatives prevail, said Christopher Hernandez-Roy, deputy director of the Americas program at the Center for Strategic and International Studies in Washington.

Such policies would more closely resemble those of Trump, who was certified as the US presidential election winner just hours after Trudeau's resignation. He has threatened 25% tariffs on his northern neighbor and has mocked Canada as the 51st US state.

The president-elect — who has also posted expansionist rhetoric about Panama and Greenland — repeated the taunt Monday, and reiterated his complaint that the US trade deficit with Canada is somehow a subsidy. The deficit is a consequence of the US buying more than 4 million barrels per day of Canadian oil.

"The United States can no longer suffer the massive Trade Deficits and Subsidies that Canada needs to stay afloat," Trump said in a Truth Social post. "Justin Trudeau knew this, and resigned."

Trump himself was elected in November amid voter discontent with the US economy under President Joe Biden, who was forced to drop his reelection bid and was replaced as a candidate by Vice President Kamala Harris.

Power Shift

Trudeau, 53, will remain as prime minister until a new leader is selected, likely sometime in March. The potential contenders include Chrystia Freeland, whose shock resignation as finance minister last month ultimately led to Trudeau's demise; Dominic LeBlanc, a Trudeau ally who replaced her; and Mark Carney, the former governor of the Bank of Canada who also serves as chair of Brookfield Asset Management Ltd. and Bloomberg Inc. He said late Monday that he's considering entering the race.

But the Liberals will then face another national election that could come as soon as April, and must happen by late October. Barring a dramatic turnaround, they'd face an uphill battle against Poilievre and the Conservatives.

Residents have grown increasingly dissatisfied with Trudeau's economy. Canada's per-capita gross domestic product contracted for six straight quarters and fell 3.5% since its peak in 2022, a never-before-seen decline outside of a recession. There aren't enough jobs for everybody who wants one and unemployment keeps rising. Wages can't keep up with surges in grocery prices. The dream of homeownership appears further out of reach for many young Canadians, a key voting bloc that helped elect Trudeau.

Conservatives have swooped in on these grievances. They blame Trudeau's mismanagement of immigration, taxes on carbon emissions and government spending for fueling inflation and making lives more expensive, and vow to reverse course.

"Canadians deserve a real choice in the next election and it has become obvious to me, with the internal battles, that I cannot be the one to carry the Liberal standard into the next election," Trudeau said Monday.

Even if Trudeau's replacement as Liberal leader seeks to run on a platform of change, "it's an academic exercise," said John Ruffolo, the founder of Toronto-based Maverix Private Equity. "Whoever is running the party, I believe, is going to lose in a landslide win for the Conservatives. So it doesn't really matter at the end of the day."

Poilievre, 45, has tried to position himself as a strong man and cast Trudeau as a weak leader. He has blamed the prime minister for losing control of the border, an issue Trump has raised as he tries to curb illegal drugs and migrants from Canada to the US.

While Trudeau's government had the experience of negotiating with Trump during his first administration, Canadians have viewed Poilievre as equal to the prime minister in managing the country's relationship with the incoming president.

Poilievre posted a video on Monday set to brooding electronic background music declaring that Trudeau and his colleagues in the Liberal Party helped to "break the country."

"Canadians can take back control of their lives and their country, take back control of our border, take back control of immigration, take back control of spending, deficits and inflation, take back control of our streets," and put "Canada first," he said.

In an interview published last week with right-wing Canadian influencer Jordan Peterson, Poilievre said he would cut federal largesse like foreign aid, outsourcing, and grants or loans to businesses, in favor of lower taxes across the board, saying he admires the economic models of Ireland, Singapore, Switzerland and Israel.

Fiscal Issues

Fiscal spending emerged as a key issue for Trudeau, with Freeland highlighting her disagreement with the prime minister on the matter when she resigned, suggesting proposed tax rebate checks were irresponsible political gimmicks.

The country's federal debt has nearly doubled since 2015, rising to C$1.24 trillion ($870 billion) in fiscal 2023-24 — mostly due to generous support payments sent to businesses and households during the Covid-19 pandemic. But the federal government has also added billions in permanent new spending measures, including child benefit checks, subsidized daycare and a national dental plan. Total program expenses were 16.2% of the economy last fiscal year, the highest proportion since the early 1990s, outside of the Covid-19 pandemic.

"Various potential outcomes after Trudeau — whether a different Liberal prime minister or another party in power — suggest tighter fiscal policy going forward," said Dominique Lapointe, an economist with Manulife Investment Management.

Some of Trudeau's signature expansions of the social safety net may be harder to roll back, such as dental and pharmaceutical care, said Laura Stephenson, a political science professor at Western University in London, Ontario. Beyond cutting taxes and costs, private equity founder Ruffolo said that Conservatives would likely focus on aligning with the US on areas like energy, critical minerals and defense.

"It's obviously bullish for the oil and gas sector," said Heather Exner-Pirot, director of energy, natural resources and environment at the Macdonald-Laurier Institute think tank, pointing to potential reform or removal of Canada's emissions cap, impact assessment act, clean fuel regulations and electric vehicle sales mandate.

Immigration Reversal

Since Trudeau was elected, his government continuously ramped up intakes of immigrants to stave off economic decline from an aging population. After a short Covid-19 lull, post-pandemic surges in arrivals pushed the country's population growth to the highest levels on record — a faster pace than any other developed nation. Rapid additions of new residents accelerated the economic recovery and filled in workforce gaps.

At that point, immigration was seen as a tool for Trudeau to boost economic growth and essentially prop up businesses by easing access to low-wage foreign workers and new customers. But eventually, mass influxes overwhelmed the country's capacity to absorb such explosive growth. Housing shortages worsened. Rent prices soared. The unemployment rate surged. And public support for immigration plunged.

In a country once known for embracing newcomers, most Canadians now say there's too much immigration. That's the first time since 1998 that this view has been held by a majority. As public sentiment turned, Trudeau's Liberal government drastically rolled back its ambitions. It is now trying to engineer a two-year freeze to population growth by reducing admissions and forcing millions to leave — a stark contrast from images of him hugging newly arrived refugees during his early years in office.

The immigration mess did Trudeau enormous political damage: It seemed to underscore that even when the government's intentions were good, it had difficulty getting the policy details right. Perhaps it's not a coincidence that the Liberals' standing in polls began to nosedive in the middle of 2023. Around that time, interest rates reached a peak, the unemployment rate was ticking higher, and the data became clear that population growth was in overdrive.

Crisis of Confidence

In the end, Trudeau's administration was undone by a broader crisis of confidence. His own party lost faith in his ability to win over the public with a clear message and agenda. The country lost confidence in his ability to take action to ease their economic pain. Consumer confidence has been slipping — about 60% of Canadians believe the economy is about to get worse — and business investment is in a funk. The arrival of Trump, with tariffs, tax cuts and an America-first mindset, could worsen that, at least in the short term.

And the rise of the Trumpian populist right in the US is arguably helping to embolden a pushback in Canada against the brand of cultural progressivism for which Trudeau was a standard-bearer. Some of his work on that front was welcomed by many as progress — such as trying to address Canada's legacy of injustice against Indigenous people, or appointing a cabinet with equal numbers of women and men. But sometimes he carried it to the point of alienating people — for instance, interjecting to correct a speaker in 2018 by saying "we like to say peoplekind, not necessarily mankind." Trudeau later said the remark was a joke.

Poilievre and allies dismiss much of Trudeau's liberal politics as "woke" and "wacko."

Despite the widespread discontent with the government, the political shift in Canada is more reflective of a need for change after almost a decade of leadership by one party than a dramatic tilt, said Stephenson, the Western University professor.

"It's not necessarily a right wing turn in Canada, so much as it's time for change," she said. "The only alternative is the other party that's ever held office, and that's where they're going."