Federal government moves to lower investment caps, reacts to Trump’s tariff threat in fall economic statement
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Federal government moves to lower investment caps, reacts to Trump’s tariff threat in fall economic statement

John Manley, former Chancellor of the Exchequer and former Deputy Prime Minister, Chairman of Jefferies Securities and Senior Advisor to Bennett Jones, gives his thoughts on

The federal government announced a move to ease limits on pension funds investing in Canadian companies in its latest tax update, along with responses to U.S. tariff threats and other measures aimed at competing for capital.

On Monday, the federal government released its fall economic statement amid turmoil in Prime Minister Justin Trudeau’s cabinet. Building on an earlier announcement last week, the government said it intends to remove restrictions on pension funds in a bid to stimulate domestic investment.

“The 2024 Fall Economic Statement announces the federal government’s intention to amend the rules to remove the 30 per cent rule for investments in Canadian entities,” the government said in its fiscal policy update.

“This will make it easier for Canadian pension funds to make significant investments in Canadian entities. During the development of regulatory changes, the federal government will consult with provinces on the treatment of provincially regulated pension plans.”

According to Ottawa, the move will make it easier for Canadian pension funds to make large investments in Canadian companies.

Finance Minister Chrystia Freeland announced his resignation in a letter posted on social media from Prime Minister Justin Trudeau’s cabinet hours before she was scheduled to deliver a fiscal update on Monday. She stated in the letter that the decision came after Trudeau offered her another position.

In the letter, Freeland highlighted risks to the Canadian economy from tariff threats from US President-elect Donald Trump. She said Canada must keep its “fiscal powder dry,” adding that the government should avoid “expensive political tricks” it cannot afford given the current situation.

Fight for capital

Freeland announced the intention to remove the cover on Canadian pension funds last week, according to Bloomberg News. She said in a statement on Friday that the announcement comes amid rising “economic nationalism” where competition for capital has intensified.

“Canada must fight harder than ever for capital, including facilitating and supporting the investment of Canadian capital here at home. This is key to the future prosperity of all Canadians,” she said.

Freeland’s removal of the pension cap comes as Canada grapples with problems related to lagging productivity and weak business investment.

The autumn economic statement highlights that Stephen Poloz, the former bank governor, was asked to examine ways to “catalyze greater domestic investment opportunities” for pension funds in the government’s previous budget.

The government also announced other changes related to Canadian pension fund operations in its fiscal policy update.

This includes the fact that Ottawa is looking into lowering the 90 percent threshold that limits municipally-owned utilities from attracting private sector ownership of more than 10 percent.

“Lowering this threshold for Canadian pension funds would allow them to acquire a higher ownership stake in these entities. For example, municipally-owned utilities could access more capital to meet future demand and expand electricity generation and distribution networks,” it says in the autumn financial statement.

In addition, the government announced that it is currently consulting on potential rules to increase transparency for large federally regulated pensions.

“This would require the Office of the Superintendent of Financial Institutions to publish the breakdown of investments, by jurisdiction and asset class within each jurisdiction, of federally regulated pension plans with assets under management in excess of $500 million,” the government said in the finance update.

The government also proposed launching a fourth round of the Venture Capital Catalyst Initiative, making $1 billion in funding available next year with more favorable terms for pension funds or institutional investors.

Response to customs threats

The federal government’s statement on the fall economy comes on the heels of trade tensions with the United States, with Ottawa saying it is focused on countering the threat in its fiscal policy update.

Last week, Freeland said Trump and his administration are trying to create a sense of economic uncertainty outside the United States as part of a strategy to “discourage investment anywhere other than the United States.”

“Canada will fight for Canada. Our government is fighting for Canadian jobs,” she said.

Trump has threatened to implement 25 percent tariffs on both Canadian and Mexican imports unless both countries address issues related to the U.S. border and crack down on fentanyl and illegal migration into the U.S., according to Bloomberg News.

The fall economic statement proposed measures to improve border security with a $1.3 billion package over six years starting in 2024-25 to various organizations, including the Canada Border Services Agency and the Royal Canadian Mounted Police.

Canada’s federal and provincial governments are mulling ways to navigate Trump’s threat to impose 25 percent tariffs on all Canadian imports on his first day in office in January, The Canadian Press reported last week. Ontario Premier Doug Ford also said last week that Ottawa was preparing potential tariffs in retaliation, as well as threatening to limit electricity exports from Ontario.

However, the provinces do not appear to be in unison on the issue as Alberta Premier Danielle Smith said the province would not under any circumstances agree to stop oil and gas exports to the US

“Financial Hit”

Ahead of the release of the fall economic statement, James Orlando, a director and senior economist at TD Economics, said in an interview with BNNBloomberg.ca last week that many are trying to figure out what impact tariffs might have on Canada’s economy.

“What we’re dealing with right now in the finance departments is we’re trying to figure out how much of an economic hit we’re going to take in Canada as a result of potential tariffs,” he said.

“With the analysis that we’ve done, and everyone else seems to have done, is that it’s very serious that we’re talking about at least a stagnation or even a recession in Canada if the worst tariffs were to come.”

As a result, Orlando said tariffs could weigh on federal government revenue if enacted.

“Let’s be honest, like Donald Trump isn’t even in the White House yet, and the government, in their economic statement in the fall, looks like they’re going to make new policies in preparation for a US president-elect. So there should be some hard promises there,” he said.

With files from The Canadian Press and Bloomberg News