A solid Liberal minority government portends sober fiscal policy, but may be bad news for the merger aspirations of Canada’s banks.

Minority governments bring uncertainty, which is something investors tend to hate. As well, last night’s results threaten to revive the question of Quebec’s separation. The separatist Bloc Quebecois swept that province, gaining 20 seats, and possibly setting up a revival of separation uncertainty.

However, on the positive side, the Liberal majority was stronger than expected. The election returns a government that has fiscal credibility, at least with international investors, and the overall distribution of power looks quite balanced.

This morning, the Canadian dollar rose on the results. RBC Capital Markets says market reaction is muted because a minority was expected. “This reaction seems warranted as the fiscal plans are premised on a balanced budget. As such, Canada is unlikely to see any major changes in fiscal policy.”

Tim O’Neill, chief economist at Bank of Montreal, concludes that the minority government will have little, if any, impact on the Canadian economy.

“With virtually no consequences for the stance of monetary or fiscal policy, and with the exchange rate largely unaffected, the election results provide no basis for altering the outlook for economic growth over the next 18 months,” he says.

One of the more intriguing aspects of the reconfigured Parliament is the make up of power. Early in the evening, once it became clear that a Liberal minority was the probable result, it also appeared that the left-leaning NDP would hold the balance of power. However, the NDP dropped back over night, and a combined Liberal-NDP alliance now falls one seat short of an overall majority. This suggests a government that won’t tilt too heavily right or left, and that should ameliorate some of the uncertainty that typically comes with a minority government.

“There’s a little bit more certainty than people thought. Everything will be more tentative in terms of policy,” Andrew Pyle, an economist for Scotia Capital, told Bloomberg News. “It’s harder to make massive policy mistakes in a minority government.”

This means any major spending plans would either have to win support from the leftish NDP and Bloc; or, the Conservatives. A Liberal-NDP-Bloc coalition might be hard to keep together, and so the Conservatives should be able to hold spending in check.

The Conservatives called for restrained growth in overall program spending, targeted increases for healthcare and defence and significant personal and corporate tax cuts. Conversely, the Liberals promised to hold the line on taxes and increase program spending growth with the key focus on health care,” says O’Neill.

While the federal Liberals are unlikely to agree to any tax increases, O’Neill suggests that there may be some risk to the commitment to debt reduction. And, Bank of Canada policy goals will remain unchanged with the Bank remaining committed to a 2 % inflation target.

While big tax cuts may not be on the agenda, the Liberals also appear to have a received a sharp rebuke for spending scandals, such as the sponsorship scandal, the gun registry and the HRDC scandal. That should help keep spending under control, but it likely also means the government will be less able to continue debt reduction, pressed by the need to win support from the opposition parties of one stripe or another.

This mixed minority government would also appear to bode ill for bank mergers. With the Liberals historically eager to play politics with bank mergers, and needing to curry favour with the NDP and the Bloc, it appears unlikely that there would be much to gain politically by allowing mergers.

As well, since minority governments tend to portend early elections, possibly with a couple of years, there would be little to be gained by making mergers an election issue. That means the banks will be looking further afield for real growth opportunities.

As for the issue of securities regulation, it’s hard to tell where that may fall. While the Liberals were supporting the creation of a single national regulator, and the previous finance minister and single regulator proponent, Ralph Goodale, was re-elected, this issue likely falls into the same category as bank mergers. There is little political gain to be had by spending the capital needed to devise a federal regulator, particularly with the separatists gaining in Quebec, and the appetite for a constitutional showdown likely very light.