David Dodge says low rates should encourage infrastructure spending
Former Bank of Canada government points to difference between his time in Ottawa and now
Low rates and a surplus of manpower in central Canada make this an ideal time for governments to invest in infrastructure, according to David Dodge, a respected economist and former governor of the Bank of Canada.
“Just as we’re trying to encourage private companies to borrow to make investments to enhance their productive capacity...in order for that to work and for them to be as productive as possible, they need the appropriate infrastructure, whether for sewers or power to be hooked up to the plant or whether it's for roads for people to get to work,” Dodge said in an interview with CBC’s The Lang & O’Leary Exchange.
The economy of central Canada has excess capacity – both of underemployed workers and resources such as concrete, he said, which makes it a good time to invest in infrastructure. But the key factor making infrastructure spending a good move for governments is low rates, he said.
“At these very low interest rates and given the need for infrastructure to allow for further economic development in Canada, it really does make sense at this point in time for governments to borrow in order to finance that infrastructure,” Dodge said.
Now a senior adviser with the Bennett Jones legal firm and chancellor of Queen's University in Kingston, Ont., Dodge is a former governor of the Bank of Canada, who led the central bank from 2001 to 2008.
In a spring economic outlook published by Bennett Jones law firm, he said governments should be investing in infrastructure rather than focus on deficit fighting.
But Dodge said Thursday that didn’t mean he was a fan of deficit budgets.
“It’s very important that current expenditures be brought in line with current revenues,” he told CBC.
He said that dictum applied equally to Ontario and Quebec and to Alberta, which he called too reliant on royalty revenue.
Dodge pointed to the “substantial difference” between the economic environment in Canada today and when he was deputy minister of finance in the 1990s. At that time, the Liberal federal government had to make deep cuts to balance the budget.
“Unlike that time, when interest rates were at 10 per cent, they’re now at three or four per cent,” he said.
“At that time, we had government expenditures of debt charges equal to one third of revenue. We’re nowhere near that rate today.”
Dodge also pointed to the risks to the Canadian economy of China’s transition from an investment and export-driven economy to one more reliant on domestic consumption.
He predicted real Chinese GDP growth will be below seven per cent this year.
“What it means for Canada, we’re going to have potentially lower commodity prices, but for us the main driver of foreign demand for goods and services is south of the border and I’m optimistic,” he said.