Former Central Bank Governor Warns Canada Faces More Austere Future

Canadians at every level of society will be facing financial challenges and making sacrifices, says David Dodge, former governor of the Bank of Canada.

The Bank of Canada building in Ottawa on Dec. 6, 2022. The Canadian Press/Sean Kilpatrick

A former governor of the Bank of Canada is warning that, in the coming years, Canadians at every level of society will be facing financial challenges and making sacrifices.

“However unpalatable such curtailment may be, failure to invest in adaptation will condemn Canadians to a much more unpleasant future,” David Dodge told the House of Commons finance committee on Sept. 25.

Mr. Dodge, who is now with the Calgary law firm Bennett Jones LLP, said there are four elements of “structural change” facing the country.

First, he said, an aging population will require more spending on care for the elderly. Second, climate change will require more spending on adaptive measures, as well as on the reduction of greenhouse gas emissions.

Third, the fragmentation of global markets means Canada will have to produce more of its own goods, rather than buying from other countries. Fourth is artificial intelligence (AI).

“AI and digitalization offer great hope for future productivity increases, but in the short term, require very significant increases in investment,” Mr. Dodge said.

At the same time, he said debt levels are high, both for individuals and governments, and savings are weak.

“Attempting to finance all these investments by borrowing is resulting in an increase in prices and interest rates and will continue to do so at least over the next decade,” he said, adding that it means governments, businesses, and people will all have to spend less.

Mr. Dodge told the finance committee that businesses must devote a larger share of revenues to investment than before the COVID-19 pandemic.

“People will look to governments for help. But governments face precisely the same issues as do households,” he said. “Governments cannot borrow their way out of these difficult choices.”

Economy Contracting

Lisa Raitt, former cabinet minister under Prime Minister Stephen Harper and co-chair for the new advisory council Coalition for a Better Future, echoed Mr. Dodge’s sentiments.

“Inflation is rising, economic challenges are also growing, and as David Dodge pointed out, we have an aging population, weak business investment, and poor productivity,” Ms. Raitt told the committee.

“On a per capita basis, our economy is not only stalled, it’s actually contracting. Real GDP, per capita, has fallen for four straight quarters, and we’re producing less per person today than we did in 2018,” she said, adding labour productivity, in terms of output per hour of work, looks even worse.

“It’s fallen 11 of the last 12 quarters, and the productivity numbers in the first half of the year are below what they were in the final six months of 2014,” said Ms. Raitt.

“If things don’t change, we'll soon be talking about a lost decade of productivity.”

Ms. Raitt said there are things to be optimistic about. Business investment is rising, she said, and there are signs of “rebounds in the construction of new factories.” Overall, she said, the country needs significantly more investment.

Government Spending

The committee heard a similar message from other economists on Sept. 21.

Ian Lee, a professor from the Sprott School of Business at the University of Carlton in Ottawa, said Canada has forgotten the painful lessons of excessive government spending that led to the Chrétien government tackling the federal debt in the mid-1990s.

“It’s now very clear we have forgotten these lessons and it’s time to go back to school,” said Mr. Lee.

“Rising inflation was indeed caused by the lockdowns and supply chain interruptions, but exacerbated by massive excessive monetary and fiscal stimulus.”

He also pointed to Ottawa’s targeting of grocery chain executives for rising food prices, which included calling them to Ottawa for a meeting Sept. 18, as an example of Ottawa’s misguided priorities.

“Some argue that grocery store executives are greedy and profit-gouging,” said Mr. Lee.

“Any person who conducts inter-industry comparative analysis knows that grocery retailing has notoriously low net profit margins,” he said, adding the prime minister’s threat of “tax measures” will not help.

“So, if such a tax was imposed on food prices in Canada, it will raise the price of food,” he said.

Mr. Lee went on to outline a host of problems he believes are hampering Canada’s economy.

“I’m urging parliamentarians to return to an examination of the economic fundamentals of Canada by examining low productivity, protectionist policies in certain industries, such as airlines, telecom, agriculture, that exclude foreign competitors that drive up prices to much higher levels,” he said.

“It is timely to recall Pogo’s very wise words,“ said Mr. Lee, referring to the comic strip by Walt Kelly. ”‘We have met the enemy, and it is us,' or more precisely, … it is you, the elected officials who have approved these extensive multiple barriers, time after time, in bill after bill, year after year.”

Pension Fund Investments

Another expert, Daniel Brosseau, with investment firm Letko Brosseau and Associates, said even pension plans are feeling the pinch, referring to the many Canadian pension funds that have fled the Canadian marketplace.

“The negative effect that seems to attract the most attention has been the exit from Canada of Canadian pension funds,” said Mr. Brosseau. “Canadian public equities held by Canadian pension funds fell from 80 percent of their total equities in 1990 to probably less than 10 percent now, representing under 4 percent of their total assets,” he said.

“The argument most often used to justify this behaviour is the expectation of higher returns in foreign markets,” said Mr. Brosseau, but pointed out that is not always the case.

He also said pension funds investing elsewhere means there is less money being invested in Canada to fuel the economy.

“From the point of view of the Canadian economy, $100 invested outside the country may generate extra dollar returns, but the impact of the absence of the $100 invested in the local economy may be much greater,” he said.

Business Investment

Mr. Lee highlighted a similar concern about dwindling business investment.

“We are seeing a decline in capital, business capital expenditures, and people who say, you know, their eyes glaze over, ‘[capital expenditures], what’s that?’” said Mr. Lee.

“If you want to know how any economy in the world, what it’s going to look like in three or four or five years, look at total aggregate business investment today. And if it’s going down, your economy is going to look pretty shabby in three, or four, or five years,” he said.

The committee is doing pre-budget consultations before the 2024 federal budget.