The government cannot rely on borrowing more money to fund pledges: David Dodge on fiscal policy
The federal government might struggle to fulfill all of the spending promises it made last year in the budget and Fall Economic Statement, according to former Bank of Canada governor David Dodge.
In a report on Monday, David Dodge, senior advisor at Bennett Jones LLP, said that the economic assumptions made by the federal government in Budget 2022 and the Fall Economic Statement were “plausible but optimistic.”
“All I was doing in the report was raising the very serious risk that they [the federal government] will not actually be able to honour the pledge that they have made in terms of their (Budget 2022) policies,” Dodge said in a television interview on Thursday.
“There’s not going to be any room, or certainly not very much more room, to make new pledges and deliver the real resources that are required to honour those pledges.”
In the Fall Economic Statement, the federal government said that Canada was on track for a balanced budget over the next five years.
Dodge said there are three main risks that could impact the federal government's ability to deliver on its spending promises while balancing the budget.
“The first is that 2023 turns out to be considerably worse than the government had penciled in,” Dodge said, adding that uncertainty still remains high.
Second, interest rates may need to stay higher than pre-pandemic levels for longer in order to dampen inflation, Dodge said.
Lastly, he said more resources may be required to deliver on policy promises than initially expected.
Dodge thinks the federal government may have to become more fiscally prudent since it can’t rely on borrowing money to pay for spending promises.
“The point being is you cannot rely, going forward, on simply borrowing more money to fund those pledges as essentially they [the federal government] have done and being willing to do since prior to COVID- 19, but certainly during COVID-19,” he said.
Dodge added that additional spending promises would require more tax hikes and that the federal government might have to re-examine its spending priorities, focusing on areas that could stimulate economic growth.