Dodge Urges Trudeau to Ramp Up Stimulus and Ease Poloz's Burden

  • Ex-Bank of Canada governor says it's time for fiscal lever
  • Few more cents of currency weakness likely to `immaterial'

Canada’s federal and provincial governments need to ratchet up stimulus spending to spur growth and ease the burden on monetary policy, former Bank of Canada Governor David Dodge said in an interview.

Current economic conditions dictate governments should be running collective deficits of 2 percent to 2.5 percent of gross domestic product, Dodge said Monday by phone, as reliance on monetary policy has created some “distorting aspects that are worrisome.”

“The important broad lever to be pulling this time is the fiscal lever, not the monetary policy lever given where we currently already sit in terms of monetary policy,” Dodge said, declining to comment specifically on the rate decision due Wednesday.

The comments come as policy makers struggle with how to handle the collapse of commodity prices rippling through Canada’s economy, with investors betting the Bank of Canada will continue stepping in to bolster growth.

Swaps traders have fully priced in at least one rate cut by April, and an almost 50 percent chance of a second by the end of this year. That’s fueled an 11 percent drop in the Canadian dollar over the past three months, the worst performing major currency after the South African rand.

‘Investment Game’

“The game at the moment to be playing is the public investment game” Dodge said. “If we talk about 2 percent of GDP, you’d be looking at -- between federal and provincial governments -- probably in the order of” about C$40 billion ($27.5 billion) annually over the next few years.

While Prime Minister Justin Trudeau won election in October partly on plans to run combined C$25 billion deficits over the next three years, he’s declined to say whether a deteriorating outlook will change those plans. The promised deficits represent less than half a percent of GDP on average over the next three years.

Provincial governments are currently running deficits of about C$15 billion, less than 1 percent of GDP, according to Bank of Montreal data, though most are planning to reduce fiscal gaps in the next few years.

Collective Effort

“We’ve always said that being fiscally responsible while creating growth is at the heart of what the Liberal Party is, and that’s exactly what we’re going to do,” Trudeau said Monday during a press conference in Saint Andrews, New Brunswick.

Dodge said that while a stimulus push needs to be a collective effort between the two levels of government, the federal administration must play an important role on the infrastructure side because it can borrow at much cheaper rates than the provinces. It can do that for example through an infrastructure bank, other federally-run funds or direct participation in projects, Dodge said.

“It’s collectively silly to send our worst credits to the market rather than our best credits,” he said.

Dodge said it would be “inappropriate” for him to comment on future decisions by Bank of Canada Governor Stephen Poloz, but he added that extremely low interest rates can have long-term consequences on an economy.

Exchange-Rate Shock

‘‘He’s got to worry about the Canadian economy not only over the next three to six months, he’s got to worry about the Canadian economy as we look out in time,’’ Dodge said.

An additional three to four cent decline in the dollar meanwhile will be almost “immaterial” because companies are still trying to assess the massive “shock in terms of the exchange rate,” Dodge said. “We had had a big shock in terms of the exchange rate. To think you would want to do this to further drive down the exchange rate rather than letting it do its job in the normal course of events seems to me to be not very sensible either.’’

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