David Dodge says low rates should encourage infrastructure spending

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 were 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 CBCs TheLang & OLeary Exchange.

• Focusing on deficits won't build economy, David Dodge says

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, Dodgesaid.

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 saidgovernments should be investing in infrastructure rather than focus on deficit fighting.

But Dodge said Thursday that didnt mean he was a fan of deficit budgets.

Its 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, theyre 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. Were nowhere near that rate today.

Dodge also pointed to the risks to the Canadian economy of Chinas 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, were 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 Im optimistic, he said.