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Former Bank of Canada Governor David Dodge at the Bank of Canada headquarters in Ottawa, Dec. 12, 2007.Sean Kilpatrick/The Canadian Press

David Dodge has had a few days to take a look at the budget that the federal Liberal government unveiled last week. He’s not a fan – of the math or the substance.

Yes, the noted deficit buster isn’t thrilled with the numbers. But his bigger issue is that this purported pro-growth budget, in his view, doesn’t really invest much in growing Canada’s economic capacity at all.

“My policy criticism of the budget is that it really does not focus on growth,” the famously blunt former Bank of Canada governor said in an interview this week.

“To me, it wouldn’t accord with something that is a reasonably prudent fiscal plan, let me put it that way,” he said.

Mr. Dodge knows a thing or two about budgets, debt and deficits. In the mid-1990s, when he was deputy finance minister, he was a driving force behind the Jean Chrétien government’s efforts to eliminate deficits and reverse the country’s deepening debt crisis. The result, the landmark 1995 budget, changed Canada’s fiscal course for a generation.

With that history, you would expect Mr. Dodge to bristle at Finance Minister Chrystia Freeland’s plan for a $155-billion deficit this year on top of the record $354-billion last year, and a near doubling of federal debt from prepandemic levels, to more than $1.4-trillion, by 2026.

But far from being an austerity proponent, Mr. Dodge has long argued in favour of increased government investments that would improve the economic-growth side of that equation. That’s very much in line with how Ms. Freeland has been selling this budget – as an investment in measures that will raise Canada’s productivity and expand its growth potential. The government’s $101-billion package of postpandemic stimulus measures is billed as a catalyst for this growth.

This is where Mr. Dodge doesn’t like what he sees under the budget’s hood. It’s not about how much the government is spending, but where it is spending – or, in Mr. Dodge’s view, misspending.

“If we’re going to generate the growth that [Ms. Freeland] has pencilled in ... over the longer haul, we face a very real challenge. And I don’t think she tried to seriously address that in the budget,” he said.

“Of that $100-billion ... if I’m very generous, there’s maybe $25-billion that adds to public or private investment,” he estimated, saying that the rest will increase consumption rather than investment.

He argues that in order to stimulate growth for the longer term, the government needs measures that expand the country’s capacity to produce goods and services, either through public capital investment or incentives for private investment. But beyond the budget’s commitment to help small businesses buy new technology, Mr. Dodge sees little focus on raising productivity and growing capacity in the country’s key industries.

“They don’t require more consumption, they require some big investment. Whether that’s in [intellectual property], whether that is in plants and equipment,” he said.

As far as the debt trajectory goes, Mr. Dodge is remarkably contained about what amounts to an undoing of the hard work he and his colleagues did a quarter-century ago. He describes the rising debt burden as a concern, but not yet a problem.

Yes, he thinks that the rapid growth in deficits and debt will mean that “the resiliency of our fiscal system will be very much less” when the next economic shock arrives. And yes, he would prefer to see a modest tax increase – say, a couple of points added to the GST – to help sustain fiscal health over the longer term, especially with Canada’s aging population expected to put increasing pressure on costs for health care and other government services.

But he stresses that the big difference between the current situation and the early 1990s is that the rate of interest the government pays on its debts today is lower than the average rate of annual growth in the economy. As long as Ottawa can keep it that way, revenue growth can stay ahead of debt service costs, allowing government to sustain the higher debt loads.

On that front, Mr. Dodge is worried that the budget is over-optimistic about growth and interest rates, which typically move together. He believes that either interest rates will rise higher if Ottawa achieves its growth estimates over the next several years, or the government’s rate forecasts imply a slower growth path than projected.

“My fiscal criticism [is] that I don’t think it’s very realistic,” he said.

But even with Mr. Dodge’s less optimistic view, “We [will] still have interest rates that are a little bit less than the rate of growth in the economy,” he said.

“It means that service on past debt is not rising and eating you alive, as it was doing from the mid-1980s on.”

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