Why is David Dodge arguing for deficit spending?

David Dodge lays out the economic case for a new national infrastructure program.

David Dodge


In the 1990s, David Dodge was a senior Finance official steering the federal government budget toward balance during the Paul Martin “Come Hell or High Water” era. The same Mr. Dodge has a new article (written with Richard Dion and John M. Weekes) arguing for slowing down today’s drive to budget balance in order to make room for greater infrastructure spending. What are the economics behind Dodge’s claims? What other challenges might confront more federal infrastructure spending?

Dodge’s economic arguments don’t require a big stretch from economic orthodoxy.

Economists typically focus on the debt-to-GDP ratio as the best measure of our ability to pay the national debt. Any ratio increases in size when the numerator on top grows more quickly than the denominator on the bottom. So, in the case of a debt-to-GDP ratio, the ratio will shrink so long as the deficit (the change in the top of the ratio) is smaller than the growth in GDP (the change in the bottom of the ratio). Dodge argues that there is room to take on new debt sustainably since the deficit is a lot lower than annual GDP growth. With this in mind, even a large increase in infrastructure spending could be consistent with an ever-decreasing debt-to-GDP ratio.

Would such investments be productive? Dodge argues that more investment should be undertaken when interest rates are low. According to standard theory, investments are productive when the future flow of benefits generated by the investment are worth more than the initial outlay of cash. With high interest rates, few projects will overcome that hurdle; with lower interest rates more projects become economically viable. That’s as true for the public sector as it is for the private sector.

Some might be concerned that other future needs—like growing health costs or public pension benefits—require us to keep the budget balanced now in order to prepare for those future expenses. Others may argue that the focus on “zero deficit” is more tangible to voters, and therefore “zero deficit” slogans are a necessary concession to political marketing. Those criticisms are sensible to the extent we let politics intrude on an economic argument, but as pure economic math, Dodge’s reasoning is hard to question.

While the economics may be solid, there are several challenges confronting anyone wanting to implement a substantial public infrastructure expansion in Canada. Here are three that come to mind.

First, how do we choose the projects? Given our political history, it is only natural for concern to be raised about partisan interference in large infrastructure expenditure decisions. Any new infrastructure plan needs to begin by installing confidence in Canadians that tax dollars will be invested wisely. It’s also important for a federal program to focus on projects with a credible national or at least cross-provincial span of benefits. If projects are only local in scope, levels of government closer to the action should make tax and spending decisions rather than faraway Ottawa.

Second, how do we control the costs? It’s not hard to recall examples of public sector infrastructure projects that blow through their budgets. In recent years, innovations in project management through public-private partnerships (P3) have made some progress, but any expansion of infrastructure spending needs to be tightly focused on getting the most infrastructure we can for every tax dollar spent.

It is worth noting that Dodge does not argue the case for infrastructure on Keynesian grounds of anti-recessionary stimulus. This should please my colleagues Stephen Gordon and Andrew Leach, who often argue that “costs are not benefits” and that the number of jobs created (the infamous “bucket brigade“) is a poor measure of the benefits of an infrastructure project. It is true that with some continuing slack in the Canadian job market (as argued by my colleague Mike Moffatt), some of the dollars spent on infrastructure will employ new resources. But Keynesian stimulus is not fundamental to Dodge’s analysis—he makes the case for more infrastructure spending without it.

The third challenge for a new infrastructure program is how to account for the spending in a clear and transparent way. With the move to accrual accounting in 2003, major capital expenditures by the federal government are now amortized over decades rather than immediately expensed. However, this distinction between capital and operating expenditures invites much confusion: you can see a full discussion from the C.D. Howe Institute here or simply recall the ongoing controversy about budgetary accounting in Alberta. Some provinces, like British Columbia, already have a capital expenditures budget listed separately on budget documents. Things might be different for the federal government though—especially if they are making contributions to assets owned by other levels of government which might need to be expensed by the feds immediately. For Canadians to know what they’re getting from new infrastructure spending and how it changes the fiscal bottom line, transparent accounting is a must.

Does Canada need a new infrastructure program? Joseph Heath argues that most people would benefit more from a few dollars spent on public infrastructure like transit than they would from the extra private consumption afforded by those same dollars left in their pockets as tax cuts. I imagine some others might quickly take the other side of that argument. For me, I’d need to see the list of projects and associated benefits to make that call—but I’m open to being convinced.

In aggregate, Stephen Gordon has noted here in Maclean’s that public infrastructure has been growing for a decade, so we’re not starting from zero. That said, Dodge’s article presents a convincing argument that lower interest rates mean we should be investing more than we have been, and that there is fiscal room to invest more without endangering Canada’s long-run budget prospects.


Why is David Dodge arguing for deficit spending?

  1. Incestuous citations.

  2. How is it that such genuinely stupid people such as Dodge rise to such influential positions? Better yet, why do journalists listen to them?
    Taxpayers easily grasp the distinction between long-term capital expenditures, and the incumbent necessity to finance or amortize them over some number of years, and operational budgets that must be cleared on a year by year basis. A 2 billion dollar capital expenditure is not a deficit. Borrowing money to cover the spread between this years tax receipts and the payroll costs is a deficit. It’s a shortfall. Operational budgets must always take into account some form of amortization costs on that infrastructure spending. Far too often, governments are running deficits on both the operational and the infrastructure amortization. They’re borrowing money to make payments on the payments they need to make. Yeah, like that works.
    It’s all fine and dandy to advocate for more infrastructure spending, but it has to be tempered with the hard reality that actual taxpayers are a shrinking breed. On top of that, there appears to be a tremendous appetite for the obstruction and even destruction of enterprises that will provide the employment and enterprise growth that will serve to provide the future taxes so important to funding the ability of governments to pay for all that infrastructure.
    You can impose higher taxes on federal and provincial and civic employees all you want, but it still won’t pay for the new roads and sewers. Without tax PAYERS, you can’t fund all that stuff.
    Dodge is advocating continued growth on the operational side as well as growth on the infrastructure side. That won’t work, because it still dvocates spending growth at a level higher than the economic ability to pay for it. See paragraph 2.
    All Dodge has done is prove he’s no brighter now than he was when he was in government, and he wasn’t the shiniest marble in the sack back then, by a long shot.

    • He rises to influential positions like this as you are corrupt, willing to say one thing to the public while lining the back room with our money, kids and unborn future debts.

      If not corrupt, they are so brainwashed that they ignore that it is immoral to borrow money on their kids and unborn futures, as that is what government debt is.

      None of these people look at the consumptive non-value added waste of government in bailouts, money creation fraud, corporate/union/bank bailouts of uncommon good and lobby corruption pushing it.

      Its so bad even media ignores that we turn away TFW taxpayers while we immigrate to social assistance, just economic looooonacy. Government and the back room corrupt have no regards for our money, just tax us more…like statism slaves of Orwellian state.

      This huge debt bubble is going to collapse, and wen it does, I am sure they have someone else they will blame, perhaps a war…a war to hide debt and corruption failure of the west.

  3. Anyone professing more debt is being blinded by political and dysfunctional ethics.

    Where is it ethical or moral to borrow from the kid and unborn futures for todays greed of debt? Where is it moral to devalue money for debt-tax of seniors and disabled on fixed and low incomes, or to be so greedy even tax the food they eat? (a lot of foods have hidden taxes and protectionism, dairy, cheese, beef and 1000s of other items are hidden taxed).

    Not one of these blinded by greed debt professing idiots ever consider governemtn waste as a great target to get the money for something used in common good like infrastructure. Always ignoring the uncommon good of bailouts of corporations, banks, unions, CBC brainwashing, inflated contracts… tax us so much, tax our costs so much, we need uncompetitive wages to live here as jobs leave.

    Most can’t understand that jobs are driven from the affordable exchange of goods and services. The more they tax or devalue money for debt, the less we have to spend on each others jobs. Governments can’t solve the problems as its their waste and corruption that is the problem.

    Fact is these people are sacrificing their morals for a easy out, slap the kids and unborn with more debt and devalued money so they need debt for a education as the parents are value broke…from taxes.

    Canadians have to earn $1,400,000 to pay $600,000 in taxes, $400,000 in fair interest, to buy a $400,000 home that is $200,000 in labour, fees, tariffs and other taxes to build the tax-debt out $200,000 home.

    Mexican earns $200,000 to pay $40,000 in taxes, $40,000 in interest to buy a $120,000 home. (Also pays a whole lost less in city/utility/education taxes too).

    USA is similar, a lot less tax inflated, so their wage demands are less and they get our jobs. But these so called “expert economists” are about BSing the people.

    Canada is going to fail like Argentina, eventually we will have so much debt and thin air electronic counterfeit currency, the currency will be worthless.

    Its why I invest more and more outside of Canada and not in value losing depreciating economy of debt fraud. Foreign stocks did pretty good as our currency failed.

  4. So. David Dodge agrees generally with Larry Summers. That’s fine.
    On condition that they do it in writing. Because the aural experience
    of them both talking in the same place at the same time would probably
    be a crime against humanity.

    • None of these debt spenders will put their own money where their mouth is. They count on us forgetting their names when the economics fails and we pay taxes to it.

  5. Because he’s a Liberal?

    • He might be, but he is more like a NWO Orwellian statism where banks control the world as everyone is in debt, even the unborn.

      Only government can slap people with debt-tax slavery without their permissions.

  6. David Dodge and some of the commentators are truly ridiculous. The latest budget indicates that we pay $25.7 billion in interest on the current debt. Where does that money go? To private investors some of which may include the big pension funds and RRSPs which is not taxed very significantly but a lot may even hidden off-shore!

    Let us suppose the Bank of Canada held 25% of the debt. What would happen to the $25.7 billion in interest? About $6 billion of the interest collected from the government by the Bank of Canada would then be returned to the government since it is owned by the government? No new borrowing and a huge pot available for infrastructure. Change the 25% to 50% and we get more than $12 billion available with NO NEW TAXES AND NO NEW SPENDING AND A VERY HUGE POT FOR INFRASTRUCTURE! David Dodge knows this but is stubbornly adhering to the BIS party line of central banks NOT lending to governments. It is the reason for the lawsuit by COMER against the Bank of Canada.

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