David Dodge: Canada Must Adapt To Rapid and Extensive Structural Changes

David Dodge appeared before the House of Commons Standing Committee on Finance on September 25, 2023, as a witness in the pre-budget consultations in advance of the 2024 federal budget. His introductory remarks are below.

"We are in a period of rapid and extensive structural change to which we all must adapt.

1. Demographic: Life expectancy at age 65 is increasing rapidly. This requires major investment in care facilities and increased saving by workers to prepare for extended retirement.
2. Climate Change: Dealing with climate change requires increased investment in adaptation to higher temperatures and more frequent terms and huge investment in all forms of low GHG emitting energy production and consumption.
3. Change in Global Trade Order: Adapting to more fragmented global economy implies additional domestic investment to improve security of supply.
4. Technological Change: AI and digitalization offer great hope for future productivity increase but in short term require very significant increase in investment in intellectual property, digital systems (including our antiquated payments system) and Research and Development.

Adaptation to these four changes is not costless. It requires that business, households and governments devote a larger share of their revenues to investment than they were doing in the years leading up to the shock of Covid. While in principle, some of this investment might be financed by borrowing, here in Canada and in almost all advanced economist, debt levels are high and savings weak so that attempting to finance all these investments by borrowing is resulting in an increase in prices and interest rates and will continue to do so at least over the next decade. So faced with this reality, it means that to increase investment businesses will have a smaller share of their retained earnings to distribute to shareholders, households will have a smaller share of their incomes to devote to current consumption and governments will have a smaller share of their revenues to devote to the provision of current services to citizens.

Devoting a higher share of revenues to investment is never easy, but can be managed more easily if incomes are growing fast and borrowing costs are low. Unfortunately, real incomes are not growing quickly indeed on a per capita basis have been falling. And the cost of servicing debt has risen and while it may come down a little after 2024, it will remain well above pre-covid levels. So Canadian households are curtailing will have to continue curtail some current consumption in order to adapt to these structural changes

And people will look to governments for help. But governments face precisely the same issue as do households. Investment requires a greater share of revenues to facilitate adaptation to the four structural changes at the same time as charges for public debt incurred in the past eat up on ever longer share of revenues as interest rates rise. And new borrowing to finance additional services for households or supports for business investment will simply raise further the fraction of revenues that must be devoted to interest charges and further curtail government capacity to provide services in the future.

Governments cannot borrow their way out of the difficult choices involved in the reallocation of resources needed to meet the four structural changes.

As politically difficult as it may be, over the next few years budgets are going to need to be roughly balanced. To allow for additional public investment and support for private investment, the growth of government provided current services or transfers need to be somewhat curtailed or alternatively taxes on private consumption increased. However unpalatable such curtailment may be, failure to invest in adaptation would condemn Canadians to a much more unpleasant future."