Finance Committee on Sept. 25th, 2023

[Daniel Blaikie, NDP, Elmwood—Transcona, MB]

Sure, I hear that. I am curious to get a little bit more feedback. I think it is useful for the committee to hear some of the ideas you may have in terms of how to do that.

I'm also interested to hear you elaborate on a number of other things, like improving public transit service. I know we saw the federal government, during the pandemic, provide a fair amount of operating funds for transit, but that is now gone. Despite the fact that the federal government moved on, transit services certainly haven't. We're continuing to see an impact on transit coming out of the pandemic, even as we know that having more Canadians feel confident in using public transit is an important part of decarbonizing our economy. I wonder if you could speak a little bit to the role the federal government could play in improving transit services across the country.

[Scott MacDougall]

I'd be happy to. Thank you.

A matching of the emergency funding the provinces were given is going to be needed. That's $750 million for the 2024-25 period in order to start to prop up public transit systems, $3 billion per year in 2024-25 for major capital projects, plus $1.5 billion per year ongoing for additional permanent core funding divided across major central capital projects, as well as the creation of a per-ride subsidy until we can start to bring back ridership levels.

[The Chair, Liberal, Peter Fonseca]

Thank you, MP Blaikie.

Now we're going to MP Lawrence for five minutes.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

Thank you, Mr. Chair.

Thank you to all the witnesses, both in person and virtually, for appearing today.

Ottawa's never in a shortage of crises, but I believe there's one that actually isn't getting enough talk. You'll actually hear, I think, agreement across the aisle, across all the parties, that we are in a productivity crisis. We are starting to see the fruit being born of that, as our GDP per capita, as Ms. Raitt talked about, is actually contracting.

Governor Dodge, you've written about this extensively. I was wondering if you might comment on that and whether you would agree that Canada is in a productivity crisis, or at least that we're moving towards one.

[David Dodge]

Yes.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

I'm not accustomed to those types of answers, especially from former politicians, but I do appreciate that and your frankness and honesty.

When we look at some of the issues, we see that we have very low capital investment—in fact near the bottom of the OECD. Actually, we're predicted, by the OECD, to have the lowest capital investment in the coming future.

I'm wondering, Governor Dodge, if you might be able to share a couple of things you might want to see in the upcoming budget that would help increase capital investment in our country.

[David Dodge]

It's a long-standing problem we've had in this country: low capital investment. That's both in terms of machinery and equipment per worker, where we slide down relative to other countries, in particular, the United States, and in what you might call the R and D side or the innovation of different ways of doing things. On both of those measures, we have not done very well historically. Since about 2015, we have been doing quite badly, because we have lost the heavy investment in the oil and gas industry that we had for roughly the first 15 years of this century. In aggregate, we are doing very poorly.

In part, that's due to changing prices and changing structures of demand. Where we have done badly historically—and where we continue to do badly—is in investing in new IP and the most modern equipment in order to boost the productivity of our individual workers in both the goods and the service sectors of the economy.

When I talked about having to make investments in my opening remarks.... It's in those areas we need to focus in order to raise productivity in those sectors. In raising productivity, we then have the money and ability to adjust to these changes in the world, which are not helpful for Canada. The fragmentation of the global trading system is very unhelpful for us. We have to do extra, if you will, to make up for the fact that, as that system changes, we lose access to markets. In some cases, we will lose access to cheap imports as well.

[Philip Lawrence, Conservative, Northumberland—Peterborough South, ON]

Thank you for your answer. There is a lot to unpack here.

I want to get to one specific policy area, especially when it comes to tax incentives that will specifically focus not on consumption but on investment.

Do you think this is something that could potentially help us with our lack of capital investment in Canada?

[David Dodge]

Yes, absolutely. How to go about that precisely is a more nuanced thing. Essentially, what we need at the moment are relatively larger investment tax credits to encourage the reinvestment of retained earnings. That's number one.

Number two, governments need revenue to do all the things everybody is asking them to do. Quite frankly, to get those revenues in a way that doesn't undermine investment, governments will have to reach back to consumption taxes. They will have to reach back to the GST, as will the provinces, because those revenues do not undermine the incentives in the private sector to invest, nor do they undermine the incentives in the household sector to save, which is extraordinarily important. You need both sides to operate in that way.

[The Chair, Liberal, Peter Fonseca]

Thank you for that.

Thank you, MP Lawrence.

We're now moving to MP Baker for five minutes.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

Thanks very much to all of our panellists.

I, like the others, won't be able to ask you all my questions, but I thank you very much for being here and for your time. We'll take very careful note of your testimony and your answers to questions from colleagues.

Mr. Dodge, I'm going to come back to you, if I may.

One thing that I've taken away from your remarks is the importance of making sure that we're taking into account not just the government's fiscal position—deficit, surplus or whatever the case may be—but also the fact that interest rates are higher and expected to be higher. That imposes a cost, and we make a provision for that. It's very sensible, and I appreciate your comments.

There has been a lot of conversation here at this committee over the last couple of years or so about the number one issue facing my constituents—I think most of our constituents—which is the cost of living and what's causing it to be so high.

There was an article I was looking at from the spring, from May of last year, where you're quoted. It talks about some of the things that Mr. Pierre Poilievre was speaking about at the time in terms of inflation. I want read this to you, and then I'll ask you to comment. It says that, on another Poilievre stance—that cryptocurrency allows people to “opt out” of inflation—Mr. Dodge said, “he has no idea what he's talking about”.

You went on to explain what you meant by that.

He's just wrong because the issue of rising prices...that you have to cope with out of your income is fundamentally at the moment a structural one.... We have limitations on supply, in part because of a war, in part because of COVID, in part because of ongoing features of the economy—we're all getting older—the labour force is not growing as fast.

That was something that you said.

You speak there to some of the reasons that you believed prices were rising. Do you still believe that? Are those still driving inflation?

[David Dodge]

Yes, they are, and that's an ongoing issue of supply. It comes back to the issue we were all discussing earlier about productivity. Unless we can get the output per worker or the output per unit of invested capital up, then, indeed, we have a problem. The first thing that happens is that prices go up. Those prices go up to curb demand, to bring the demand back down in line with this rather weak capacity to produce.

The way forward for us, especially in this difficult period when we have all this change going on, is that we have to increase the share of our national income that we devote to investment to raise that productivity. That's just the very unfortunate fact of life we're in. That means that in the short run we are going to have to give up, collectively, some elements of consumption in order to provide the real resources, both human and physical, that are needed for the investment to raise that productivity over time.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

Could I just—

[David Dodge]

Technological change will help us eventually, but we have to make the investment first before we get the benefits down the line. It's a very hard message, because we don't like—none of us like—to give up some of our income or defer some of our income in order to be in a good position in 2030 and 2040.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

That makes a lot of sense.

I will ask you this quickly. I only have about a minute left.

In your quote, you mentioned the war. I presume you mean the war in Ukraine. Would you agree that the war—the blockades of food exports and the impact on energy prices—is having a significant impact on inflation around the world and in Canada?

[David Dodge]

Absolutely, and it still is.

[Yvan Baker, Liberal, Etobicoke Centre, ON]

If Ukraine were to win the war, in other words, no longer face the blockades, control its territory, be able to export its grain and those sorts of things, would this have a positive impact on inflation?

[David Dodge]

That I just don't know. All I think that's really important to note and remember is that for 30 years since the wall came down, we have had a tremendous advantage of being able to divert resources from production of war goods into production of goods and services for ordinary Canadians. We exercised a peace dividend after the collapse of the Soviet Union.

We are unfortunately on the other side now, and indeed you, as members of Parliament, are going to have to take into consideration how it is that we provide Canadians with the security we need given the current level of budget. We may have to spend more. That may, unfortunately, be one of the things—

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Dodge.

Thank you, MP Baker.

Members, we are moving into our third round. To get through this third round, we have to be very strict on time, and I will be, so if I cut you off, that's why.

We're starting with the Conservatives and MP Morantz.

Go ahead, please.

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

Governor, to continue on with our conversation, in another paper you co-wrote in January with Mr. Asselin, one of your conclusions was that there was a high risk that the government would not be able to deliver the promises it made in the 2022 budget and the fall economic statement. You said that, if anything, even more spending and borrowing might be required in order to deliver on its policies.

It's pretty clear to me that you're basically sending a message to the government that they need to get their spending under control while at the same time investing in infrastructure and trying to grow the economy. I get that from your opening remarks.

I'm wondering if you could comment on that particular conclusion.

[David Dodge]

Yes, it is an unfortunate fact of life that indeed, if you're going to deliver a service, there's a real cost to delivering that service. For some of those services that collectively we look to governments to provide—in particular health, education and security services—the cost of actually providing those services in real terms is going up over time. It's very hard to deliver that promise and to expand on that promise in terms of what you're going to deliver without devoting more revenues to it.

What I was saying was that, given that those things are costly and they were promised, I was very worried that the amount of revenue the government was going to have was totally insufficient to deliver on the services that were promised. It's not just this government here in Ottawa. That is a collective problem that governments are having in the provinces and in Europe and that, a fortiori, they are having in the United States.

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

In terms of the revenue question, one of the things the government can do is to raise taxes. As Conservatives, we hate that. Do you think that's something that is in play?

[David Dodge]

I don't think anyone likes paying taxes, but the taxes are there to pay for the services the government delivers and to allow government, on its part, to make the investments in its services and in the future of its services and, at the same time, to ensure that it has a tax structure that allows the private sector to make the investments it needs to make.

[Marty Morantz, Conservative, Charleswood—St. James—Assiniboia—Headingley, MB]

We have a situation in which government debt from Confederation to 2015 was $600 billion. From 2015 to 2023, it was $600 billion. We had a Prime Minister and Governor Macklem saying money was essentially free and interest rates would be low forever, and they just borrowed and borrowed. Now interest rates have gone up, which eats away at the pie that we can use to pay for services.

Isn't there some blame on the government for blowing the bank?

[David Dodge]

Look, we faced a situation in March 2020 where we really didn't know what was going to happen. We didn't know what COVID was going to do and how we were going to control it. You sat here in 2020 and you had to make decisions, the government had to make decisions, on how to deal with it, and I think it's very hard to fault the decisions at that time. We did not know at that time what we were up against.

I think your comment is much more trenchant with respect to what happened after the second half of 2021. I think that is much more trenchant when we should have known better, although most economists on the outside—not me—thought we would come through this relatively easily and that rates would not go up. There were only a few of us who kept warning, quite frankly, that we were going to be into high rates.