David Dodge talks with the Toronto Star about fiscal guidelines for federal government spending and what it might mean in the face of an economic downturn:

Dodge, who went on to become the governor of the Bank of Canada in the 2000s and is now a consultant, has developed a new fiscal guideline just in time for the new cabinet, and its hallmarks are flexibility, sustainability and compatibility with the Bank of Canada.

Warning: This is complicated. But it’s also a good idea. Read on.

The federal government, Dodge says, should govern its finances by tracking and targeting the cost of servicing the debt compared to revenues. Right now, interest payments on debt are about eight per cent of total federal revenues.

When the central bank cuts interest rates in response to a weak economy, the federal government would have room to borrow more money and stimulate the economy because servicing the debt would be cheaper. Conversely, if interest rates rise in response to a strong economy, Ottawa should cut back on its spending to keep its debt-servicing costs in check.