The former head of Canada's central bank has urged politicians to have an "adult discussion" about what government services they will be able afford over the next decade.

David Dodge said given Canada's aging population, declining productivity and shaky economy, governments will be unable to pay for such things as health care without serious reform.

'But reform won't happen, he argued, unless the people of Canada force national and provincial leaders gather up the courage to address the stark choice between raising taxes or cutting services'.

I personally believe reducing the funding of services already planned in the budgets but not enacted is not a saving its an old financial trick and will never resolve the problem.

Mr Dodge added "We kind of are wishing the problem away by assuming that we can curtail expenditures without curtailing the real services that governments are providing to you and me as citizens," he said Saturday following a speech to the Liberal party's thinkers conference in Montreal.

"We need an adult discussion of how we're going to do it."

Dodge, who headed the Bank of Canada until 2008, expressed frustration at the current level of debate over how to pay for government services in the years to come.

"Health costs are going to go up," he said. "Governments that put forward plans that simply assume that they can hold those costs to zero or two per cent, without telling you how to do it, I think are not very helpful."

Dodge acknowledged that neither increasing taxes nor eliminating services is popular. Indeed, both have been political untouchables for Liberals and Conservatives alike.

The Tories had a field day with Liberal leader Michael Ignatieff after he suggested raising taxes to deal with the deficit. The Tories, however, largely avoided cutting government services in their recent budget despite facing a $29.8 billion deficit in 2010-11.

Dodge suggested increasing productivity was necessary to offset the costs of caring for Canada's aging population. Wealth redistribution first requires wealth creation, he said.

But Dodge painted a particularly grim picture of the current level of Canada's productivity, which has all but stalled in recent years.

"Without productivity improvement, we will condemn ourselves to a standard of living which is in decline relative to the rest of the world this decade and in absolute decline in the next decade," Dodge said.

Failing to take action on productivity, he added, would mean forcing Canadians to work longer hours and retire later.

In order to make difficult financial decisions more politically palatable, he encouraged federal and provincial governments take a phased approach to balancing their budgets, ideally over a four-year period.

He later told reporters that the federal government was right to put off making drastic cuts in this year's budget, as the economic recovery is still fragile.

At the same time, Dodge said Canadian politicians can't always content themselves with forestalling difficult decisions about how to pay for government services.

"We're not going to grow out of it magically," he said.

"There is no magic here. We're going to have to come to that rather tough discussion and set out tough plans, really starting next year, as to how we go forward."