Canadian governments regularly fund corporate ventures, but it is invariably money poorly spent.
Bombardier Inc. received its first federal subsidy of $36.9 million back in 1966 from Prime Minister Lester Pearson’s governing Liberals. The Montreal-headquartered company has since received Industry Canada funding of more $1.1 billion, plus another $1.1 billion that the federal agency poured into airplane manufacturer de Havilland, which later became Bombardier’s airplane division. The company has also received nearly $300 million from provincial governments, bringing the total to $2.5 billion.
Now Prime Minister Justin Trudeau’s government faces intense pressure to match Quebec’s $1.3-billion bailout of Bombardier’s financially-strapped airplane division, more than doubling the taxpayer largesse received by the company in the past 50 years.
This latest aerospace subsidy saga is only a part of taxpayer support for the sector. Quebec-based Aero-engine manufacturer Pratt & Whitney has received a whopping $3.3 billion and Ontario-based flight simulator CAE has received $646 million.
Overall, Industry Canada doled out $22.4 billion of taxpayers’ money to private businesses from 1961 to 2013. And that’s just part of Ottawa’s corporate welfare generosity. The $350-million Atlantic Canada Opportunities Agency and the $250-million Western Diversification Program dispense direct handouts that tend to favour governing party constituencies. And then there are the tax-based subsidies including: labour-sponsored venture capital corporations ($120 million), flow-through shares ($100 million), Canadian Film or Video Production Tax Credit ($200 million), the Film or Video Production Services Tax Credit ($100 million) and the Atlantic Investment Tax Credit ($250 million).
Among the provinces, Quebec is the champion corporate subsidizer, handing out billions per year. Besides the recent $1.3-billion bailout of Bombardier, there’s the $350-million handout to McInnis Cement for a plant under construction in the Gaspe region that, interestingly, is owned by the Bombardier-Beaudoin families.
Ontario is also a generous subsidizer. It gave U.S.-based technology giant Cisco $220 million to hire 1,700 people. There have been myriad other recent subsidies to business, including $120 million to software company Open Text, $87 million to Honda and a plethora of smaller handouts. The province has established a Jobs and Prosperity Fund that will dole out $2.7 billion in subsidies over a 10-year period.
Taken together, Canada’s federal, provincial and municipal governments hand out tens of billions annually to private businesses. Announcement of these handouts are great photo opportunities for politicians who extol the jobs to be created.
But do these pronouncements paint a true picture? For example, when Premier Kathleen Wynn arrived at Cisco’s Bay Street offices to announce that $220-million grant, she stated, “This is the largest job-creating investment that we’ve seen in the technology sector.” But University of Western Ontario economist Mike Moffatt points out that Cisco will be hiring people who would have been employed by other high tech firms. “They automatically assume the people that get hired wouldn’t have had jobs otherwise.”
Another perverse effect of selective subsidization is the tilting of the playing field against unsubsidized competitors.
And there are myriad examples of businesses that failed after being granted a subsidy, illustrating the truth of the adage, “Governments are terrible at picking winners but losers are great at picking governments.”
Australian professor Terry Buss, formerly with the World Bank and a foremost expert on business subsidies, authored a comprehensive analysis that found most job and economic benefit studies are “based on poor data, unsound social science methods and faulty economic reasoning.” He states that such reports “provide politicians and practitioners with justification to award political favours without appearing to be political.”
And then there’s the bees-to-honey effect of putting billions of dollars in the hands of politicians to dispense. Montreal-based business columnist David Descoteaux points out that “The more governments hand out subsidies . . . the more corporate success is dependent on government assistance, forcing companies to hire lobbyists to get their share of the pie.”
But what about the argument that if we don’t do it, the investment will flow to a jurisdiction that will? In such situations, subsidies may be the only hope of attracting or retaining important employers. The U.S. think-tank Good Jobs First estimates that state and local governments shell out US$70 billion a year in business subsidies, sometimes funding half or more of a new investment. Trying to compete with such aggressive tactics is a losing game.
Descoteaux says that the only way to halt this race to the bottom is to strengthen international trade agreements to eliminate subsidies. Canada should be a big booster of such agreements, because the ten-fold larger economy to the south can win a subsidy competition any time they choose.
And as long as that imbalance exists, we tend to throw good money after bad.
Gwyn Morgan is a retired Canadian business leader who has been a director of five global corporations.
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