Getting Rid of Corporate Welfare

-- (historic), Commentary, Role of Government, Taxation, Uncategorized

For much of the past year, Wall Street’s bears have been predicting that a stock market bottom can only be reached once the average individual investor is thoroughly discouraged. Once that occurs, and she exits the market in a once-and-for-all selling spree, a bottom is reached and the stage is set for base-building and a general market recovery.

One can only guess whether that bottom has been reached with the recent financial turmoil, but a similar sort of disappointment would need to occur among the general public on the matter of corporate welfare if it is ever to be significantly reduced in Canada.

Judging by the recent announcements from Industry Minister Jim Prentice – $12 million in “interest rate support” for the construction of seven tugs in Prince Edward Island, $43 million in a “repayable contribution” for Magellan Aerospace, $27 million for Héroux Devtek, up to $80 million for Ford, and up to $350 million for Bombardier – the Conservatives have not deviated from previous governments on this file, especially leading up to and in the present election campaign.

Corporate welfare – specific subsidies in the form of grants, loans never repaid, and other such similar “incentives” for individual businesses – is a costly political exercise in Canada. Between 1995 and 2004, (the last year for which comprehensive statistics are available) governments at all levels and of all partisan stripes spent $144 billion from the public treasuries to prop up individual enterprises, which amounted to $11,030 for each person who filed and paid taxes in 2004.

In 2004 alone, business subsidies amounted to over $19 billion. The federal government contributed $6.6 billion of that amount, a figure I doubt will decline much once the figures are in for 2006, 2007, and 2008, the initial years of the Conservative reign in Ottawa. But there’s a cost to such profligacy. At the federal level alone, corporate tax rates could have been chopped by 30 percent back in 2004 had Ottawa not engaged in the game or picking corporate winners and losers.

Beyond a souring in public attitude about corporate welfare, the only other way business subsidies might be reduced is if a strategic risk-taker of a Prime Minister with a majority government announced federal subsidies would be halted in exchange for a dramatic reduction in corporate tax rates.

But subsidies have their defenders. Corporate welfare is justified by its proponents on a number of grounds. They assert it saves or creates jobs, stimulates economic activity, and even pays a net benefit to the public treasury in terms of tax revenues.

But none of the claims have withstood critical scrutiny. The best, peer-reviewed studies on the subject of business subsidies note how jobs “created” or “preserved” in one locale have merely displaced employment elsewhere. Something akin to this happened in BC in the 1990s when the NDP busily subsidized the out-of-date, failing, and environmentally unfriendly pulp mill in Prince Rupert at an eventual cost to BC’s treasury of $323 million. Meanwhile, mills elsewhere laid off employees or closed completely.

Federally, to use the example of just one program now long dead but still costly, between 1982 and 1997, the Defence Industry and Productivity Program doled out $2.6 billion in loans meant to be repaid one day between 1982 and 1997; barely over $500 million, or 20 per cent has been repaid to date. And that’s for a program now dead for 11 years. Think of the 11-year opportunity cost of the $2.1 billion still outstanding, or the $144 billion in total foregone over a ten-year period.

In the history of corporate welfare in Canada, I can only think of one instance where corporate welfare made such a negative impression upon the general public so as to discredit itself and to result in significantly changed policy. It happened in Alberta. After the provincial governments led by Peter Lougheed and then Don Getty gave loans and loan guarantees in the 1980s and into the early 1990s, this to fight unemployment, many of the loans were never repaid and many of the guarantees soured, leaving the province on the hook.

The experiment in intervention wasn’t cheap; the final tally to Alberta’s taxpayers was about $2.1 billion. The result was that the Ralph Klein government passed legislation to require loans or loan guarantees above $1 million to be specifically approved in the legislature. To my knowledge, the only time that occurred was with a loan to Pacific Western Airlines. But in general, the government, media, and public opposition to most forms of corporate welfare in Alberta mostly stuck.

Would that were the case nationally. Unfortunately, unless a prime minister with a post-October 14 majority in Parliament is willing to risk political capital instead of public capital, it may take significant losses – beyond the billions already foregone – to change the attitudes of the wider Canadian public on corporate welfare.