Subsidizing Business is No Way to Build an Economy

Commentary, Frontier Centre, Media Appearances, Role of Government, Taxation

It seems like only yesterday — in fact, it was April 2007 — when the Conservative government announced $900 million in federal assistance for Canada’s aerospace industry, with most of the money destined for Quebec.

Not enough. In his grilling of the government last month, Liberal MP and former astronaut Marc Garneau demanded: “When will they put a plan in place to assure the future of the aeronautics industry before it is too late?”

Perhaps Ottawa will get around to another handout after it rescues the Canadian automobile industry, to which it has pledged about $3.5 billion in aid. Canada’s commitment hinges on approval in Washington of the $14-billion US bailout that was recently derailed in the U.S. Senate.

Recognizing that aid to the auto industry looks like sectoral favouritism, the Harper government has intimated that forestry — ravaged by weak housing starts, low lumber prices, and the mountain pine beetle — and mining, caught in a downward spiral of plummeting commodity prices, will also be included in any assistance package.

But why stop there? Alberta’s economy cannot be expected to stand on its own with oil hovering around $48 US a barrel. And Canada’s tourism business has been devastated by the economic downturn, and needs public support to replace revenue from the visitors who aren’t coming.

With sickly stock markets and venture capitalists in retreat, Canada’s ever-fledgling high-technology industry, notable for burning more cash than it earns, desperately needs help finding financing to survive.

The financial-services sector has received billions of dollars in government support to relieve ailing institutions of mortgage obligations and toxic debt, so how can Ottawa deny grants to companies in fishing, power generation, film and TV production, book publishing, retailing and agriculture?

Canada has a long tradition of providing business with public funding. A study by Mark Milke, director of research for the Frontier Centre for Public Policy, calculates that Canada’s federal, provincial and local governments spent $182.4 billion between 1994 and 2006 on subsidies to business — or $13,639 for every individual who paid taxes in each of the 12 years.

The top provincial donors to corporations in 2006, the last year for which data are available, were Quebec, at more than $5.4 billion, Ontario at $2.4 billion, Alberta at nearly $1.5 billion, and B.C. at just under $950 million.

Canada’s branch-plant automakers, which have received pledges of $742 million in grants since 2004, argue that the consequences of not receiving public money would be catastrophic. They are right in that it would be catastrophic for management teams that failed to predict market trends, to retool, and to control costs. In the absence of a publicly funded bailout, they would be replaced as part of the inevitable restructuring that would result in leaner operations or acquisition by a better-managed company.

In any event, there would likely be job losses. And that’s where the government could play a valuable role. Rather than prop up faltering and failing businesses, shifting incalculable risk from shareholders to taxpayers, governments can direct public resources to retraining the workforce for jobs of the future. Studies have shown that investment in human capital pays dividends in productivity gains, leading to higher wages and improved standards of living.

Governments have a sorry record of picking winners and losers. Their job should be to create an environment conducive to business investment, with fair and equitable taxes and reasonable regulations, for all sectors without discrimination.

There is no rational economic case for subsidies for business, since a subsidy for an industry in one province may simply shift investment from one jurisdiction to another with no net gain in investment or employment.

Indeed, corporate welfare is not based on economic principles, but rather political expediency. A corporate handout may win a few votes in the next election, but it’s no way to build a successful, job-generating, wealth-producing economy.