Canada's Prime Minister Justin Trudeau and Ontario Premier Doug Ford arrive to attend a news conference to announce details on the construction of a gigafactory for electric vehicle battery production by Volkswagen Group's battery company PowerCo SE in St. Thomas, Ontario, Canada April 21, 2023. REUTERS/Carlos OsorioCARLOS OSORIO/Reuters
Tegan Hill is an economist with the Fraser Institute.
In a recent panel discussion on CTV Question Period with strategists linked to the three main federal political parties, there was general agreement that recent taxpayer handouts to Volkswagen and Stellantis were necessary – whether to create jobs, expand the electric-vehicle (EV) industry in Canada or compete with U.S. subsidies.
But this consensus on corporate welfare reflects a deep misunderstanding of the limits of government handouts and, more broadly, the limits of government.
Corporate welfare in Canada is nothing new. For example, governments at the federal, provincial and local level sent $352.1-billion (inflation-adjusted) in taxpayer money to select firms and industries from 2007 to 2019 (the latest pre-COVID-19 year of available data), primarily in the form of subsidies (the actual amount of corporate welfare was even higher during this period, as this number does not include loan guarantees, direct investment and other forms of government support).
In this year’s federal budget, Ottawa earmarked $80-billion in corporate handouts to select industries, purportedly to reduce carbon emissions and grow Canada’s “clean economy.” Then, in April, the government announced it will spend more than $13-billion on subsidies for Volkswagen’s EV battery plant in Ontario. According to Ottawa, these “green” subsidies – funded by taxpayers – are necessary to compete with Washington’s misnamed Inflation Reduction Act, which includes billions in corporate handouts.
Not surprisingly, after seeing Volkswagen’s good fortune, Stellantis has been demanding more taxpayer money for its EV battery factory in Ontario. On Wednesday, Stellantis said it has reached a deal with provincial and federal governments.
So what do we, the taxpayers, gain from all this corporate welfare? Again, voices across the political spectrum point to job creation and economic growth. Yet according to a significant body of Fraser Institute research, not only is corporate welfare unlikely to help the economy, but it may actually hurt it. Government intervention, including handouts to corporations, interferes with the private decisions of firms, investors and consumers, leading to a misallocation of resources and a less-efficient economy. A less-efficient economy means lower economic growth and less widespread prosperity, despite the benefit to select firms.
These results are not surprising given that governments face unique incentives and constraints that differ from the private sector.
For instance, if a private firm misallocates capital or offers an unwanted good or service, it pays the price through poor sales; employees may be laid off and the firm may even go out of business. So there’s a clear incentive for businesses to deliver goods and services that are in demand, and in the most efficient way possible.
The same cannot be said for government. When it fails, it often doubles down and spends more money. And since policy makers are spending taxpayer money, not their own, they have little incentive to be prudent investors. More broadly, politicians and bureaucrats simply do not have the knowledge to make economic decisions like investors, firms and consumers, who are directly involved in market transactions.
In the case of EVs specifically, Ottawa hasn’t solved several major problems with the planned transition from gas-powered vehicles, including the insufficient supply of minerals for batteries, lack of financing of electricity transmission infrastructure, and the massive investment needed to expand electricity generation. These are the types of challenges that come with trying to create a market, though none of the politicians advocating today for the EV transition will pay the price for future failure.
Despite what politicians of all political stripes say, the evidence suggests that taxpayer handouts will do little, if anything, to successfully develop the EV industry or grow the broader economy for Canadians.