Corporate subsidies are the potato chips of fiscal policy. Each one might seem like a fine enough idea. But once you start, it’s hard to stop. And then what started as a smallish snack (or industrial investment, if you prefer) turns into a habit. And a habit turns into a problem.
The Liberals have indulged their taste for “investments” – or, stripped of euphemism, corporate subsidies – ever since they came to office. But they have lately begun to gorge, most notably with tens of billions of dollars in current and promised future payments to the electric-vehicle industry.
An analysis of Ottawa’s corporate subsidies by economist John Lester, a fellow in residence at the C.D. Howe Institute, makes clear just how big a problem that subsidy habit has become. By fiscal 2028, he projects that Ottawa will spend $50.4-billion on corporate subsidies across the economy, more than triple the tally when the Trudeau Liberals came to office in 2015.
Such subsidies in 2028 will equal 54 per cent of the federal government’s corporate income-tax revenue, up from 42 per cent in 2014-15.
As alarming as those numbers are, Mr. Lester’s conclusion is even more shocking: The vast majority of those subsidies are not just wasted, they end up harming the economy. His analysis indicates that 65 per cent of subsidies could boost real income, either because they could raise productivity or they fill in a gap left by a private-market failure. Right off the top, more than a third of subsidies are ineffective.
He then applied a cost-benefit analysis to those potentially positive subsidies; 70 per cent of those failed. The result is that just 20 per cent of total subsidies boosted real income. For the past fiscal year, 2023-24, he estimates that just $8-billion out of $40.1-billion had a positive effect. (There are some effective programs, including the Scientific Research and Experimental Development tax credit for large businesses.)
Was the remainder merely wasted? If only. Ottawa needed to either raise taxes or issue debt to pay for its $32-billion of ineffective subsidies. That fiscal burden means that the subsidies aren’t just money thrown out the window, they actually drag down the economy.
Mr. Lester’s study, issued in March, doesn’t cover off the specifics of the Liberals’ April budget, but the pattern is the same. More subsidies, to more favoured sectors and firms, paid for by higher taxes on the profits of innovative and successful companies – or what the Liberals call “windfalls.”
The EV subsidies are just the most egregious example, with tens of billions committed to supposedly creating jobs of the future. Such claims were always weak-kneed, but they are especially flimsy now, with Canada entering a years-long labour shortage.
Subsidizing jobs merely shifts workers from elsewhere. One can only wonder at what Canadian-owned firms think about their government underwriting a foreign company so that it can poach their workers.
And the claims of new jobs are largely unverifiable. As The Globe and Mail recently reported, the federal government refuses to disclose whether the job-creation claims used to justify many corporate subsidies came to fruition. There are three possible explanations: the job-creation record of subsidies is a roaring success, and Ottawa is just too modest to brag; no one is bothering to keep count; or the jobs created fall short of promises. We’ll stake a bet on a combination of No. 2 and No. 3.
To further weaken the case for subsidies, the latest round of largesse, sent Honda’s way, is intended in part to simply maintain existing jobs.
All of this is at once an indictment of the Liberals’ redistributionist economic program, and a big opportunity for any new government. If four-fifths of corporate subsidies are inflicting harm, then scrapping them would both deliver an economic boost and free up tens of billions of dollars.
A future government could wipe out the deficit and still have a few billion left over to cut personal and corporate income taxes, or to bolster national defence, or to fully fund national child care. Any one of those options is better than shovelling tax dollars to companies in a vain effort to out-innovate the private sector.
Such a move would also have the salutary effect of pruning the thicket of lobbyists in Ottawa – not to mention forcing businesses to turn a profit by catering to their customers, rather than to the political appetites of the federal cabinet.