Thank you for having me back.
The federal government currently spends at least $18 billion on corporate subsidies, although the government does not publish easily accessible estimates of how much it allocates. This is equivalent to one-third of all corporate income tax revenues of $52 billion. The largest programs were administered by Natural Resources Canada, ESDC, Industry Canada, regional development agencies and Canadian Heritage.
Subsidies can be of short-term benefit to individual companies and specific regions; however, they also distort Canada’s overall economy, encouraging investment in areas that are less productive. Spending on subsidies ultimately is supported by higher taxes that penalize the competitiveness of businesses positioned for growth in the marketplace.
Reducing even a small number of subsidies and using the savings to lower the corporate income tax would restore Canada’s tax advantage over the United States, encouraging more investment in Canada.
More broadly, focusing government policies on creating a favourable business climate for growth and innovation through less government regulation and lower taxes would encourage all businesses to pursue growth strategies using Canada’s skills and knowledge honed over decades of experience.
Canada’s economic development has been guided by entrepreneurs who understood the opportunities and skills shaped by our history and geography, not subsidies provided by government. Canada created global brands in oil and gas, banking, railways, hydro power, pipelines, communications and mining by building on our natural advantages.
The list of subsidies to unsuccessful businesses is a long one: cucumber farms and an oil refinery in Newfoundland, a heavy water plant in Cape Breton, steel mills and auto plants in Quebec, the New Flyer bus plant in Manitoba and the Arrow plane manufacturer. The graveyard for high-tech companies that received subsidies is particularly crowded, including companies such as Consolidated Computers, Telidon and Dynalogic Hyperion.
Billions of dollars are given to companies to encourage research and development and innovation, with little evidence that these activities have materially improved as a result. Billions more are spent on regional diversification. What started as a program to help poorer regions, such as the Atlantic provinces and northern Ontario, has now been extended across the country, which is both costly and self-defeating for regional development.
Instead, these programs operate more as slush funds for politicians to reward favoured industries and supporters, with little evidence that they reduce entrenched patterns of regional inequality or boost overall economic growth. Quebec’s recent economic resurgence, as government spending and taxes are curtailed, shows that good governance, not corporate subsidies, best reduces regional inequality.
There is a place for temporary direct government support of particular firms and sectors with a proven record of success. During the 1986 oil price crash, federal government intervention kept the Hibernia project afloat, an investment that paid off handsomely for workers, governments and other members of the consortium. When the 2009 great financial crisis threatened the survival of auto manufacturers and parts suppliers, government support helped this industry survive and restructure.
However, interventions such as Hibernia and the auto sector should be the exception during times of crisis and not a model for routine and recurring government subsidies of business. Too close a relationship between government and a company creates conditions for corrupt practices. The renowned economist Dani Rodrik said, "State-business collaboration is just another name for corruption.”
Subsidies have an insidious effect on corporate priorities and strategies. Instead of focusing on innovation and efficiency, firms focus on lobbying government for handouts. In 1972 the National Association of Manufacturers moved its headquarters from New York to Washington, stating that “We have been in New York since before the turn of the century because we regarded this city as the center of business and industry. But the thing that affects business most today is government.”
It is a sad comment that a major business organization believes success for its members depends more on its relationship with government than with suppliers or customers. Until recently, a notable exception has been America’s hugely successful big tech companies, almost all of which are on the west coast, where their focus is on customers and growing their business, not on lobbying Washington.
If anything, the nexus between government and business is worse in Canada. Its origins go back at least to the British government granting a monopoly to the Hudson’s Bay Company. It grew with the development of railroads in the 19th century and tariff protection for manufacturers under the National Policy. Industry minister C.D. Howe extended government’s reach during the war by entrenching monopolies in the private sector or by creating Crown corporations.
Robin Broadway of Queen’s University recently wrote that Canada is developing a “rent-rich economy”. Rents are captured when government confers a benefit on one party and not others, usually by insulating it from competition. If StatsCan had an industry classification for rent-seeking, it would probably be Canada's largest industry. Too much effort is devoted to the granting of favours and subsidies from governments in Canada, and not enough to creating innovative and efficient companies that can compete on the world stage.
The federal government mandates an exhaustive inventory of contacts between lobbyists and government officials, yet the end goal of much of this communication—either direct subsidies to firms or an exemption from competition—remains opaque. Creating an inventory of such outcomes would help document for the public not only the frequency but the substance of the extensive communication between business, lobbyists and government.
Thank you.