The corporate welfare challenge

The promise that government subsidies will create jobs is a mirage.

Governments that want to cut spending without causing too much harm to the economy have only one option available: reduce their overabundant subsidies.

Each year, the various levels of government spend billions of dollars in corporate subsidies in exchange for promises of job creation — promises that don’t always deliver. What’s more, these subsidies are often more politically than economically motivated.

According to a recent study by the Fraser Institute, Canada’s federal, provincial and municipal governments handed out a total of $684 billion in subsidies between 1980 and 2009. While this figure includes subsidies to consumers, the lion’s share has gone to public and private enterprises.

In 2012, researcher Mark Milke, author of the Fraser Institute study, also determined that Industry Canada paid out $13.7 billion in corporate subsidies between 1982 and 2012, mostly to aerospace multinationals and automakers.

What’s worse for Canadian taxpayers, according to Milke, is that of this amount, $6 billion was disbursed as grants, not as loans. The remainder (just over $7 billion) was paid out in loans, which companies very rarely pay back. Since 1982, a mere $2.1 billion has been repaid.

This policy is actually costlier than it seems. Companies are often charged a minimal interest rate on these loans, whereas the state — which must first borrow the funds on the markets — pays market interest rates. According to Milke, over the past three decades, Industry Canada has only recouped $9 million in interest on its loans, while it likely paid more in interest to borrow the funds in the first place. That’s quite an investment for taxpayers!

Economic mirages

The promise that government subsidies will create jobs is a mirage. Subsidies don’t create jobs; they just displace them. The benefits produced in the target region are offset by lost jobs or lost tax revenue elsewhere.

Companies that receive subsidies cannot possibly guarantee the jobs promised by politicians. Such jobs depend on economic growth, not subsidies. But this won’t keep politicians from using corporate subsidies to buy votes in some regions.

This policy also has the negative side-effect of contributing to the proliferation of lobbyists. The more governments hand out subsidies and regulate industry, the more corporate success is dependent on government assistance, forcing companies to hire lobbyists to get their share of the pie. What a waste of effort and resources.

Thoughts on reform

Some will argue that since other jurisdictions, including the United States, the European Union and China, also hand out subsidies, Canada has no choice but to follow suit. This is partly true. The only real solution to this race to the bottom is to strengthen trade agreements with the help of the World Trade Organization, for example, in order to eliminate subsidies in all countries.

According to the Canadian Federation of Independent Business, the vast majority of small and medium businesses in Canada would prefer lower taxes to government subsidies. This would be a welcome change for taxpayers, as governments would also save on the administrative costs of running subsidy programs.

The problem is, politicians relish having the power to spend your money as they see fit. As for bureaucrats, well, they just want to keep their jobs. That’s why reforming government assistance programs is likely to be quite a challenge.