Hill and Mitchell: Stellantis, Volkswagon — corporate welfare is back

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In 1972, federal NDP leader David Lewis invoked the term “corporate welfare bums” to describe big businesses that demanded — and received — millions of dollars in government subsidies on the taxpayers’ dime. Today, governments once again are dolling out taxpayer money to select businesses. But this time no politician — of any political stripe — seems willing to call it out. And Canadians will pay the price.

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Recently, the Trudeau government announced it will spend an estimated $13 billion on subsidies for Volkswagen’s Ontario battery plant and offer $700 million to help with construction. According to the federal government, these types of handouts are necessary to compete with the United States, and more specifically, with the slew of subsidies introduced in the Biden administration’s Inflation Reduction Act.

News of the Volkswagen handout prompted automaker Stellantis to halt construction of an electric vehicle battery factory in Windsor, insisting that the federal government deliver a promised $500 million to help with construction costs and sweeten the deal to make it more competitive with U.S. subsidies.

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Ontario Premier Doug Ford not only sided with Stellantis, he offered more Ontario taxpayer support to ensure the factory stays in the province.

While the brazen demands from these major automakers have spawned headlines, unfortunately corporate welfare is nothing new: it was already running rampant in Canada. Federal, provincial and local governments spent $352.1 billion (inflation-adjusted) on direct transfers to select businesses from 2007 to 2019 (the latest pre-COVID year of available data). This doesn’t include other forms of government support such as loan guarantees, direct investments and regulatory privileges for particular firms or industries. Canadians are ultimately responsible for financing this spending, and every dollar spent on corporate welfare is a dollar unavailable for tax cuts or other priorities, including health care and education.

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Politicians like corporate welfare because they can claim credit for job creation and investment. But in reality, according to research, corporate welfare does little if anything to actually create economic growth. It may in fact hurt the economy.

When governments attempt to pick winning firms, technologies or industries, they shift jobs and investment away from other firms and industries, overriding the preferences of customers and investors. If a project won’t locate in a particular area without corporate welfare, that’s a strong indication the project isn’t well-suited to the area. As Lewis’s memorable phrase suggests, corporate welfare also tends to make firms lazy and less attentive to customers, ultimately making an economy less competitive.

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For their part, since politicians are spending other people’s money, they have little incentive to be careful investors. And ultimately, higher taxes (or lower government spending in other areas) must finance subsidies. So, corporate welfare depresses economic activity in some parts of an economy to encourage it in others, and over the long run, often fails to create jobs or investment on a net basis.

Finally, corporate welfare may not even meaningfully impact a firm’s decision on where to locate. Surveys suggest that between 75 and 98 per cent of subsidized firms would have chosen their location even without the subsidy because other factors — such as proximity to a customer base, supply chains, and livability — seem to matter more.

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Even if a subsidy does entice a firm to relocate, it doesn’t mean it will stick around. Instead, the subsidy may lead to an escalating bidding war with other governments. Just look at Stellantis, which has threatened to relocate if the federal government and/or Queen’s Park don’t match subsidies offered in the U.S.

Today, politicians seem to have forgotten Lewis’s warnings. Corporate handouts don’t help the economy; they drain financial and economic resources from productive sectors to reward wealthy and well-connected firms, sticking Canadians with the bill.

Tegan Hill and Matthew Mitchell are economists with the Fraser Institute.