Chrystia Freeland’s ‘new economy’ is fuelled by old-fashioned subsidies
By Jack Mintz, National Post, Jan 26, 2024
With Canadian GDP per capita dropping like a stone, what would you expect our minister of finance, Chrystia Freeland, to say last week at the elite Davos confab? “Come to Canada! We have $135 billion to give you!” is what she did say. Given our poor investment performance, it seems the only way to attract capital is to offer billions of tax dollars to foreign multinationals.
But not just to any company that might want to invest in Canada. Freeland’s $15-billion Canada Growth Plan and $120-billion in tax credits constitute an industrial policy skewed toward clean energy, critical mining (e.g., lithium, nickel and copper) and retooling manufacturing, largely in voter-rich Central Canada. It is a huge number to spend, equivalent to a year and half of federal corporate tax collections.
If you are mining for iron ore and gold, however, you’re out of luck since these are not critical minerals. As for agriculture and forestry, they don’t count, either. Service sectors like construction, communications and transportation also take a back seat. And forget about greenfield oil and gas investments like liquified natural gas plants. Instead, tell Germany to fly a kite in Qatar rather than have reliable Canadian supply.
Past experience tells us subsidies don’t work
Will these “new economy” subsidies work? Past experience says no.
- Subsidies are often paid to companies that would do the investment anyway. If there really is a transition to e-cars, batteries will be built for a profit anyway.
- Even if subsidies do stimulate more investment, money is wasted as countries bid to attract the same investment. Besides, it is better to import subsidized products and use the tax dollars where Canada can create a real comparative advantage. Australia learned that lesson three decades ago when it let its frequently bailed-out auto industry disappear. Australian productivity improved.
- Do subsidies really create jobs? Companies that hire more workers may simply draw them from more profitable enterprises elsewhere in the economy, with no net gain in jobs. Plus: not all jobs are equal. Freeland’s green economy means replacing oil and gas extraction that produces close to $1,000 in output per working hour with green investments that earn about a thirteenth of that.
- Subsidies are paid to politically chosen companies that might well fail. The feds gave $173-million to a Quebec vaccine company, Medicago, that ended up being shut down despite such a generous “helping hand.” Bombardier, recipient of over $4-billion in subsidies since 1996, can barely turn a profit without them.
The extravagant EV battery subsidies for the auto industry are a perfect example of what can go wrong. Fearing EV production would go south, Canada has thrown $35-billion (so far!) at three companies (Volkswagen, Stellantis and Northvolt) to create roughly 8,500 jobs. That works out to over $4 million for each worker.
By comparison, Michigan is spending US$1.75 billion on an EV battery plant that will create 2,500 jobs costing $US700,000 per worker (C$920,000). Though it’s a bargain compared to Canada’s handouts, the subsidies have generated much criticism as a “massive cost” generating “good-paying jobs” that in fact will pay only US$20 per hour.
And who knows whether these companies will even succeed? Tesla has 60 per cent of the U.S. EV market, compared to just six per cent for Volkswagen and zero for Stellantis. Maybe Stellantis and Volkswagen will grab a sizeable market share but with mounting EV financial losses as sales slow, it’s also possible they may end up in financial trouble and require — oops! — another bailout.
Canada needs ‘open for business’ agenda
To fund this subsidized new economy, the rest of Canada is paying higher personal, excise, payroll, property and corporate taxes to cover new-economy spending. And the command-and-control socialism that is Freeland’s new-economy master plan doesn’t have a good track record, to put things kindly.
There is an alternative. Focus on the private sector’s animal spirits rather than Soviet-style central planning. As I wrote last week, no single silver bullet will solve our growth policy. We need an “open for business” agenda, which means taking the shackles off the private sector, where entrepreneurial talent is most likely to be found.
Instead of throwing around tens of billions of dollars in subsidies, we need policies that make it easier for the private sector to create jobs. Getting rid of regulation that slows down the building infrastructure and housing is a start. Cutting taxes would make life more affordable and improve incentives to work, save and invest. Keeping immigration at levels consistent with growth is critical, too.
Governments should also be looking at their own productivity. The rising furor over inflationary municipal property tax hikes is a case in point. At our home this week, we received a robocall invitation to a phone-in town hall to solve Toronto’s “financial crisis.” It’s Mayor Olivia Chow’s way of selling painful property tax hikes — 10.5 per cent — to voters already pressed by high food, shelter and transportation prices. It seems Toronto can’t find any cost savings.
This same story is being repeated in Calgary (where the tax hike is 7.8 per cent), Vancouver (7.5 per cent) and Edmonton (6.6 per cent). Yet, with digitization of processes, artificial intelligence and greater opportunities for contracting-out, cities that wanted to could improve their productivity, lower their costs and not need to raid household piggy banks.
The new economy won’t come as a result of Freeland’s industrial policy. It will come from markets unfettered by political interference.
Jack Mintz is an economist who is head of the School of Public Policy at the University of Calgary.