For those who look back on 2011 and wonder how European and American governments dug themselves into such a deep debt hole, consider this image as an explanation: Santa Claus.
Over the decades, governments have promised benefits to current voters at the expense of future generations. They borrowed massively; that created debt, which future families must pay back with interest through their taxes. Government played this promise-now, pay-back-later game in both high-tax countries (Greece) and in more moderately-taxed countries (the United States), so a lack of tax revenue was never the problem, just the chronic Santa-induced spending binges.
Even in Canada, where we pat ourselves on the back for having (partially) dealt with government deficits in the 1990s, the federal government ran deficits in 37 of the last 50 years, including in every year since 2009. Most of the provinces are also deeply in the red again.
Governments have played Santa Claus in another fashion and this added to the borrowing binge: by spending billions annually on subsidies to business (corporate welfare), this on the justification that such spending creates jobs.
Almost every government in the country—be it Alberta, B.C., Quebec, other provinces and the federal government—engages in corporate welfare. They do so even though all are running large deficits.
As a specific example, consider Canada’s most populous province, Ontario, which forecasts a $16.3 billion deficit this year. From 1991/92 to 2008/09, Ontario governments of every political stripe—NDP, Progressive Conservative and Liberal—have transferred $27.7 billion in total in tax dollars to businesses.
In the last year alone for which data is available from Statistics Canada, Ontario’s corporate welfare bill was $2.7 billion.
Ontario’s Minister of Economic Development and Innovation, Brad Duguid, argued recently that such spending is a necessity. He asserted that without it, Ontario would be “completely unarmed” in competition with the rest of the world.
Nonsense. Ontario has been lowering corporate taxes rates and that helps make it competitive with other jurisdictions. That’s not the only factor that matters in attracting business—regulation, power costs and other factors also count—but lower rates are preferable to picking corporate winners and losers with scarce tax dollars.
Besides, Canada’s politicians should keep in mind Canada can easily be “outgunned” in subsidy battles given our relatively small 34-million population base and thus how much any one government can spend in tax dollars vis-à-vis larger jurisdictions. The European Union has 500-million people and the United States has 312 million people. If they attempt to bribe companies and outbid Canada (and they do), it’s relatively easy to do. That imbalance is why free trade agreements between countries that cut down on corporate subsidies are useful and ought to be pursued with vigour.
In any event, such spending and its alleged link to job creation is as illusory as the big red guy sliding down the chimney. It’s why economists who look at the corporate-welfare-creates-jobs justification find it flawed.
For example, Timothy Bartik found that extra job growth in one locale due to business subsidies comes, in part, at the expense of reduced job growth in another region. Another economist, Margaret Dewar, found that programs aimed at specific distressed geographic regions show “almost no effects on the growth of these areas.”
Economist Terry Buss found that governments, in their corporate welfare and jobs justifications, routinely ignore what’s called the “substitution effect”. That’s where tax dollars and jobs are merely transferred from healthier businesses to those in pursuit of taxpayer cash. Buss concluded that no new economic activity or jobs were created from corporate welfare, not when the wider geographic area was considered.
A perfect illustration of this happened years ago in Quebec. There, in the 1980s, the federal government funnelled tax dollars to pay for the construction of a new fish processing plant at a cost of $2.2 million with the justification of 250 new jobs. However, in a later review, the federal Auditor General noted how the nearby existing fish-processing facility soon shut down. The job losses at the old facility were equivalent to those “created” at the newly subsidized plant.
Maybe this is why a more recent Auditor General’s report found the Conservative government didn’t even bother to try and track the number of jobs the recent stimulus program ostensibly created.
As we enter 2012, governments will need to stop playing Santa Claus. They will need to end the practice of borrowing money which future families must repay with interest. So here’s one easy “gift” governments can stop giving: corporate welfare.