Canadians who don’t regularly track how governments spend money might be surprised to find how myths crop up about government expenditures.
Exhibit A is a new report from the Institute for Research on Public Policy (IRPP) that claims Canada needs even more “industrial policy,” academic lingo for subsidies to business, as if governments had not already long practised such policy, and at a considerable cost to taxpayers.
“Industrial policy” is more colloquially known as corporate welfare. Proponents dislike that term as “industrial policy” sounds more technical. It thus conjures up the notion of smart people in government successfully targeting this or that sector for growth.
Space does not permit a full analysis of the report, which urges Canadian governments to enact a “strategy” on corporate welfare. (To be fair, the report acknowledges problems with and critiques of the practice.) Let me instead point out that peer-reviewed, academic research on business subsidies cast doubt on the many claims proponents offer up in defence of the practice.
One of the more comprehensive analyses is from Terry Buss, currently a professor in Australia and formerly with the World Bank. In a review of studies that support industrial policy, Buss found most were industry-sponsored, and/or never peer-reviewed and thus lacked scientific rigour. That led to correlation-causation errors and faulty claims of increased investment and employment.
Such studies, Buss writes, are “based on poor data, unsound social science methods, [and] faulty economic reasoning.” He concludes such reports “cloaked in the legitimacy of what appears to be scientific and economical [rationale], provide politicians and practitioners with justification to award political favors without appearing to be political.”
Back to on-the-ground practice in Canada. With the exception of Alberta (where subsidies have been mainly abandoned since 1996 following a disastrous $2.2 billion loss on 1980s-loan guarantees to business), most Canadian governments are too eager to send tax dollars to corporations. (My 2009 report found Canadian governments spent over $200-billion on capital and operating subsidies to business in a 14-year period.)
In contrast, governments are less eager to be frank about the cost of corporate welfare, including chronic government failure on collecting on past loans. This is particularly true of the federal Conservative government.
For instance, one retired civil servant, Cliff Oldridge who once worked for the federal Department of Industry, has tried for years to get accurate numbers from his former department. One example: Over the past year, he filed an Access to Information request for repayment forecasts for five Industry Canada programs that authorized $5.3 billion in taxpayer cash to corporations between 1996 since 1996 through to 2011.
The department denied Oldridge the repayment forecasts, even though such estimates would not reveal confidential commercial information. There is a reason: the department’s own history and internal reports reveal its repayment forecasts are routinely revised downward.
As proof, consider a 2005 analysis prepared for Industry Canada by a consultant who noted “repayments are typically less than originally forecasted.” The consultant informed Industry Canada its original repayment estimates “totalled about $4.3 billion, while the current repayment estimates total about $2.4 billion, or 55 per cent of the original aggregated estimates.” In other words, the federal government wrote down expected repayments by $1.9 billion.
In another example of non-transparency, since 2008 cabinet ministers and MPs from the Harper government have announced $550 million in funding from Industry Canada’s Strategic Aerospace Defence Initiative, the main program for dispensing taxpayer cash to the aerospace industry. Politicians eager to make announcements included Christian Paradis, Jim Prentice, Tony Clement, Kerry-Lynne Findlay and Bob Dechert.
Problematically, the accompanying media releases claimed the $550 million given to companies such as Pratt & Whitney, Heroux Devtek, Bristol Aerospace and others, were in the form of “repayable contributions.” That language, wrongly, gives the public the notion such loans are guaranteed to be repaid one day.
In fact, the over-half billion dollars disbursed were “conditionally repayable contributions” in the accurate legal language.
The “conditional” descriptor is critical; companies that receive conditionally repayable contributions don’t necessarily have to pay them back. Repayments depend on a variety of factors, known only to departments and recipients. However, we do know – as noted above – that repayments are poor.
If the Harper government included the “conditional” word in its public statements, it might flag how billions in taxpayer dollars are sent out with only a chance of a partial return.
Canada’s governments have never taken a breather in “industrial policy” and the call for more of it is ill-advised, strategic or not. The Harper government is also rather non-transparent about the chronic corporate welfare already practised by it and previous federal governments.
Mark Milke is a Senior Fellow at the Fraser Institute and author of five reports on corporate welfare.