Canadian government should resist urge to match Bombardier bailout

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Bombardier received its first federal subsidy of $36.9-million back in 1966 from Prime Minister Lester Pearson's governing Liberals. Since then, the Montreal-headquartered company has received Industry Canada funding of more than $1.1-billion. The company also received nearly $300-million from provincial governments, bringing the total to $1.4-billion.

Now, the Trudeau Liberals are facing intense pressure to match Quebec's $1-billion bailout of Bombardier's financially strapped airplane division, more than doubling the taxpayer largesse received by the company in the past 50 years. The investment, for a 49-per-cent interest in its C Series airplane program, is the latest aerospace subsidy saga, but it's only a part of taxpayer support for the sector. Quebec-based airplane engine manufacturer Pratt & Whitney has received a whopping $3.3-billion and Ontario-based flight simulator CAE has received $646-million.

Over all, Industry Canada has doled out $22.4-billion of taxpayers' money to private businesses from 1961 to 2013. But that's just part of Ottawa's corporate welfare largesse. The $350-million Atlantic Canada Opportunities Agency and the $250-million Western Diversification Fund dispense direct handouts that tend to favour governing party constituencies. And then there are the tax-based subsidies, including: labour-sponsored venture capital corporations ($120-million), flow-through shares ($100-million), the Canadian film or video production services tax credit ($200-million) and the Atlantic investment tax credit ($250-million).

Among the provinces, Quebec is the champion corporate subsidizer, handing out billions a year. Besides the recent $1-billion bailout of Bombardier, there's the $350-million handout to McInnis Cement for a plant currently under construction in the Gaspé region which, interestingly, is owned by the Bombardier-Beaudoin families.

Ontario is also a generous subsidizer. In 2013, it gave U.S.-based technology giant Cisco $220-million to hire 1,700 people. There have been myriad other recent subsidies to business, including $120-million to software company Open Text, $87-million to Honda Canada and a plethora of smaller handouts. The province has established a "Jobs and Prosperity fund" that will dole out $2.7-billion in subsidies over a 10-year period.

Taken together, Canada's federal, provincial and municipal governments hand out tens of billions annually to private businesses. Announcement of these handouts are great photo opportunities for politicians who extoll the jobs to be created. But do these pronouncements paint a true picture? For example, when Ontario Premier Kathleen Wynne arrived at Cisco's Bay Street offices to announce that $220-million grant, she stated, "This is the largest job-creating investment that we've seen in the technology sector." But University of Western Ontario economist Mike Moffatt points out that Cisco will be hiring people who would have been employed by other high-tech firms. "They automatically assume the people that get hired wouldn't have had jobs otherwise," he said.

Another perverse effect of selective subsidization is the tilting of the playing field against unsubsidized competitors. There are myriad examples of businesses that failed after being granted a subsidy, illustrating the truth of the adage, "Governments are terrible at picking winners, but losers are great at picking governments."

Terry Buss, formerly with the World Bank and a foremost expert on business subsidies, wrote a comprehensive analysis that found most job and economic benefit studies are "based on poor data, unsound social science methods and faulty economic reasoning." He states that such reports "provide politicians and practitioners with justification to award political favours without appearing to be political." Then there's the bees-to-honey effect of putting billions of dollars in the hands of politicians to dispense. Montreal-based business columnist David Descôteaux points out that, "The more governments hand out subsidies … the more corporate success is dependent on government assistance, forcing companies to hire lobbyists to get their share of the pie."

But what about the argument, "If we don't do it, the investment will flow to a jurisdiction that will"? In such situations, subsidies may be the only hope of attracting or retaining important employers. The U.S. think tank Good Jobs First estimates that state and local governments shell out $70-billion (U.S.) a year in business subsidies, sometimes funding half or more of a new investment. Trying to compete with such aggressive tactics is a losing game. Mr. Descôteaux says that the only way of halting this race to the bottom is the strengthening of international trade agreements to eliminate subsidies. Canada should be a big booster of such agreements, because the tenfold larger economy to the south can win a subsidy competition any time they choose.

Gwyn Morgan is the retired founder and CEO of Encana Corp. He has been a director of five global corporations.