Clark Savolaine is a Senior Manager for KPMG in Canada’s Deal Advisory – Infrastructure practice.
Greece has had about 10 finance ministers since the Great Recession in 2008. The story goes that one of them ordered a fresh line-by-line audit to determine how much spending exceeded revenue. When the revised spending figure came back significantly higher than expected, the minister exclaimed, “Why wasn’t all of this spending included in earlier estimates?” Unmoved, the closest civil servant replied, “Well, no one ever asked us to add it all up before.”
So it goes, everywhere – including in Ontario.
As shown in the recent line-by-line review of Ontario’s public finances, there is opportunity to reduce spending in the province. A key area of focus must be adding up all of the corporate financial aid programs and eliminating the ones that cannot clearly demonstrate value for money.
Whether you call them “business supports” or “stimulus,” these are the programs that transfer public money to individual private-sector companies. Unlike broad-based tax relief or infrastructure investment, business supports often take the form of industry-specific grants, loan guarantees, boutique tax credits, marketing and subsidized training or hiring. They are classic examples of governments creating one-off, narrowly targeted programs and then walking away. Each one on its own isn’t going to break the bank, but, before you know it, you’re spending significant sums and it’s near impossible to evaluate the return on investment from a results-based perspective.
Giving public money to private business is not a partisan issue. We see these programs created across the globe by governments of every political stripe. In some cases, they are legitimate policy responses to crippling market failures, such as during the 2008 recession. However, most of these programs are not. Indeed, these programs persist because they are easy to start, but hard to stop.
For policy-makers in Ontario looking to get a handle on value-for-money audits, below are five action items.
1. Identify program spending
Before you can look across government to understand spending on business supports, much greater clarity on what you’re looking for is essential. These programs show up in several ministries, and there are numerous examples of conflicting policy objectives. Assessing these programs doesn’t take long – but to get started, you need to know what you’re looking for.
2. Measure outcomes, not inputs
Almost always, business support programs measure performance based on how much spending goes out the door as opposed to outcomes-based objectives such as return on investment. Even when “jobs,” “full-time equivalents” and “multipliers” are estimated, they are part of the application process, not the evaluation process. Without this type of cost-benefit analysis, it’s impossible to assess the trade-offs involved in continuing existing programs, ending or reducing programs, or implementing new ones.
3. Consolidate to reduce spending
The more programs that are offered, the more complex the program landscape. Many of these programs are administratively burdensome, both for employers seeking the funding and for public servants administrating them. Consolidating the number of programs and ministries with authority to manage business supports makes it easier for entrepreneurs seeking the funding when they need it. It also improves government oversight and service delivery.
4. Communicate the bigger picture
Reducing or eliminating existing programs will inevitably affect some stakeholders. Managing this change requires an ability to demonstrate to employers that they will still benefit once other pro-growth policies are in place – such as reducing the corporate income tax rate, eliminating red tape, lowering hydro costs or providing investments in education, health care and transportation infrastructure.
5. Sunlight is the best disinfectant
Ensure that all new business supports include a commitment to transparency and public reporting. Require an auditor-general, financial accountability officer or external stakeholder to conduct the cost-benefit analysis to add credibility to the exercise. Transfers of public money to private businesses require clear sunset clauses to properly inform market expectations and to prompt difficult discussions about continuation.
To spend billions each year on businesses that require support, government must first collect billions in taxes from businesses that do not. It’s an inefficient economic strategy. We’ve all heard the examples of companies promising new jobs but failing to hit their employment guarantees or, worse, closing down entirely shortly after receiving millions. Reducing Ontario’s spending on business supports doesn’t have to be a herculean task. It could help provide a positive boost to the economy when combined with other pro-growth policies, as well as free up public money to further strengthen core front-line services that Ontarians rely on.