Sometimes you cut the ribbon, and sometimes the ribbon cuts you. The federal Liberals are discovering the perils of spending (tens of) billions of dollars on subsidies to the electric-battery industry on the premise of creating thousands of jobs.
It sounds great in the moment, and it makes for a heck of a ribbon-cutting ceremony. But such promises eventually end up cutting the other way, when government subsidies don’t deliver the touted benefits. Then politicians are left to explain why, say, cucumber greenhouses in Newfoundland were not such a surefire winner after all.
Such disappointment usually takes a few years to ripen, but the reckoning came sooner in the case of federal and provincial production subsidies to NextStar, the joint venture between LG Energy Solution and Stellantis, worth up to $15-billion. Industry Minister François-Philippe Champagne justified that outsized bill by pointing to the thousands of jobs that would be created in the Windsor, Ont., area, and by claiming Ottawa would recover its outlay within five years.
However, hundreds of South Korean workers will be brought in temporarily to work on the site, apparently because no Canadians have the necessary advanced manufacturing know-how to set up the facility.
Mr. Champagne has scrambled to explain this extraordinarily awkward situation, insisting that he will demand an explanation and ensure that the promised jobs for Canadians are created. (Presumably, the best time to ask for clarity and assurances would have been before signing a contract, not afterward.)
The Conservatives, meanwhile, have pounced on the revelations and are making copious use of the phrase “foreign replacement worker” – a solution to the quandary of how to criticize the NextStar contract without actually criticizing a deal that is understandably popular in the battleground ridings of southwestern Ontario.
The Liberals can protest that it’s an unfair critique from the Tories (and can point to the free-trade agreement with South Korea that allows for such things). But the episode underscores one of the fundamental follies with such massive government subsidies: they turn what should be a private-sector business decision into a public political debate.
If LG and Stellantis were using their own money, the hiring of a few hundred specialized workers would be (justifiably) unremarked upon. Several hundred jobs are less than an afterthought of a rounding error in the overall Canadian economy, particularly heading into a decade of tight labour markets. Public largesse brings public scrutiny, however.
Then there is the longer-term folly: the fanciful claim that the subsidies will pay for themselves within a few years. The Parliamentary Budget Officer has dismantled that assertion, scrutinizing the $15-billion in production subsidies to NextStar, as well as $4.6-billion committed to NorthVolt in Quebec and $13.2-billion for Volkswagen.
The PBO concluded that, contrary to Ottawa’s claims, there will be no quick payback. It will take 23 years of full production at NextStar for incremental government revenues to fully offset the $15-billion subsidy; for Volkswagen’s $13.2-billion, it will take 15 years of full production; and for Northvolt’s $4.6-billion, 11 years.
The government and its supporters have criticized the PBO’s numbers as overly gloomy, saying that the analysis does not take into account upstream and downstream spinoff benefits in the supply chain. If anything, though, the PBO is being overly generous: its payback calculations do not include the $6.6-billion interest costs on the money that Ottawa will need to borrow, nor does it account for the time value of money (a dollar today is worth much more than a dollar 10 years from now).
More significantly, the PBO’s tally of the subsidy spending spree ($43.6-billion, including funds for construction and foregone corporate tax revenue) does not include what those billions cost the rest of the economy. Despite what the Liberals would have Canadians believe, those funds are not plucked out of thin air. They come from taxes or borrowing; either a bill to be paid by others now, or later.
Of course, there is no press release for Ottawa to send when a company decides to invest its own money. No lectern awaits a minister when an entrepreneur sets out to pursue their dreams. And there is no ribbon to cut when a business, underwritten only by its own initiative, creates a job.