Subsidies deal not quite the dream governments told us to believe

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The dreamers of government had a great vision of things to be built in fields of Southwest Ontario, and believed that if they spent it – $28.2-billion in subsidies – they would come.

Not only would battery plants come, but also mines, metals and vehicle-assembly plants that would be hubs to an electric-vehicle industry.

Yes, they would come, and all to Canada – not to the United States or Mexico. They would come, and pay taxes that, the governments suggested, would recoup all the costs of the subsidies within five years. Five years.

But the “heartless economist” who checks the math on these things, Parliamentary Budget Officer Yves Giroux, has pierced that dreamy bubble. He called the forecasts that the federal government used to suggest they’d recoup costs within five years “wildly optimistic.”

Those forecasts outlined scenarios which assumed that luring these two big battery plants with large subsidies would spawn an electric-vehicle industrial ecosystem that would span mining, raw materials making battery components, manufacturing batteries and electric-vehicle assembly plants – with most of the revenue benefits from the auto assembly at the end of that supply chain. And all of it would be done in Canada.

The PBO figures it is more reasonable to assume that with free trade, a lot of those inputs would come from the U.S. or Mexico. And that two battery plants won’t draw an entire industry. Volkswagen doesn’t assemble cars in Canada now, so it might ship batteries to U.S. assembly plants.

A forecast based on reasonable assumptions, the PBO concluded, found it would take 20 years for the subsidies to be covered by tax revenues from the industry they help stimulate.

In other words, a Canadian child born today will be starting university by the time those billions are paid off, even without interest.

Some will think that’s good enough because the money is recouped eventually, so jobs have been bought and paid for. But then $28.2-billion might have paid for other things, or better things, or things that did the economy more good while a generation grew up. Perhaps scientific research. Or sending more kids to university. Or maybe subsidies for another kind of clean-energy manufacturing that would do a lot more for the economy than going toe-to-toe with massive U.S. electric-vehicle subsidies.

Mr. Giroux declined to make an overall judgment of the value of these subsidies because, he said, governments can have other reasons for subsidies beyond the fiscal break-even point, from national security for military contracts to social benefits or building an industry ecosystem. That, he said, is why such decisions “are made by elected politicians and not heartless economists like me.”

But there wasn’t much debate about the choices, and still isn’t. A federal Liberal government and an Ontario government made a multibillion-dollar decision that is popular in political battleground regions around St. Thomas, Ont., and Windsor, where the Volkswagen and Stellantis-LG battery plants will be located.

Conservative Leader Pierre Poilievre hasn’t taken a position on whether these subsidies were a good thing or bad. The party’s critic for innovation, science and industry, Nova Scotia MP Rick Perkins, issued a statement that declared the Liberals “lied to taxpayers and to Parliament” when they suggested the subsidies would be recouped in five years, and argued there should be more transparency about the details. But the Tories still don’t dare to tell us if they think $28.2-billion should have been spent on two battery plants.

Of course, governments can argue over what might happen in the future and claim their gamble will pay off. But Mr. Giroux makes a strong case that the expectations governments have sold are fantasy. Are they all dreamers?

No, these are big-money subsidy decisions driven by loss aversion. Ottawa and Ontario saw the U.S. rolling out massive subsidies for electric vehicles, feared that the car industry might be sucked out of the province’s south and decided they had no choice but to do it – fast.

Was it the best use of public money? There isn’t much desire in Canadian politics to even debate that. But these subsidies are not the easily repaid dream deals that governments sold.