Justin Trudeau and his cabinet ministers fanned out across the country last week on a postbudget tour to sell a sham “grocery rebate” and tout subsidies to bring factory jobs to Canada.
But the most important choice from this spring’s federal budget was a decision to subsidize provincial government corporations.
That might sound like government on top of government, but in the end this will be the least-costly type of subsidy in the $80-billion package of industrial incentives unveiled by Finance Minister Chrystia Freeland in her March 28 budget.
Part of that package is an effort to spur low-emission electrification – to make Canada’s electricity grids greener but also expand the supply of electric power to meet the expected sharp increase in demand.
Natural Resources Minister Jonathan Wilkinson has obsessed about the need to do that for a long time, but the federal government’s decision to compete with all the clean-technology subsidies in the U.S. Inflation Reduction Act is now provided a powerful lever.
Ottawa created a clean-electricity subsidy last November, but it had a weakness: The investment tax credits didn’t apply to companies that don’t pay tax, such as provincial power utilities. In most provinces, they are the entities that build new hydro projects or small modular nuclear reactors or transmission lines, and that’s not going to change anytime soon. So the Finance Department agreed to a newish thing: industrial incentives for state corporations.
In many ways, electrification is different from the rest of the subsidies. This isn’t direct competition to get companies to build here in Canada instead of the United States. In some ways, this is a federal-provincial infrastructure program.
Another big difference is where the money will end up. Much of it will be a subsidy paid from the Canadian public to the Canadian public – in the sense that taxpayers will end up subsidizing the electricity bills of ratepayers who would otherwise bear the cost of expanding and greening the grid.
And yet it doesn’t seem to be the kind of subsidy Mr. Trudeau and his ministers like to talk about most.
The PM went to a Honda plant in Alliston, Ont., last Wednesday to talk about federal industrial strategy, promising it will bring the jobs of the future. The Liberals are looking forward to the official announcement of a heavily subsidized Volkswagen electric vehicle battery plant in St. Thomas, Ont.
Factories make for good political marketing, and that is what the postbudget tour was about: That’s why ministers went to grocery stores to tout the extension of an expanded GST rebate as a “grocery rebate,” even though it has nothing to do with groceries.
The Liberal government has decided they will compete for factories in a subsidy war, paying to lure multinationals to build plants in Canada. Ms. Freeland’s budget featured a pyramid graphic with four layers of incentives and a number of organizations that will offer them: Canada Growth Fund, Canada Infrastructure Bank, Strategic Innovation Fund.
That could end up as an expensive way to buy jobs, especially if the cost of the subsidy is high, and it doesn’t bring high-value activity such as research and development.
But clean electrification is different. It would be necessary infrastructure for a cleantech industrial strategy. But it’s not competing to ensure plants locate here so much as it is spurring investment in a sector that is by nature domestic. And If you believe it is necessary to build clean-energy infrastructure then the question is who will pay.
If the feds take on some of the cost, that will reduce the impact on electricity bills, because regulators base price approvals on utilities’ costs. Your tax bill will subsidize your electricity bill.
The impact of that is likely to be that people with higher incomes will bear more of the cost through taxes, said University of Regina economist Brett Dolter, who co-wrote a paper on the topic with the University of Calgary’s Jennifer Winter. Energy costs make up a larger part of a low-income household’s budget.
Maybe that’s not as easy to sell with a slogan as a cheque or a factory opening, but this was one of the most consequential things to come from Ms. Freeland’s budget. It might well spark a decade of national electrification, and that will be critical infrastructure.