THUNDER BAY – Have you ever wondered why governments run into trouble, and end up spending more than they have? Perhaps one of the reasons is what is often called “corporate welfare”. In Ontario, during its first term, “Premier McGuinty’s government ramped up spending from $73.9 billion in 2003/04 to $96.5 billion in 2007/08, an increase of more than 30% (Ontario, Ministry of Finance, 2009: 52–53)”.
The McGuinty Government’s record on picking business winners, by supplying “corporate welfare” are leading to massive deficits. “Updated budget numbers presented by Finance Minister Dwight Duncan last month put this year’s provincial deficit at $24.7 billion, with additional deficits of $21.1 billion and $19.4 billion forecast for the next two fiscal years,” according to figures in the latest analysis from the Fraser Institute.
The spending seems to be continuing. Every week, even though the deficit keeps climbing, the spending announcements continue across Ontario.
The real problem might be that Premier McGuinty does not seem willing to make the difficult decisions, or to be pre-desposed to listening to the people of Ontario. This week as the debate on the HST is ramping up, McGuinty has done another “Dalton dash” and is out of Queen’s Park on a trade mission to India.
The Fraser Institute, in a report titled “Ontario’s spending problem” suggests that the real problem is an inability by the McGuinty Government to slow the rate of spending. “Restraint would have been an option back in 2003/04, but it is not one that will get the province out of its fiscal crisis quickly. What is needed now are spending reductions. And while Minister Duncan may want to continue increasing spending in priority areas like health care and education, those are the obvious places to cut back”, according to the authors.
One of the problems for the McGuinty Government is that it often appears along with Premier McGuinty, his MPPs have become addicted to making spending announcements.
Do all these government announcements really help the economy? Another new study by the Fraser Institute suggests not.
The report states, “Canadian governments provided businesses with more than $202 billion in bailouts, loans, and subsidies between 1994 and 2007, according to a new study released today by the Fraser Institute.That works out to $15,126 per taxpayer over that 13-year period or $1,244 per taxpayer in 2007 alone.
“Unfortunately for Canadian taxpayers, our governments have a long history of spending public money on corporate welfare in attempts to pick winners and losers among various business sectors,” said Mark Milke, author of the report Corporate Welfare Breaks the $200 Billion Mark; An Update on 13 years of Business Subsidies in Canada.
“With governments of all levels providing subsidies and bailouts to a variety of businesses in the past year in the name of stimulating the economy, the corporate welfare tab yet to come will no doubt be significantly higher for all Canadians”.
Milke first wrote on corporate welfare for the Fraser Institute in 2007 and again in 2008. This updated study contains another year of additional data and a discussion of the impact of the massive taxpayer-financed bailouts for General Motors and Chrysler.
The cost of bailouts and subsidies for the auto industry
Corporate welfare to the automotive sector increased substantially in 2009 as Canadian governments poured money into General Motors and Chrysler to help the companies stave off bankruptcy. Based on announcements in the past year and previously released data, Milke estimates the federal and Ontario governments committed $16.5 billion to the automotive sector between 2003 and 2009, with $15.3 billion of that amount coming in a two-month period between April 7, 2009 and early June 2009.
“Bailouts for the automotive industry over this two-month period will cost every Canadian taxpayer over $950,” Milke said.
The report also points out that government support of General Motors and Chrysler comes at a cost to other auto manufacturers that didn’t receive bailouts.
“Insofar as governments picked winners, they made losers out of the shareholders and employees of Ford, Toyota, Honda, Hyundai, Volkswagen, and others who also manufacture and sell cars and trucks in North America,” Milke said.
“The illusion of corporate welfare directed to the automotive industry in 2009 was the illusion that jobs were being saved. No, they were not. Instead of jobs being cut at General Motors or Chrysler, they were simply cut elsewhere or prevented from being created at other automotive companies that would have increased production to meet market demand in the absence of GM or Chrysler in the marketplace”.
Milke’s other findings include:
In 2007 alone, Canada’s federal, provincial, and local governments spent $19.4 billion on corporate welfare, almost double the 1995 figure of $10.4 billion;
The cost to each taxpayer who paid income tax in 2007 was $1,244, which was 28 per cent higher than the 1995 figure of $967;
Between 1994 and 2007, provincial governments spent $110.3 billion on corporate welfare. The federal government spent $66.6 billion and municipal governments spent $25.8 billion;
The total corporate welfare bill (federal, provincial, and municipal) has ranged from a low of $9.9 billion in 1996 to a high of almost $20.1 billion in 2005 and also $20.1 billion in 2006. In 2007, it was $19.4 billion.
In 2007, Quebec disbursed the highest amount of public money to corporations: over $6 billion. Ontario followed at $2.1 billion, then Alberta at almost $1.2 billion, then British Columbia at just over $1 billion.
Peer-reviewed research on business subsidies concludes that corporate welfare may not have a demonstrable positive impact upon the economy, employment, and tax revenues because of the substitution effect. The substitution effect occurs when employment and tax revenues are shifted to business at a significant cost, and no new investment or employment is created, on a net basis, when the national or international economy is considered. For example, a subsidy meant to “create” manufacturing jobs in Quebec may simply shift intended investment from Ontario or British Columbia. A subsidy offered to an automotive company in Michigan will tend to shift jobs from Ontario or Kentucky.
“Government intervention only delays the day of reckoning for teetering businesses and often at the expense of other businesses and a healthy industry and economy,” Milke said.
“If governments truly want to build a sound economy and vibrant business sector, they should move away from corporate handouts and provide Canadian taxpayers with broad-based tax relief. Not only will this put more money in Canadians’ pockets, but tax reductions have also been proven to encourage investment and economic growth”.
The problem for Northern Ontario could be greater. The region’s economy is increasingly based on government spending, and government subsidies. The impact of either higher taxes to pay for the McGuinty spending, or the reduction in spending that will be needed are more likely to impact our region at a greater level.