How to Stop Playing the Subsidy Game

National CBC Radio “Commentary”

By AIMS President Brian Lee Crowley

Broadcast 26 August 2004


As Ontario Premier Dalton McGuinty and his federal counterparts rush to justify offers of hundreds of millions of dollars in subsidies to automobile manufacturers in Ontario to attract new investment, they should ask themselves a simple question: 

What are car plants for? Not to “create jobs” or to engage in research and development or to invest. They exist to make cars that consumers want at a price they’re willing to pay. A car plant that cannot do that is doomed. 

Consumers and companies therefore have a common interest: plants and other investments should go to the locations that confer the greatest competitive advantage, in terms of low costs, high productivity, competitive taxes, quality of infrastructure, etc. 

There are only two real reasons for governments to subsidise these investments. One is that, without the subsidy, the location is not competitive compared to others. In that case, consumers may still pay the same price, but Ontario and federal taxpayers will be paying an additional amount, and that should be added to the cost of the car. 

A more competitive jurisdiction could produce the car for the going market rate period, so the subsidy is a loss of economic well-being for all of us. And, ironically, since most of the plant’s cars will be bought by Americans, they will get cars at a discount, courtesy of the Canadian taxpayer, who on average is less well-off than the average American. If Ford workers and managers can’t produce cars at a competitive price in Ontario, that’s a problem for them to solve, not one for taxpayers to make go away. No wonder autoworkers union president Buzz Hargrove thinks subsidies are such a great idea. 

The other possible justification for taxpayer subsidies is everybody does it. True, but the cost remains: we get a less competitive economy, because investments go to less efficient locations, and we get a higher tax burden as a result. 

Businesses know that politicians love to announce big new investments, so companies essentially auction off to those politicians the right to take political credit for investments.

The right response to this is not to pony up, but to change the rules of the game. The European Union, for example, long ago realized that the state subsidy game impoverished consumers and taxpayers and enriched companies while encouraging an inefficient industrial structure. So they brought in rules against state aid to companies. They have even forced a number of companies to repay subsidies received from national governments.

The rules are not perfect, and too many subsidies make it through the net, but the Europeans are far ahead of us in thinking about how to reduce the power of corporations to win concessions from taxpayers. We should be taking a leaf out of their book, not defending subsidies that leave us worse off overall.

For Commentary, I’m Brian Lee Crowley in Halifax.

This article was originally posted on the AIMS website on 27 August 2004. To listen to the original broadcast, click here.