Ottawa’s corporate welfare won’t spur economic growth

The Trudeau government recently announced it will spend an estimated $13 billion on subsidies for Volkswagen’s Ontario battery plant and offer $700 million to help with construction, in addition to another $500 million from the Ontario government. Federal Industry Minister François-Philippe Champagne argues that the economic value from this corporate welfare—funded by taxpayer money—will be worth it. But Trudeau’s spending spree hasn’t spurred economic growth yet, so why should we expect it to now?

Since taking office in 2015, the Trudeau government has significantly increased government spending, recording the five highest years of inflation-adjusted per-person federal program spending in Canadian history from 2018 to 2022.

And though per-person federal program spending (inflation-adjusted) spiked during the pandemic (reaching $19,208 in 2020/21), it has yet to return to pre-pandemic levels and stands at a projected $11,498 in 2022/23—5.0 per cent higher than in 2019/20, which was itself the highest historical level of pre-COVID spending.

New federal subsidies to Volkswagen, not to mention nearly $80 billion in “green” subsidies to select firms and industries announced in the latest federal budget, are more examples of Trudeau’s proclivity for bigger government and higher spending. This proclivity to spend rests on the belief that a stronger economy relies on a bigger role for politicians and bureaucrats picking winners and losers, and a reduced role for entrepreneurs, businessowners and investors.

Such spending might be justified if it led to widespread economic growth, but it hasn’t. Consider that Canada’s economic performance (measured by economic growth, private-sector job creation and business investment) was weaker between 2015 and 2019 than during the previous five pre-recessionary periods going back to prime minister Brian Mulroney. For instance, between 2016 and 2019 the Trudeau government recorded average GDP growth (inflation-adjusted) of 2.1 per cent compared to 4.6 per cent during the Chrétien years (1997-2000), which were defined by smaller and smarter government spending. In fact, a recent study by Philip Cross, former chief analyst at Statistics Canada, found that economic growth over the last decade was the weakest since the 1930s.

Moreover, according to data from the Organization for Economic Cooperation and Development (OECD), Canada ranked 30th of 38 industrial countries for its average rate of economic growth from 2015 to 2019, and 24th in economic growth in 2020 with a 5.4 per cent contraction.

One big reason we haven’t seen any bang for our buck is the simple fact that governments have unique constraints and features, which limit what they can do effectively. In the case of corporate welfare, governments aren’t great at picking winners and losers—those decisions are better left to individuals and businesses. Indeed, a significant body of research finds that corporate welfare may actually hurt the economy as government interference in the market ultimately distorts private decision-making and misallocates resources from their most effective use.

But rather than recognize its failures and rework its policies, the federal government continues to take economic decisions away from investors, entrepreneurs, workers and consumers by increasing government spending. The recent Volkswagen deal is just one more example of this, and it will continue to cost the Canadian economy.