Stellantis ‘deal’ underscores intrinsic problems with corporate welfare

Automaker Stellantis recently halted construction of its electric vehicle battery factory in Windsor because the Trudeau government has not delivered a promised $500 million to help with capital costs. In addition, the firm now wants a deal more competitive with the United States—specifically, a deal that matches the slew of subsidies introduced in the Biden administration’s Inflation Reduction Act—which would mean $3 billion more in tax credits alone. Unfortunately, this is just one more glaring example of the problems with corporate welfare.

The news comes just weeks after the Trudeau government announced it will spend an estimated $13 billion on subsidies for Volkswagen’s Ontario battery plant and offer $700 million to help with construction. According to the Trudeau government, the handout—funded by taxpayer money—was necessary to compete with the United States. For his part, Ontario Premier Doug Ford recently said the federal government should support Stellantis as it did Volkswagen.

But continuing to engage in a subsidy war will come with huge costs to Canadians. Indeed, federal, provincial and local governments spent $352.1 billion (inflation-adjusted) subsidizing firms from 2007 to 2019 (the last pre-COVID year of available data). That huge number includes government transfers to businesses but excludes other forms of government support such as loan guarantees, direct investment and regulatory privileges for particular firms or industries, so the actual level of corporate welfare was much higher. Every dollar spent on corporate welfare is a dollar unavailable for tax cuts or other spending priorities.

Not only does corporate welfare come at a huge cost to taxpayers, but a significant body of research indicates it doesn’t produce widespread economic growth or job creation. In fact, corporate welfare may actually hurt the economy.

Why? Because all else equal, jurisdictions that hand out subsidies must impose higher tax rates on everyone else to make up the difference. Higher taxes discourage economic activity, and the higher the rates, the more economic activity they discourage. So, subsidies depress economic activity in some parts of an economy to encourage it in others.

To make matters worse, subsidies typically have no affect on firm location decisions. Surveys suggest that between 75 and 98 per cent of subsidized firms would have chosen their location even without the subsidy because other factors such as proximity to a customer base, supply chains and livability seem to matter more.

Finally, even if a subsidy does entice a firm to relocate, that may not be a good thing. That’s because a firm that can be lured by a subsidy is a firm that may be lured away by another country or province in a few years. It makes no sense to build an economy around such flighty firms. Moreover, if the firm wouldn’t locate in an area without artificial enticements, that may mean the firm isn’t a good fit for the region anyway.

When it comes to economic development, there are no get-rich-quick shortcuts. The best route to growth is the tried-and-true approach supported by a large body of research, which shows that provinces that foster economic freedom through low taxes and sensible regulations tend to prosper. Those that don’t, tend to languish. And if you think you have to offer subsidies to entice firms to your province, that may be an indication that your taxes are too high or your regulations are too onerous.