On the chopping block: business subsidies

With the global economy looking ever more fragile, the Conservative government should feel increasingly uneasy about its plan to balance the budget. To strengthen the current plan and promptly balance the budget, Finance Minister Jim Flaherty should aim his sights at cutting unnecessary government spending. An easy first step is to put regional development spending on The Chopping Block.

Since establishing the first of two region-specific development agencies in 1987-88, the Atlantic Canada Opportunities Agency and Western Economic Diversification, the number of agencies and amount spent by the federal government on regional development has increased significantly.

In 2010-11, the federal government distributed almost $2-billion through its main regional initiatives: Federal Economic Development Agency for Southern Ontario ($507-million), Canada Economic Development for the Regions of Quebec ($463-million), Western Economic Diversification ($429-million), Atlantic Canada Opportunities Agency ($382-million), Northern Ontario Development Program ($61-million), and Canadian Northern Economic Development Agency ($61-million).

While these regional development schemes share common goals like encouraging economic growth in flagging communities and regions with few employment opportunities, they have historically had little, if any, positive net economic impact.

All federal regional development agencies focus on providing subsidies to businesses through repayable contributions or loans (often not paid back) and non-repayable contributions. In 2009-10, subsidies to businesses and other organizations made up 65% of Atlantic Canada Opportunities Agency's spending, 54% of Western Economic Diversification spending and 62% of Canada Economic Development for the Regions of Quebec spending.

The justification for these subsidies is that capital from the private sector is unavailable, either because entrepreneurs are unaware of the opportunities in these areas or unwilling to take the risk. The reality, however, is that in many cases, loans and non-repayable subsidies are provided to businesses to fund investments that would have proceeded without involuntary taxpayer-financed assistance.

Also troubling is the fact that businesses receiving federal subsidies bid up the price of labour, capital and other resources, which increases the cost of these factors for non-subsidized businesses and ultimately reduces private investment.

The poor track record of business subsidies spurring economic growth is well documented. This is particularly true for the Atlantic Canada Opportunities Agency. In a 2003 examination, University of Calgary professor Jack Mintz and University of Toronto professor Michael Smart concluded: the impact of [the Agency's] activities has questionable effects on the economy at a relatively significant cost.

Canada's Auditor-General has found similar results in its examinations of the federal government's regional development initiatives. For instance, in a wideranging audit of such initiatives, the Auditor-General found that most programs had objectives stated in general terms rather than specific, measurable goals. And despite the billions spent on economic development programs, there was no clear consensus on results.

The Auditor-General has also confirmed that government regional subsidies displace existing businesses. In one case, the federal government sponsored the construction of a new fish plant in Quebec at a cost of $2.2-million. The plant was built near an established, already operating fish plant, which also received federal subsidies. More than 250 jobs were to be created by the construction of the new plant, but this job creation was offset by the closure of the established plant with as many employees.

In the case of the federal government's regional development projects in Quebec, the Auditor-General noted how Ottawa's own evaluators of those projects could not determine if those programs were of any benefit and noted 30% of projects that received financial aid would have gone ahead without government assistance.

In a review of the Atlantic Canada Opportunities Agency, the Auditor-General uncovered a finding of considerable concern: the agency apparently did not consider the net economic benefit to the region of nearly a quarter of all its projects.

At Western Economic Diversification, the Auditor-General concluded that monitoring of projects was poor, that incomplete information existed on the success rate of projects, and there were frequent accounts of beneficiaries making multiple applications and receiving multiple grants for the same projects. Indeed, 50% of more than 100 cases studied had received multiple funding. Additionally, a third of projects in a major program administered by Western Economic Diversification failed to meet objectives, while another third produced inconclusive results.

Finally, a subsequent review of the Atlantic Canada Opportunities Agency found that more than 20% of projects reviewed were deemed unlikely to be financially sustainable in the future without on-going government assistance. Meanwhile, recipients of the Agency's Business Development Program repaid only $78-million (or 17%) of $460-million in repayable contributions.

Rather than use taxpayer money for regional development initiatives that have a history of questionable benefit, the government should focus on creating the right economic environment for all businesses to succeed through lower taxes, minimal red tape, prudent government finances, and the maintenance of adequate infrastructure.

With a potential $8-billion in savings over the next four years, regional development spending is a top contender.