Montreal, June 8, 2006 – An Economic Note published today by the Montreal Economic Institute (MEI) finds that the greater the role played by direct government subsidies to business, the lower the rate of economic growth.
Economist Nathalie Elgrably, who wrote the study, examined the national accounts of OECD countries from 1970 to 2004 and concluded that there exists a negative relationship between direct subsidies and real economic growth. She was not surprised by this conclusion.
“Subsidy programs mean that governments are deciding to favour a company, production or sector artificially,” she wrote. “This creates a cost for other, more profitable projects and for the production of other goods and services that represent greater value in the eyes of consumers and that may have been chosen in the absence of subsidies.”
Non-refundable tax credits would cause less harm
Of the various types of subsidy examined, Ms. Elgrably says, non-refundable tax credits – deductible only from taxes owed by companies, with no chance of their receiving government funds if they have no taxes to pay – are the least harmful way for governments to subsidize business.
“Non-refundable tax credits have the advantage of being a far less harmful form of subsidy and of leaving money with its owners, who earned it by creating wealth. Moreover, to the extent that tax credits are available to all companies, or to many of them, they are less discriminatory and cause fewer economic distortions or inefficiencies.”
The MEI economist considers, however, that lowering taxes for all businesses would be the best way for governments to proceed.
Two out of three people in Quebec agree
People in Quebec seem to agree with the idea that governments should stop giving back with one hand what they are taking with the other.
A Léger Marketing poll conducted May 24 to 28 for the MEI found that nearly two out of three people in Quebec (64%) are in favour of governments putting a halt to business subsidies and providing the equivalent instead in the form of lower taxes for all companies.
This proposal would be easy to apply at the federal level since the amount collected in tax from companies is nine times higher than total subsidies paid to them. The Conservative Party made this a policy plank in the 2004 election campaign.
The Economic Note, titled Are business subsidies efficient?, is available, along with the Léger Marketing poll, on the Institute’s Website.
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Information and interview requests: Patrick Leblanc, Director of Communications, Montreal Economic Institute, Tel.: (514) 273-0969 (office) / (514) 571-6400 (cell) / E-mail: email@example.com